Wells Fargo & Company Annual Report 2012
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The power of a
conversation.
2 To Our Owners
10 Creating Conversations
22 Community
27 Board of Directors, Senior Leaders
29 2012 Financial Report
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(cid:580)(cid:6)(cid:36)(cid:41)(cid:28)(cid:41)(cid:30)(cid:36)(cid:28)(cid:39)(cid:588)(cid:19)(cid:32)(cid:49)(cid:36)(cid:32)(cid:50)
(cid:580)(cid:3)(cid:42)(cid:41)(cid:47)(cid:45)(cid:42)(cid:39)(cid:46)(cid:588)(cid:28)(cid:41)(cid:31)(cid:588)(cid:16)(cid:45)(cid:42)(cid:30)(cid:32)(cid:31)(cid:48)(cid:45)(cid:32)(cid:46)
(cid:580)(cid:6)(cid:36)(cid:41)(cid:28)(cid:41)(cid:30)(cid:36)(cid:28)(cid:39)(cid:588)(cid:20)(cid:47)(cid:28)(cid:47)(cid:32)(cid:40)(cid:32)(cid:41)(cid:47)(cid:46)
(cid:580)(cid:19)(cid:32)(cid:43)(cid:42)(cid:45)(cid:47)(cid:588)(cid:42)(cid:33)(cid:588)(cid:9)(cid:41)(cid:31)(cid:32)(cid:43)(cid:32)(cid:41)(cid:31)(cid:32)(cid:41)(cid:47)(cid:588)(cid:19)(cid:32)(cid:34)(cid:36)(cid:46)(cid:47)(cid:32)(cid:45)(cid:32)(cid:31)(cid:588)
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(cid:580)(cid:533)(cid:535)(cid:538)(cid:580) (cid:580)(cid:20)(cid:47)(cid:42)(cid:30)(cid:38)(cid:588)(cid:16)(cid:32)(cid:45)(cid:33)(cid:42)(cid:45)(cid:40)(cid:28)(cid:41)(cid:30)(cid:32)
(cid:20)(cid:35)(cid:48)(cid:28)(cid:580)(cid:25)(cid:36)(cid:42)(cid:41)(cid:34)(cid:580)(cid:423)(cid:45)(cid:36)(cid:34)(cid:35)(cid:47)(cid:424)(cid:580)(cid:50)(cid:36)(cid:47)(cid:35)(cid:580)(cid:24)(cid:32)(cid:39)(cid:39)(cid:46)(cid:581)(cid:6)(cid:28)(cid:45)(cid:34)(cid:42)(cid:406)(cid:46)(cid:580)(cid:1)(cid:29)(cid:29)(cid:52)(cid:580)(cid:24)(cid:28)(cid:45)(cid:31)(cid:391)(cid:580)
(cid:20)(cid:47)(cid:390)(cid:581)(cid:16)(cid:28)(cid:48)(cid:39)(cid:391)(cid:580)(cid:13)(cid:36)(cid:41)(cid:41)(cid:32)(cid:46)(cid:42)(cid:47)(cid:28)
THE POWER OF A CONVERSATION
At Wells Fargo,
every conversation
is important.
Like the conversation between small business customer Shua Xiong, owner
of Golden Harvest Foods in St. Paul, Minnesota, and banker Abby Ward.
Their talk eventually resulted in the remodeling of Xiong’s store, which
Wells Fargo financed.
Conversations are also a beginning because they often lead to something more.
A deeper relationship. A great idea. A way to solve a problem. That happened over
the course of their relationship when Ward recommended treasury management
and equipment finance services to help meet Xiong’s needs.
Relationships like these are a Wells Fargo staple because they help our
customers succeed financially.
Today, Wells Fargo serves one in three U.S. households and can provide just
about any financial service an individual or business requires. We serve
customers in communities across the country through our 9,097 stores, and
we are the fourth largest in assets among U.S. banks. We got to this place
because we continue to believe in the personal touch.
And that starts with a conversation.
1
To Our Owners,
Each morning, across the company,
our day starts with conversations(cid:3)—(cid:3)
conversations about how best to
serve our customers and help them
succeed financially.
We’ve been having those
conversations at Wells Fargo for
more than 160 years, and they are
the cornerstone of our success.
Today, we serve one in three U.S.
households and employ one in 500
working Americans. We handle
5.5 billion customer interactions
a year in our Community Bank
alone(cid:3)—(cid:3) these give us more than
10,000 opportunities a minute to
be a hero for our customers.
John G. Stumpf,
Chairman, President and
Chief Executive Officer,
Wells Fargo & Company
2
Our focus on customers and serving them well drove
In 2012, we continued to produce value for our
another year of record results in 2012 for Wells Fargo and
shareholders. Our return on assets was 1.41 percent, our
our stakeholders.
2012: Continued financial success
We delivered net income of $18.9 billion in 2012, up
19 percent from 2011. This fourth consecutive year of
record profit reflected the time-tested virtues of our
diversified business model and our focus on growing
revenue and managing costs and risks(cid:7)—(cid:7) no matter how
difficult the operating environment. We grew our core
return on equity was 12.95 percent, and our full-year
earnings-per-share growth was 19 percent. In 2012, we
also returned more capital to our shareholders, as we
increased our regular quarterly dividend by 83 percent
to 22 cents per share and purchased 119 million shares
of the company’s common stock. On Jan. 22, 2013, we
raised our regular quarterly dividend again, an increase
of 14 percent to 25 cents per share. Wells Fargo finished
the year with an industry-leading market capitalization
loans and deposits, despite an uneven economic recovery,
of $180 billion (our stock price multiplied by the number
and grew revenue in a low interest rate environment that
of shares outstanding).
pressured our margins. Each of our primary business
segments grew its full-year segment net income year
over year: Community Banking by 15 percent, Wholesale
Banking by 11 percent, and Wealth, Brokerage and
Retirement by 4 percent.
In 2012, Wells Fargo led in areas central to our
customers’ lives and our economy’s vitality(cid:7)—(cid:7) small
Wells Fargo’s full-year income was equally balanced
between net interest income and noninterest income,
a balance that has come to typify a core benefit of our
business model that makes growth an attainable goal in
a variety of interest rate environments. Indeed, in 2012,
Wells Fargo’s net interest income grew by $467 million,
or 1 percent, to $43.2 billion. This was achieved despite
business lending, home mortgage lending, auto lending,
low interest rates that put pressure on our margins,
and private student lending. We provided a safe and
as we delivered more products and services to customers
sound place for our customers to hold and manage their
across our huge deposit base.
financial assets, and served our customers efficiently
and conveniently through the nation’s most extensive
network of banking stores, more than 12,000 ATMs, our
24-hour-a-day Wells Fargo Customer ConnectionSM, and
our industry-leading online and mobile presence.
Meanwhile, we reduced credit losses to $9.0 billion,
down $2.3 billion, or 20 percent, from $11.3 billion in 2011.
Our capital position also improved. Wells Fargo
finished 2012 with Tier 1 common equity1 of $109.1 billion,
up 15 percent from $95.1 billion a year ago, resulting in a
Just as important, we accomplished this with a cross-
Tier 1 common equity ratio of 10.12 percent under Basel I.
sell strategy that continues to distinguish Wells Fargo
as a leader in building customer relationships. It’s as
simple as this: The better we know our customers, the
Helping an economy in transition
In conversation after conversation last year(cid:7)—(cid:7) across
more opportunities we have to provide them with the
kitchen tables, as well as conference room tables(cid:7)—(cid:7) we
products and services they need. In 2012, that mindset
heard of signs of a strengthening U.S. economy. Still, we
produced records in the average number of Wells Fargo
also observed the worries and uncertainty that influenced
products per customer. At the end of the fourth quarter,
consumer and business behaviors in many areas of the
the average Retail Bank household had more than
country and the economy. Yes, low interest rates offered
six products, our average Wholesale Bank customer
a compelling opportunity to get household balance sheets
had nearly seven products, and our average Wealth,
in order. And there were bright spots, such as energy,
Brokerage and Retirement customer had 10 products!
that reminded us of the advantages our U.S. economy
Another measure of our success: deposit and
still holds. But overall, our customers remained cautious
loan growth. Since completing our 2008 merger with
given the economy’s tepid growth and headlines about
Wachovia Corp., Wells Fargo has grown deposits by more
Washington gridlock, budget pressures, and higher taxes.
than $221 billion and core loans by $31 billion. Frankly,
So, while we remain optimistic for continued economic
there’s no better proof of customer confidence in today’s
expansion in 2013, we do so guardedly, based on what we
Wells Fargo and our unique opportunity to grow.
experienced in 2012.
1 Please see the “Financial Review – Capital Management” section in this Report
for more information.
3
Supporting small business
Perhaps no Wells Fargo activity was more representative
Since the beginning of 2009 and through the end
of 2012, Wells Fargo has also supported the housing
of the times than our small business lending. In 2012,
market’s recovery by:
Wells Fargo extended $16 billion in net new loan
commitments to U.S. small businesses (primarily those
with annual revenues of less than $20 million)(cid:7)—(cid:7) up more
than 30 percent from 2011. The rise partly reflects our
focus on being a leader in Small Business Administration
(SBA) lending. In 2012, Wells Fargo finished its fourth
consecutive year of SBA lending leadership, extending a
record $1.24 billion in SBA 7(a) loans.
(cid:396)(cid:580) (cid:19)(cid:32)(cid:360)(cid:41)(cid:28)(cid:41)(cid:30)(cid:36)(cid:41)(cid:34)(cid:580)(cid:40)(cid:42)(cid:45)(cid:32)(cid:580)(cid:47)(cid:35)(cid:28)(cid:41)(cid:580)(cid:374)(cid:390)(cid:377)(cid:581)(cid:40)(cid:36)(cid:39)(cid:39)(cid:36)(cid:42)(cid:41)(cid:580)(cid:40)(cid:42)(cid:45)(cid:47)(cid:34)(cid:28)(cid:34)(cid:32)(cid:46)(cid:391)(cid:580)(cid:40)(cid:28)(cid:41)(cid:52)(cid:580)
at historically low interest rates, and financing
2.8 million mortgages for home purchases.
(cid:396)(cid:580) (cid:16)(cid:45)(cid:42)(cid:30)(cid:32)(cid:46)(cid:46)(cid:36)(cid:41)(cid:34)(cid:580)(cid:40)(cid:42)(cid:45)(cid:32)(cid:580)(cid:47)(cid:35)(cid:28)(cid:41)(cid:580)(cid:378)(cid:374)(cid:371)(cid:391)(cid:370)(cid:370)(cid:370)(cid:580)(cid:47)(cid:45)(cid:36)(cid:28)(cid:39)(cid:580)(cid:42)(cid:45)(cid:580)(cid:43)(cid:32)(cid:45)(cid:40)(cid:28)(cid:41)(cid:32)(cid:41)(cid:47)(cid:580)
mortgage modifications that gave families facing
foreclosure a second chance by making their mortgage
terms more favorable.
But while approval rates improved in 2012, application
(cid:396)(cid:580) (cid:6)(cid:42)(cid:45)(cid:34)(cid:36)(cid:49)(cid:36)(cid:41)(cid:34)(cid:580)(cid:40)(cid:42)(cid:45)(cid:32)(cid:580)(cid:47)(cid:35)(cid:28)(cid:41)(cid:580)(cid:450)(cid:376)(cid:581)(cid:29)(cid:36)(cid:39)(cid:39)(cid:36)(cid:42)(cid:41)(cid:580)(cid:36)(cid:41)(cid:580)(cid:40)(cid:42)(cid:45)(cid:47)(cid:34)(cid:28)(cid:34)(cid:32)(cid:580)(cid:43)(cid:45)(cid:36)(cid:41)(cid:30)(cid:36)(cid:43)(cid:28)(cid:39)(cid:580)
rates remained below what we have typically seen at this
stage of an economic recovery. Still, we worked hard to
for our customers, including forgiveness that
customers earned through making on-time payments.
serve small businesses, whether they sought to stay the
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(cid:580)(cid:8)(cid:42)(cid:46)(cid:47)(cid:36)(cid:41)(cid:34)(cid:580)(cid:42)(cid:45)(cid:580)(cid:43)(cid:28)(cid:45)(cid:47)(cid:36)(cid:30)(cid:36)(cid:43)(cid:28)(cid:47)(cid:36)(cid:41)(cid:34)(cid:580)(cid:36)(cid:41)(cid:580)(cid:40)(cid:42)(cid:45)(cid:32)(cid:580)(cid:47)(cid:35)(cid:28)(cid:41)(cid:580)(cid:371)(cid:391)(cid:371)(cid:370)(cid:370)(cid:580)(cid:35)(cid:42)(cid:40)(cid:32)(cid:580)
course in a choppy economy or to venture out as first-time
preservation events or workshops, where we met face
entrepreneurs. As a result, in 2012 we grew small business
to face with more than 40,000 mortgage customers.
checking accounts by a net 3.7 percent year over year and
saw a more than 50 percent increase in credit cards, lines
of credit, and loan product solutions in our Business Direct
Our five strategic priorities
Wells Fargo emerged from the financial crisis of 2008 as
lending unit, which focuses primarily on serving the credit
a stronger company. Our decision to merge with Wachovia
needs of businesses with less than $2 million in annual sales.
gave us a more diverse geography, a broader balance in
Supporting the housing recovery
In housing and mortgage lending, our early expectations
revenue streams, and a great team of people dedicated to
the customers they serve, all of which increased the value
of our franchise. As a combined company, we weathered
for a rebound were validated. We have long believed
the storm because we managed with a long-term view(cid:7)—(cid:7)
in the emotional attachment our customers have with
investing heavily where the opportunities were greatest,
homeownership. Buying a home is the most important
but also willingly ceding markets and share to others
financial decision many of them will ever make. So, we were
when we believed the opportunities didn’t fit our view
bullish about mortgage lending throughout 2012, well before
of how we best help our customers succeed financially.
signs of a recovery had become more obvious to others.
Getting this right attracts team members, customers, and
We staffed up and stepped up as others stepped back from
investors who share an interest in having a long-term
the market. As a result, we originated nearly one in three
relationship with Wells Fargo.
U.S. home mortgages in 2012 and serviced one in six.
Indeed, our two teams have become One Wells Fargo
Why were we bullish? Across the U.S., we saw prices
with a shared understanding of our commitment to
and inventory situations improving. We also know that
customers. Our customers’ success comes first. When
the best loans are made after(cid:7)—(cid:7) not before(cid:7)—(cid:7) a downturn,
we serve customers well, the money we earn is the result.
as customers with improved balance sheets return to the
This is why we know never to put the stagecoach ahead
marketplace. In 2012, this confidence translated into more
of the horses.
than 2 million mortgage loans originated by Wells Fargo(cid:7)—(cid:7)
As we did last year, Wells Fargo will continue to focus
$500 billion of lending that helped customers refinance
on five strategic priorities in 2013:
into lower rates or buy homes.
And we still see room for growth in the mortgage
business, with refinancing of mortgages still an attractive
option for millions of customers and sales of new and
existing homes getting stronger. This can only be good
for the overall economy, because housing has led almost
every economic recovery in recent history.
(cid:396)(cid:580)
(cid:396)(cid:580)
(cid:396)(cid:580)
(cid:396)(cid:580)
(cid:396)(cid:580)
(cid:580)(cid:16)(cid:48)(cid:47)(cid:47)(cid:36)(cid:41)(cid:34)(cid:580)(cid:30)(cid:48)(cid:46)(cid:47)(cid:42)(cid:40)(cid:32)(cid:45)(cid:46)(cid:580)(cid:360)(cid:45)(cid:46)(cid:47)
(cid:580)(cid:7)(cid:45)(cid:42)(cid:50)(cid:36)(cid:41)(cid:34)(cid:580)(cid:45)(cid:32)(cid:49)(cid:32)(cid:41)(cid:48)(cid:32)
(cid:580)(cid:19)(cid:32)(cid:31)(cid:48)(cid:30)(cid:36)(cid:41)(cid:34)(cid:580)(cid:32)(cid:51)(cid:43)(cid:32)(cid:41)(cid:46)(cid:32)(cid:46)
(cid:580)(cid:12)(cid:36)(cid:49)(cid:36)(cid:41)(cid:34)(cid:580)(cid:42)(cid:48)(cid:45)(cid:580)(cid:49)(cid:36)(cid:46)(cid:36)(cid:42)(cid:41)(cid:580)(cid:28)(cid:41)(cid:31)(cid:580)(cid:49)(cid:28)(cid:39)(cid:48)(cid:32)(cid:46)
(cid:580)(cid:3)(cid:42)(cid:41)(cid:41)(cid:32)(cid:30)(cid:47)(cid:36)(cid:41)(cid:34)(cid:580)(cid:50)(cid:36)(cid:47)(cid:35)(cid:580)(cid:30)(cid:42)(cid:40)(cid:40)(cid:48)(cid:41)(cid:36)(cid:47)(cid:36)(cid:32)(cid:46)(cid:580)(cid:28)(cid:41)(cid:31)(cid:580)(cid:46)(cid:47)(cid:28)(cid:38)(cid:32)(cid:35)(cid:42)(cid:39)(cid:31)(cid:32)(cid:45)(cid:46)
4
30%
Increase over 2011 in new
loan commitments to U.S.
small businesses
Putting customers first
Many companies say they put customers first; it’s another
thing to do it. It begins with recognizing there are
elements in the future we can’t control, but we can control
how we show up each day to serve customers.
That’s our constant focus.
Consider our customers’ banking habits. In 2012, more
than 23 million customers actively banked with us online,
including more than 9 million with mobile devices. Yet,
even today, most customers open their first account, and
establish their banking relationships, by having face-to-
face visits at brick-and-mortar stores. That’s why we’ve
invested in a store network that provides a Wells Fargo
retail store or ATM within two miles of nearly half the U.S.
population and small businesses within our footprint.
We’re also committed to offering more digital access
via mobile, tablet, and computers to allow customers
to choose when, where, and how to conduct their
banking business. In 2012, we launched new features
like Wells Fargo Mobile® Deposit, expanded our Send &
Receive Money service, and introduced a new Wells Fargo
app for iPad. In 2012, retail customers made more
than $30 billion in payments and transfers via mobile.
Wells Fargo was the first major U.S. financial services
company to offer mobile banking for commercial and
corporate customers when the service launched in 2007,
and we’ve continued to innovate and work with our
customers to design and build new mobile services.
In 2012, we made our leading international trade services
application, TradeXchange, available via CEO Mobile®.
We also introduced enhancements to our popular
Commercial Card Expense Reporting mobile capabilities.
(cid:12)(cid:28)(cid:46)(cid:47)(cid:580)(cid:52)(cid:32)(cid:28)(cid:45)(cid:391)(cid:580)CEO Mobile securely processed more than
$17 billion in wires. In 2012, we reached a milestone of
100 million e-receipts chosen by customers for their ATM
transactions, and we also added an e-receipt option for
teller transactions. Technology even empowered our
customers’ philanthropy, as they used Wells Fargo ATMs
to give more than $1 million to the American Red Cross
for Superstorm Sandy relief efforts.
Growing revenue
When we put customers first, it opens doors to our next
priority: growing revenue. At Wells Fargo, we have chosen
not to let the “Great Recession” serve as an excuse to not
grow. We see ourselves as a growth company(cid:7)—(cid:7) no matter
the environment(cid:7)—(cid:7) and believe the best measure of
progress against that goal is revenue. We grow revenue in
two important ways: through interest income on loans we
make, and fee income on services we provide.
In 2012, we grew revenue 6 percent to $86.1 billion,
mostly from noninterest income. (Imagine our earnings
power when a more normal rate environment returns.)
The revenue growth included double-digit growth in
our capital markets, commercial real estate, corporate
banking, mortgage, asset-based lending, corporate trust,
and international businesses.
Our Community Banking segment grew revenue by
$2.6 billion to $53.4 billion and net income by $1.4 billion
to $10.5 billion in 2012, partly because of higher mortgage
banking revenue and above-average equity gains. Its
performance also included annual revenue growth in
Education Financial Services(cid:7)—(cid:7) up 2 percent(cid:7)—(cid:7) and Dealer
Services(cid:7)—(cid:7) up 4 percent.
Our Wholesale Banking segment grew full-year
revenue by $2.5 billion to $24.1 billion and full-year net
income by approximately $800 million to $7.8 billion
in 2012. The broad-based growth included acquisitions
and increased loans and deposits. Areas of notable
growth included capital finance, commercial banking,
commercial real estate, and corporate banking. For
example, Investment Banking’s revenue from commercial
and corporate customers grew 30 percent from the prior
year due to attractive capital markets conditions and
continued cross-selling. In 2012, we saw broad-based
year-over-year revenue growth in our International Group
of 15 percent, driven by growth in net interest income
and cross-sell-related revenue in our Global Financial
Institutions business, which serves U.S. customers doing
business globally and foreign companies doing business
in the U.S. Our Commercial Banking team also celebrated
its 10th consecutive quarter of average loan growth.
5
Our performance
$ in millions, except per share amounts
2012
2011
% Change
FOR THE YEAR
Wells Fargo net income
Wells Fargo net income applicable to common stock
Diluted earnings per common share
Profitability ratios:
Wells Fargo net income to average total assets (ROA)
Wells Fargo net income applicable to common stock to average
Wells Fargo common stockholders’ equity (ROE)
Efficiency ratio 1
Total revenue
Pre−tax pre−provision profit 2
Dividends declared per common share
Average common shares outstanding
Diluted average common shares outstanding
Average loans
Average assets
Average core deposits 3
Average retail core deposits 4
Net interest margin
AT YEAR−END
Securities available for sale
(cid:12)(cid:42)(cid:28)(cid:41)(cid:46)
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
Common shares outstanding
Book value per common share
Team members (active, full−time equivalent)
$
$
18,897
17,999
3.36
1.41%
12.95
58.5
86,086
35,688
0.88
5,287.6
5,351.5
$ 775,224
1,341,635
893,937
629,320
3.76%
$ 235,199
799,574
17,060
25,637
1,422,968
945,749
157,554
158,911
126,607
157,588
11.17%
11.75
14.63
9.47
10.12
5,266.3
$
27.64
269,200
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
5,262.6
24.64
264,200
19
20
19
13
9
(4)
6
13
83
—
1
2
6
8
6
(5)
6
4
(12)
2
8
8
12
12
11
6
4
4
(1)
5
7
—
12
2
1 The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
2 Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others
to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.
3 Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).
4 Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
5 See Note 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.
6
Our Wealth, Brokerage and Retirement (WBR)
for each to hire seasonal temporary help. This has also
segment reported revenue of $12.2 billion and record net
created development opportunities for team members.
income of $1.3 billion in 2012, driven by strong growth
Most important, Education Financial Services didn’t miss
in brokerage-managed account fees. WBR client assets
out on opportunities to lend, and Shareowner Services
grew to $1.4 trillion in 2012, a 7 percent increase from
continued to receive high satisfaction scores from its
2011, including 20 percent growth in brokerage-managed
customers(cid:7)—(cid:7) including our shareholders.
account assets and 6 percent growth in average deposits.
WBR continued its success in cross-selling products to
clients. The average products grew during 2012 to more
than 10 products per household.
Living our vision and values
Putting customers first, growing revenue, reducing
expenses(cid:7)—(cid:7) these are goals shared by many companies.
What’s the outlook for revenue growth in 2013? Though
How they’re achieved is what ultimately reflects
we don’t set public revenue goals, we do set our sights
a company’s culture. We evaluate our leaders on
on continuing to grow by earning more of our customers’
their cultural performance as well as their financial
business, growing market share across business lines, and
performance, knowing that our culture binds us together
making acquisitions that make sense for our customers
as a team. At Wells Fargo, we believe in the power of
and our business model.
Reducing expenses
At Wells Fargo, we don’t believe growing and saving
plurals. It’s not about I, me, and mine. It’s about us, we,
and ours. Our formula for success is team success, not
individual success, and it works. The average tenure at
Wells Fargo among my direct reports is 28 years.
are mutually exclusive objectives. This is why reducing
Our culture is outlined in The Vision & Values of
expenses is a top priority even as we emphasize growing
Wells Fargo, a 41-page booklet that details our business
revenue. We want to grow efficiently in ways that result in
(cid:46)(cid:47)(cid:45)(cid:28)(cid:47)(cid:32)(cid:34)(cid:52)(cid:391)(cid:580)(cid:42)(cid:48)(cid:45)(cid:580)(cid:49)(cid:28)(cid:39)(cid:48)(cid:32)(cid:46)(cid:391)(cid:580)(cid:28)(cid:41)(cid:31)(cid:580)(cid:42)(cid:48)(cid:45)(cid:580)(cid:45)(cid:32)(cid:28)(cid:46)(cid:42)(cid:41)(cid:580)(cid:33)(cid:42)(cid:45)(cid:580)(cid:29)(cid:32)(cid:36)(cid:41)(cid:34)(cid:390)(cid:580)(cid:12)(cid:28)(cid:46)(cid:47)(cid:580)(cid:52)(cid:32)(cid:28)(cid:45)(cid:391)(cid:580)
products and services that our customers value.
we sent a refreshed version of this 19-year-old document
This discipline is expressed by our “efficiency ratio,”
to each of our more than 265,000 team members and
which reflects how much we spend in expenses for every
made it available to the public on wellsfargo.com. Many
dollar of revenue we earn. In 2012, Wells Fargo’s efficiency
team members highlight favorite passages. Others refer
ratio was 58.5 percent, the lowest of our industry’s four
to our vision and values when they’re solving business
largest companies. This meant we spent 58.5 cents
problems. It’s a document that’s widely used because it
for every dollar of revenue we generated. However,
sums up who we are today and how we plan to become
we didn’t cut expenses solely to achieve this feat. We
one of the world’s great companies.
struck a balance between managing expenses wisely and
A new advertising campaign we launched last year
spending on opportunities. So we hired people where we
brings an aspect of our vision and values to life(cid:7)—(cid:7) our
saw opportunities for growth and reduced operations
culture of listening to customers. Called “Conversations,”
where we no longer saw value for our customers.
the campaign showcases how trusted conversations with
Since 2008, we have reduced the size of our overall
our customers can affect their lives. One conversation
real estate occupancy portfolio by more than 16 million
can lead to so much more. The stories highlighted in this
square feet, net of growth. That’s almost six Empire
Annual Report reflect that. By listening to our customers
State Buildings. More than 4.5 million square feet of this
and deepening relationships with them, we support their
reduction took place as we grew revenue in 2012. So, we’ve
success. At Wells Fargo, we live our vision and values.
reduced our company’s physical footprint while improving
That’s how we build trust, and that’s how we differentiate
the productivity and efficiency of the space we use.
ourselves.
Sometimes the opportunity to save spans operations.
Education Financial Services, which offers private loans
for college students, and Shareowner Services, which
Connecting with communities and stakeholders
Our team members set Wells Fargo apart through their
services companies and their shareholders, recognized
support of the communities we serve. Team members
they each had seasonal volume peaks; other times, when
make personal donations. They volunteer. They quickly
business slowed, they had too much staff. Now the two
respond when disaster strikes.
organizations train each other’s teams, reducing the need
7
At Wells Fargo, we believe
in the power of plurals.
It’s not about I, me, and mine.
It’s about us, we, and ours.
contributed nearly $316 million to community and
philanthropic causes in 2012(cid:7)—(cid:7) a 48 percent increase
from 2011. In addition, our team members volunteered
1.5 million hours and pledged a record $79 million in
personal contributions(cid:7)—(cid:7) up 23 percent from 2011(cid:7)—(cid:7)
to more than 28,000 nonprofits.
Of ‘fiscal cliffs’ and confidence
Any discussion of the past year would not be complete
without touching on the issue that dominated U.S. policy
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discussions in the closing months of 2012: what to do
to the Northeast, our team members(cid:7)—(cid:7) despite many
having lost electrical power or their homes to the storm(cid:7)—(cid:7)
rallied to restore operations. In New Jersey, one team
member drove more than an hour to reopen her store,
even though she couldn’t return to check on her home’s
damage. Another team member opened her home to
20 family members, friends, and storm refugees. One of
our personal bankers helped a local business obtain a
loan to repair damaged floors. In addition, Wells Fargo
donated $1 million to Superstorm Sandy relief efforts.
In 2012, team members responded again when
community leaders in cities deeply affected by the
housing crisis told them down payment challenges and
competition from cash investors were keeping many
Americans from re-entering the housing market or buying
their first home. In response, Wells Fargo partnered
with housing nonprofit NeighborWorks® America to
create NeighborhoodLIFT SM, one of several programs
about the country’s huge budget deficits. The U.S. ended
the year with approximately $16.4 trillion of debt, and
this country is on a “debt growth path,” which in a couple
of years is expected to exceed $20 trillion. I believe that
everyone can agree that is too much debt.
It’s hard to get one’s head around a trillion dollars. If
I look at the expected $20 trillion national debt through
the prism of basic consumer products, such as home
mortgages, here’s what I see: There are 50 million homes
in America with a mortgage, and the average homeowner
owes $200,000 on their home. If we took the national debt
and gave each homeowner an equal share, their mortgage
would grow from $200,000 to roughly $530,000 today
and to more than $600,000 in four years. The U.S. cannot
borrow 40 cents of every dollar it spends; the size of the
national debt does matter. My concern is that, sooner
or later, the interest alone on the debt will crowd out
resources needed for programs vital to all Americans.
we’ve funded to help keep homeownership accessible to
That’s why I strongly feel that policymakers should return
Americans of moderate means in 20 U.S. housing markets.
to discussions of long-term fiscal solutions.
Along with CityLIFT SM, a similar program resulting
from an agreement with the U.S. Department of Justice,
Wells Fargo has provided $170 million in down payment
assistance, homebuyer financial education, and other
support. In the first 12 months, the programs have helped
communities recover from the foreclosure crisis and
In the year’s final hours, the president and Congress
reached a compromise that achieved a short-term
solution but postponed crucial decisions on the debt
ceiling, the sequester, and ongoing funding of the federal
government. Although many have put forward plans to
address such long-term fiscal issues, no solution has
helped more than 1,600 people buy homes.
been implemented.
Community solutions such as these are at the heart
of Wells Fargo’s philanthropy. Though ranked 26th
last year on the Fortune 500 list of America’s largest
companies, Wells Fargo finished No. 4 on The Chronicle
of Philanthropy’s 2012 ranking of America’s most
philanthropic companies. That ranking(cid:7)—(cid:7) which was based
on 2011 giving(cid:7)—(cid:7) is likely to rise because Wells Fargo
While short-term debates will occur, progress is
needed on these long-term problems. Until our country
is on a sustainable fiscal path, businesses and consumers
will remain cautious and job creation will suffer. We
cannot continue to have the fiscal “flavor of the month”
dominate the policy agenda. This fosters uncertainty and
lack of confidence, which are the enemies of the only sure
way to prosperity(cid:7)—(cid:7) a strong and growing economy. This
is the tide that lifts all boats, and we believe the path to
achieving that ought to include the following:
8
(cid:396)(cid:580)
(cid:580)Putting the country on a sustainable fiscal path.
This will give confidence to trading partners, creditors,
We welcomed Howard V. “Rick” Richardson to our
board of directors as of Jan. 1. Rick is a retired partner
and most important, to consumers and business
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owners(cid:7)—(cid:7) those who create jobs and invest in this country.
benefit from his more than three decades of experience
(cid:396)(cid:580)
(cid:396)(cid:580)
(cid:580)Updating and simplifying our antiquated tax code.
Tax policy should promote growth in the U.S.
(cid:580)Re-evaluating regulatory burdens. When I meet with
business leaders of companies large and small, I hear
stories of the regulatory burdens and “red tape” that
get in the way of their doing business, hiring workers,
and the like. I am in favor of sound regulations, playing
by the rules, level playing fields, and regulators who
have the authority to hold wrong-doers accountable.
However, we have seen regulations in all industries
that have unintended consequences, such as increasing
the cost of credit or slowing economic recovery.
(cid:396)(cid:580)
(cid:580)Promoting the U.S. We are blessed in this country
with huge advantages: an abundance of natural
in a wide range of leadership, audit, and business
advisory positions. He serves on the board’s Audit and
Examination Committee.
We also want to thank all of our stakeholders, including
team members, customers, communities, and shareholders.
Your confidence in and support of Wells Fargo remind
us why we’re so excited to serve customers each and
every day. And the best part is when we can all celebrate
our accomplishments together.
As a result of our combined efforts, millions of
customers are better off financially than they were a
year ago, communities across the country are more vital,
businesses small and large have the financial support and
guidance they need to grow, and our economy is showing
signs of increased vibrancy due to a housing market
resources, especially energy; the best rule of law;
on the mend.
a culture of innovators and entrepreneurs; the best
post-secondary schools in the world; and the world’s
best farmers and manufacturers. The world wants
what we produce, and our policies should support that.
2012 was an outstanding year for Wells Fargo’s
customers, team members, communities, and shareholders.
Because, in the end, it all comes down to how well we
listen to the needs of all stakeholders and execute in ways
that help them succeed.
And that’s why we look forward to many more
conversations with you.
John G. Stumpf
Chairman, President and Chief Executive Officer
Wells Fargo & Company
(cid:396)(cid:580)
(cid:580)Immigration reform. Our nation has always
won as a team. We’re better together than apart,
and I’m encouraged by what I’m hearing out of
Washington, D.C., on this topic.
The American spirit is as strong as ever. And Americans
will be more confident when we see elected officials
working together in a way that supports growth with
sensible policies and strategies for fiscal issues, taxes,
trade, regulations, and immigration.
In appreciation
In April 2012, Mackey J. McDonald retired from our board
of directors after 18 years of service to our company. Mackey
served on the boards of two predecessor companies, starting
with First Union in 1994 and also with Wachovia Corp.
He brought extensive experience from his distinguished
career, and we benefited from his pragmatic approach,
excellent instincts, and vast experience in various
markets and consumer-oriented businesses. This made
Mackey an exceptional resource as our company grew and
changed. We thank him for his long-standing service and
contributions to Wells Fargo, and we wish him all the best.
9
CREATING CONVERSATIONS
Building lifelong
relationships one
customer at a time.
At Wells Fargo, we look forward to speaking with customers. Whether in person,
on the phone, or online, we want to hear what’s on your mind(cid:3)—(cid:3) and are eager to
explore how we might help.
For Jean Iverson of Spicer, Minnesota, the talk came at a painful time: after her
husband, Dr. Paul Iverson, died suddenly in 2010.
The late Dr. Iverson had turned to Wells Fargo after seeing how we managed
the retirement plan of the hospital where he was an orthopedic surgeon. The
Iversons worked with Christine Kaehler and a team of specialists at Wells Fargo
Private Bank to craft a retirement plan. Because Wells Fargo had listened,
and crafted a plan for both of them, it was a smooth transition to readjust the
plan for Jean alone.
Now she says she is prepared to pursue one of her passions(cid:3) —(cid:3) skiing with her
granddaughters, Madeline and McKenzie.
“It’s hard enough when you lose a spouse,” said Iverson. “To not have to worry
about your finances, well, you have no idea.”
10
Jean Iverson with granddaughters
McKenzie (left) and Madeline, Spicer, Minnesota
11
12
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The bank in your pocket
keeps getting better.
Jeremy Husk used to save checks until he had enough to make
a trip to the bank. Now, he deposits them quickly and securely
using CEO Mobile® Deposit.
9.4 million
Wells Fargo has 9.4 million active consumer and
business mobile banking customers, and the feature
they ask for most is mobile deposit.
Six years ago, koi founder Kathy Peterson of Santa Monica,
California, noticed that nurses often carry designer handbags
but didn’t have designer options when dressing for work.
“The scrubs available then were more of a commodity item.
I saw the opportunity to do something more fashion-forward,
so I jumped on it.”
Today, koi is a hit(cid:7)—(cid:7) not just with nurses, but also doctors,
veterinarians, and dental hygienists(cid:7)—(cid:7) and her company
always is on the lookout for faster, simpler ways to get things
done, and mobile banking fits that bill.
Jeremy Husk, executive vice president of Operations at
koi, was talking with Relationship Manager Dean Yasuda,
who knew about a pilot program for CEO Mobile Deposit.
“Now when we get a check in,” said Husk, “we just whip
out the iPhone and take a picture of it, and we’re finished.
It’s great.” He estimates that the entire deposit process, from
log-in to check acceptance, takes less than 30 seconds.
Saving time is important for this rapidly growing business.
Husk said, “While we really like the mobile banking
features, it’s only one piece of our relationship with Wells Fargo.
We need a bank that’s going to be flexible as we grow, and
Wells Fargo has done that. Our partners there come up with
solutions to support our business.”
Just one example: Wells Fargo has continued to adjust koi’s
working capital line over the years to help it grow and meet its
specific needs.
Peterson concluded, “Wells Fargo has been really good
about keeping in touch, working with us(cid:7)—(cid:7) and listening.”
Kathy Peterson and Jeremy Husk,
Santa Monica, California
13
Wells Fargo’s Joseph Millhouse with
Maria Marquez, San Antonio, Texas
14
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Listening and earning
your trust.
When Maria Marquez visited a Wells Fargo banking store
with questions about her mortgage, it started a conversation
that paid off with a lower payment(cid:7)—(cid:7) and a new friend in
Joseph Millhouse.
4.7 million
Since 2009, Wells Fargo has helped 4.7 million
customers take advantage of historically
low interest rates to refinance their mortgages.
Not all conversations begin smoothly. Maria Marquez of
San Antonio, Texas, stopped in a Wells Fargo store with
questions about her monthly mortgage payment. She was
referred to Home Mortgage Consultant Joseph Millhouse, but
was skeptical he could help her. She even joked, “How can you
help me when you can’t even grow facial hair yet?”
But she quickly saw that Millhouse(cid:7)—(cid:7) who had joined
Wells Fargo as a summer intern several years before and
worked his way up(cid:7)—(cid:7) was an expert who knew the ins and outs
of mortgage products. During their first meeting, she shared
the details of her financial situation and what she wanted to
accomplish. Millhouse put together a package with options to
refinance her mortgage and reduce her monthly payments.
He kept in touch with her throughout the process.
“Once we obtained the loan approval,” he said, “I called her
right away to share the news.”
Now Marquez is putting away additional cash each month
for retirement savings.
“I was treated with dignity and respect and was always
encouraged whenever I got discouraged,” she said. “Joseph
and the mortgage processor who helped with my loan make
a great team. They patiently dealt with me throughout
the process.”
Millhouse joined the company through an internship
program that gives diverse college students exposure to the
mortgage industry and Wells Fargo. He said, “I love helping
customers. You quickly realize that what you’re really doing
is assisting them with one of the biggest and most important
financial transactions they’re likely to experience in a
lifetime(cid:7)—(cid:7) paying for a home.”
15
16
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Global reach, local team.
U.S.-based manufacturing company MAT Holdings needed
help with financing as well as support for its global operations.
By working with Wells Fargo, the company and its CEO,
Steve Wang, now have the support to seek out possibilities
for further expansion.
37 countries
With a presence in 37 countries, Wells Fargo
serves the needs of businesses across all segments.
Wells Fargo also serves more than 3,000 banks
in 130 countries, 48 central banks, and a variety
of multilateral organizations.
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and distributes products for home improvement centers and
the automotive industry. CEO Steve Wang began working
with Wells Fargo in 2006 based on a recommendation from
another company. Since then, MAT Holdings has grown its
relationship with Wells Fargo, including a recent acquisition
made possible with increased credit.
“The big difference is that Wells Fargo works with my
teams instead of telling us ‘no’ or telling us we have to do
things a certain way,” said Wang. “Wells Fargo supports
my team on daily activities so I can focus on global growth
opportunities. That gives me a confidence level I never
had before.”
MAT Holdings has 11 locations in the U.S. and 27 locations
in Europe, India, China, and Vietnam. “We use Wells Fargo for
a variety of international business services, including foreign
exchange, trade letters of credit, and financing our global
operations,” said Wang.
Relationship Manager Rosalie Hawley said, “As Wells Fargo
grows our international capabilities, we’ve been talking with
MAT Holdings about other ways we can assist. Ultimately, the
goal is to give them and all our customers with international
needs the same level of excellent service they receive in the U.S.”
Wells Fargo’s Betty Latson (left), Rosalie Hawley,
and Peter Gates (right) with Steve Wang,
Long Grove, Illinois
17
Leonard Burch, Charlotte, North Carolina
18
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Knowing small businesses
inside and out.
In the highly competitive commercial heating and air
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with Wells Fargo helps him weather the economic storms(cid:7)—(cid:7)
and continue growing.
No. 1
Wells Fargo has been the No. 1 small business
lender based on total dollar volume in the U.S.
for 10 years.
Elderly residents in an affordable-housing building will live
more comfortably because of the heating and air conditioning
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Mechanical Systems of Charlotte, North Carolina.
Every part of Strawn Tower’s heating and cooling system
as well as the installation(cid:7)—(cid:7) from recycled materials to
eco-friendly cleaning solutions(cid:7)—(cid:7) is green. The project is just
one example of the growth Superior Mechanical Systems
has enjoyed since Burch turned to Wells Fargo for financial
guidance eight years ago. At that time, he had three employees
and an average project size of $50,000. Today he employs
70 people and averages more than $4 million per project.
Despite a challenging economic environment, the business
is thriving. And Superior’s relationship with Wells Fargo has
grown to include cash management services, retirement plan
administration, direct deposit, real estate lending, and more.
Burch said financing from Wells Fargo allowed him to build
an annex to his headquarters. “Along with our line of credit,
it means we can buy what we need for projects very quickly,
store it on-site, and move immediately on new business.”
What he values most is a financial review with the
Wells Fargo team, organized twice a year by Business
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opportunity to plot business strategy: “With the plan we’ve
developed from these conversations, we can monitor our
strengths and weaknesses, stay on track, and continue to
serve our customers,” Burch said.
(cid:580) (cid:8)(cid:32)(cid:580)(cid:30)(cid:42)(cid:41)(cid:30)(cid:39)(cid:48)(cid:31)(cid:32)(cid:31)(cid:391)(cid:580)(cid:403)(cid:12)(cid:28)(cid:36)(cid:41)(cid:580)(cid:28)(cid:41)(cid:31)(cid:580)(cid:24)(cid:32)(cid:39)(cid:39)(cid:46)(cid:581)(cid:6)(cid:28)(cid:45)(cid:34)(cid:42)(cid:580)(cid:48)(cid:41)(cid:31)(cid:32)(cid:45)(cid:46)(cid:47)(cid:28)(cid:41)(cid:31)(cid:580)(cid:40)(cid:32)(cid:580)(cid:28)(cid:41)(cid:31)(cid:580)
my business. They are part of my team.”
19
Juanita Soranno, New York, New York
20
(cid:20)(cid:21)(cid:22)(cid:4)(cid:5)(cid:14)(cid:21)(cid:580)(cid:12)(cid:5)(cid:14)(cid:4)(cid:9)(cid:14)(cid:7)
Building a future,
together.
After turning to Wells Fargo to help pay for college, Juanita
Soranno came back for advice on the best way to pay off her
student loan, and then landed a job with Wells Fargo.
No. 2
Wells Fargo is the No. 2 provider of private
student loans.
When Juanita Soranno was accepted to San Francisco State
University, it was a tossup over who was most excited: her or
her grandmother (and namesake), Juanita Ramos, who lived
in San Francisco. Ramos was happy to have her granddaughter
close(cid:7)—(cid:7) and also knew where to turn for advice on paying for
college: the local Wells Fargo Mission Ocean store, where
Ramos was a loyal customer.
“The personal banker there explained to us how
Wells Fargo could help me achieve my goals,” said Soranno,
(cid:50)(cid:35)(cid:42)(cid:580)(cid:44)(cid:48)(cid:28)(cid:39)(cid:36)(cid:360)(cid:32)(cid:31)(cid:580)(cid:33)(cid:42)(cid:45)(cid:580)(cid:28)(cid:580)(cid:46)(cid:47)(cid:48)(cid:31)(cid:32)(cid:41)(cid:47)(cid:580)(cid:39)(cid:42)(cid:28)(cid:41)(cid:390)(cid:580)(cid:403)(cid:12)(cid:28)(cid:47)(cid:32)(cid:45)(cid:391)(cid:580)(cid:24)(cid:32)(cid:39)(cid:39)(cid:46)(cid:581)(cid:6)(cid:28)(cid:45)(cid:34)(cid:42)(cid:580)(cid:28)(cid:39)(cid:46)(cid:42)(cid:580)
advised me on planning to prepay interest before the loan was
due and gave me ideas on how I could pay down debt with
money I earned while working part time.”
Soranno took the advice to heart, and even applied for
a part-time teller role at Wells Fargo(cid:7)—(cid:7) the same store where
her grandmother banked. Upon graduating, she moved to
New York as a lead teller at the Seventh and 39th Street store,
and eventually became assistant to the Community Banking
president of Metro New York.
“Over the years, the resources and service I received
as a customer and a team member have been excellent,” she
concluded. “I am thrilled that I received good advice and
continue to take advantage of the expertise all around us at
Wells Fargo.”
21
COMMUNITY
Working side by side
to create a thriving
community.
Part of helping customers succeed financially is supporting thousands of
communities and all their varied priorities.
Our focus is on helping communities and their residents succeed in the long
term. So, we reach out. We listen. We remain open to feedback. The very best
conversations lead to practical, sustainable solutions that make a difference.
Sometimes that means getting our hands a little dirty. In Renton, Washington,
Wells Fargo volunteers like Esther Lee support Seattle University’s Urban Farm,
which donates all of its produce to food banks in the Puget Sound region.
Located on a wastewater treatment site, the farm planted its first crops in
January 2011. Michael Boyle, a professor in the university’s Environmental
Studies Program, helps manage the farm.
With the urging of Wells Fargo team members, the Urban Farm applied
for and was awarded a $100,000 environmental grant from Wells Fargo, and
volunteers from a Wells Fargo Green Team regularly spend time weeding,
planting, watering, and harvesting. With that help, in its second year the farm
doubled production of broccoli, spinach, beans, tomatoes, and other produce
to 14,000 pounds in 2012.
22
Wells Fargo’s Esther Lee with
Professor Michael Boyle, Renton, Washington
23
Idania Remon with Wells Fargo’s
Jaime Yepes, Tampa, Florida
24
COMMUNITY
Revitalizing communities
one neighbor at a time.
Idania Remon was able to buy a home with the help of a
(cid:403)(cid:12)(cid:36)(cid:33)(cid:47)(cid:404)(cid:586)(cid:415)(cid:586)(cid:580)(cid:28)(cid:580)(cid:31)(cid:42)(cid:50)(cid:41)(cid:580)(cid:43)(cid:28)(cid:52)(cid:40)(cid:32)(cid:41)(cid:47)(cid:580)(cid:28)(cid:46)(cid:46)(cid:36)(cid:46)(cid:47)(cid:28)(cid:41)(cid:30)(cid:32)(cid:580)(cid:34)(cid:45)(cid:28)(cid:41)(cid:47)(cid:580)(cid:42)(cid:358)(cid:32)(cid:45)(cid:32)(cid:31)(cid:580)(cid:47)(cid:35)(cid:45)(cid:42)(cid:48)(cid:34)(cid:35)(cid:580)
Wells Fargo’s NeighborhoodLIFT SM program.
more than 1,600
The Wells Fargo NeighborhoodLIFT and
CityLIFT SM programs have already helped
more than 1,600 potential homebuyers
become homeowners.
Idania Remon of Tampa, Florida, immigrated to the U.S. from
Cuba 10 years ago with her husband and two children. She got
a job as a machine operator in a sports apparel manufacturing
company and began working with Wells Fargo to establish
credit. When she was interested in buying a home, she talked
to Home Mortgage Consultant Jaime Yepes.
Yepes said, “I really wanted to help, but like many first-time
homebuyers, Idania couldn’t find a house that she could afford.
I told her I would keep in touch if anything came along that
could help.”
Enter NeighborhoodLIFT, a program in which Wells Fargo
provides down payment assistance grants, homebuyer assistance
and education, and housing counselor support in partnership
with NeighborWorks® America and local nonprofits. Through
the LIFT programs, Wells Fargo has committed $170 million
for 20 areas in need of help across the country.
The NeighborhoodLIFT program came about during the
prolonged housing downturn when community leaders told
Wells Fargo they needed extra help to turn the corner. The
NeighborhoodLIFT program aids in stabilizing some of the
hardest-hit communities. Every two-day event includes tours
of affordable homes, home-buying education for attendees,
and one-on-one meetings with Home Mortgage consultants.
When the NeighborhoodLIFT program came to Tampa,
Yepes invited Remon to attend, and she was approved on the
spot for a $15,000 grant to help buy a home.
“I was ready to buy a home but just needed a bit of help,”
said Remon. “It would have taken me years to save up the down
payment. The NeighborhoodLIFT program changed my life.”
25
(cid:3)(cid:15)(cid:19)(cid:16)(cid:15)(cid:19)(cid:1)(cid:21)(cid:5)(cid:580)(cid:20)(cid:15)(cid:3)(cid:9)(cid:1)(cid:12)(cid:580)(cid:19)(cid:5)(cid:20)(cid:16)(cid:15)(cid:14)(cid:20)(cid:9)(cid:2)(cid:9)(cid:12)(cid:9)(cid:21)(cid:26)(cid:580)(cid:8)(cid:9)(cid:7)(cid:8)(cid:12)(cid:9)(cid:7)(cid:8)(cid:21)(cid:20)
We focus on investing our resources in the areas our team members, customers, and communities
tell us they care about most. Here are a few highlights from our five strategic areas, and
we invite you to read our 2012 Corporate Social Responsibility Interim Report to learn more.
Community investment
We provide human and financial
resources to help build strong
communities.
Environmental stewardship
We focus on integrating
environmental mindfulness into our
products, services, and operations.
Product and service responsibility
We offer all customers responsible
financial advice and solutions for
now and the future.
Philanthropy
Invested $315.8 million in 19,500 nonprofits
Community development
loans & investments
Community
development: 46%
Education: 24%
Human services: 17%
Arts & culture: 5%
Civic: 5%
Environment: 3%
$3.6billion in 2011
$7.0 billion in 2012
Environmental grants
Environmental loans & investments
$4.4 million in 2011
$8.0million in 2012
More than
$6 billion
in environmental financing in 2012
Homeownership
Small business lending
1,600 new homeowners helped with
$27 million
in down payment assistance through
16 Wells Fargo LIFT programs
launched in 2012
$16 billion
in new loan commitments to small
businesses across the U.S. in 2012
Team member engagement
We support our team members
professionally, financially,
and personally.
Team member giving
Volunteerism
$79 million
in donations pledged in 2012
1.5 million hours in 2012
Ethical business practices
We ensure all business functions
run responsibly and ethically.
Training
99.96%
of eligible team members completed
the Code of Ethics and Business
Conduct annual training in 2012
To learn more
Download our 2012 Corporate Social
Responsibility Interim Report at
www.wellsfargo.com/about/csr/reports/
Wells Fargo & Company Corporate Social Responsibility Interim Report 2012
Conversations that
make a difference.
26
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 3, 4
Distinguished Fellow
The Heritage Foundation
Washington, D.C.
(Educational and
research organization)
John S. Chen 6
Retired Chairman, CEO
Sybase, Inc.
Dublin, California
(Computer software)
Lloyd H. Dean 2, 5, 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)
Cynthia H. Milligan 2, 3, 5, 7
Dean Emeritus
College of Business
Administration
University of Nebraska –
(cid:12)(cid:36)(cid:41)(cid:30)(cid:42)(cid:39)(cid:41)(cid:391)(cid:580)(cid:14)(cid:32)(cid:29)(cid:45)(cid:28)(cid:46)(cid:38)(cid:28)
(Higher education)
Nicholas G. Moore 1, 3, 7
Retired Global Chairman
PricewaterhouseCoopers
New York, New York
(Accounting)
Federico F. Peña 1, 5
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)
Howard V. Richardson 1
Retired Partner
PricewaterhouseCoopers
New York, New York
(Accounting)
Judith M. Runstad 2, 3, 4, 7
Of Counsel
(cid:6)(cid:42)(cid:46)(cid:47)(cid:32)(cid:45)(cid:580)(cid:16)(cid:32)(cid:43)(cid:43)(cid:32)(cid:45)(cid:580)(cid:16)(cid:12)(cid:12)(cid:3)
Seattle, Washington
(Law firm)
Stephen W. Sanger * 5, 6, 7
Retired Chairman, CEO
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 *
(cid:13)(cid:36)(cid:30)(cid:35)(cid:28)(cid:32)(cid:39)(cid:580)(cid:10)(cid:390)(cid:580)(cid:12)(cid:42)(cid:48)(cid:34)(cid:35)(cid:39)(cid:36)(cid:41)(cid:391)(cid:580)(cid:3)(cid:35)(cid:36)(cid:32)(cid:33)(cid:580)(cid:19)(cid:36)(cid:46)(cid:38)(cid:581)(cid:15)(cid:366)(cid:30)(cid:32)(cid:45)(cid:580)(cid:445)
Paul R. Ackerman, Treasurer
Caryl J. Athanasiu, Chief Operational Risk Officer
(cid:1)(cid:49)(cid:36)(cid:31)(cid:580)(cid:13)(cid:42)(cid:31)(cid:37)(cid:47)(cid:28)(cid:29)(cid:28)(cid:36)(cid:391)(cid:580)(cid:3)(cid:42)(cid:41)(cid:46)(cid:48)(cid:40)(cid:32)(cid:45)(cid:580)(cid:12)(cid:32)(cid:41)(cid:31)(cid:36)(cid:41)(cid:34)(cid:580)(cid:445)
Jamie Moldafsky, Chief Marketing Officer
Kevin D. Oden, Chief Market and
Anthony R. Augliera, Corporate Secretary
Institutional Risk Officer
Patricia R. Callahan, Chief Administrative Officer *
Kevin A. Rhein, Chief Information Officer *
Jon R. Campbell, Government and
Joseph J. Rice, Chief Credit Officer
Community Relations
David M. Carroll, Wealth, Brokerage
and Retirement *
Donald E. Dana, Corporate Properties
Hope A. Hardison, Human Resources
(cid:13)(cid:36)(cid:30)(cid:35)(cid:28)(cid:32)(cid:39)(cid:580)(cid:10)(cid:390)(cid:580)(cid:8)(cid:32)(cid:36)(cid:31)(cid:391)(cid:580)(cid:8)(cid:42)(cid:40)(cid:32)(cid:580)(cid:12)(cid:32)(cid:41)(cid:31)(cid:36)(cid:41)(cid:34)(cid:580)(cid:445)
Bruce E. Helsel, Corporate Development
David A. Hoyt, Wholesale Banking *
David M. Julian, Chief Auditor
(cid:19)(cid:36)(cid:30)(cid:35)(cid:28)(cid:45)(cid:31)(cid:580)(cid:4)(cid:390)(cid:580)(cid:12)(cid:32)(cid:49)(cid:52)(cid:391)(cid:580)(cid:3)(cid:42)(cid:41)(cid:47)(cid:45)(cid:42)(cid:39)(cid:39)(cid:32)(cid:45)(cid:580)(cid:445)
James H. Rowe, Investor Relations
(cid:5)(cid:45)(cid:36)(cid:30)(cid:580)(cid:4)(cid:390)(cid:580)(cid:20)(cid:35)(cid:28)(cid:41)(cid:31)(cid:391)(cid:580)(cid:3)(cid:35)(cid:36)(cid:32)(cid:33)(cid:580)(cid:12)(cid:42)(cid:28)(cid:41)(cid:580)(cid:5)(cid:51)(cid:28)(cid:40)(cid:36)(cid:41)(cid:32)(cid:45)
Timothy J. Sloan, Chief Financial Officer *
James M. Strother, General Counsel *
Oscar Suris, Corporate Communications
(cid:3)(cid:28)(cid:45)(cid:45)(cid:36)(cid:32)(cid:580)(cid:12)(cid:390)(cid:580)(cid:21)(cid:42)(cid:39)(cid:46)(cid:47)(cid:32)(cid:31)(cid:47)(cid:391)(cid:580)(cid:3)(cid:42)(cid:40)(cid:40)(cid:48)(cid:41)(cid:36)(cid:47)(cid:52)(cid:580)(cid:2)(cid:28)(cid:41)(cid:38)(cid:36)(cid:41)(cid:34)(cid:580)(cid:445)
* “ Executive officers” according to Securities and Exchange
Commission rules
27
Senior Business Leaders
COMMUNITY BANKING
Group Head
Carrie L. Tolstedt
Business Banking Group
Hugh C. Long
David L. Pope, Business Banking Sales
and Service
Debra B. Rossi, Merchant Services
David J. Rader, SBA Lending
Deposit Products Group
Kenneth A. Zimmerman
Daniel I. Ayala,
Global Remittance Services
Edward M. Kadletz, Debit and
Prepaid Products
Customer Connection
Diana L. Starcher
Digital Channels Group
James P. Smith
Regional Banking
Regional Presidents
Paul W. “Chip” Carlisle, Southwest
John T. Gavin, Dallas-Fort Worth
Glenn V. Godkin, Houston
Lisa J. Riley, New Mexico/Western Border
Jeffrey Schumacher, Central Texas
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
Daniel P. Murphy, North Dakota,
South Dakota
Joy N. Ott, Montana
Gerrit van Huisstede, Western Mountain
Kirk V. Clausen, Nevada
Pamela M. Conboy, Arizona
Joseph C. Everhart, Alaska
Don M. Melendez, Idaho
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
Frank Newman III, South Florida
Larisa F. Perry, Central Florida
Darryl G. Harmon, Southeast
Michael S. Donnelly, Atlanta
Glen M. Kelley, Greater Georgia
Leigh Vincent Collier, Mid-South
Pete Jones, Mid-Atlantic
Andrew M. Bertamini, Maryland
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
Vincent J. Liuzzi III,
Greater Philadelphia, Delaware
Gregory S. Redden,
Greater Pennsylvania
Brenda K. Ross-Dulan,
Southern New Jersey
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
Beverly J. Anderson,
Consumer Financial Services
Ruben O. Avilez,
Strategic Auto Investments
Jerry G. Bowen, Commercial Auto
Dawn M. Martin Harp, Dealer Services
John P. Rasmussen,
Education Financial Services
Home Lending
Michael J. Heid
Bradley W. Blackwell, Portfolio Lending
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
David M. Carroll
Christine A. Deakin, Business Services
Daniel J. Ludeman, Wells Fargo Advisors
John M. Papadopulos, Retirement
James P. Steiner, Abbot Downing
Timothy A. Butturini, Greater Virginia
Jay S. Welker, Wealth Management
Michael L. Golden,
Greater Washington, D.C.
Deborah E. O’Donnell, Western Virginia
WHOLESALE BANKING
Group Head
David A. Hoyt
28
Asset Management Group
Michael J. Niedermeyer
Robert W. Bissell,
Wells Capital Management
International Group
Richard Yorke
Rajnish Bharadwaj,
Cross Border Governance
Thomas K. Hoops, Affiliated Managers
Peter P. Connolly,
Karla M. Rabusch, Wells Fargo
Funds Management, LLC
Commercial Banking
Perry G. Pelos
John C. Adams, Northwest Region
Mary A. Knell, Washington and
Western Canada Division
Ralph C. Hamm, III, Oregon and
Inland Northwest Division
Tim M. Billerbeck, Specialty Finance and
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
Michael J. Carlin,
Government Banking Credit
Jim E. Fitzgerald, Northeast Division
Stan F. Gibson, Carolinas Division
Howard M. Halle, Florida Division
Marybeth S. Howe, Great Lakes Division
Edmond O. Lelo, Mid-Atlantic Division
Susanne Svizeny, Pennsylvania, Delaware
and Eastern Canada 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
Global Transaction Banking
James C. Johnston,
EMEA Regional President
Chris G. Lewis, Global Trade Services
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
Walter Dolhare and Tim Mullins,
Markets Division
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
Wholesale Credit & Risk
David J. Weber
James D. Heinz, U.S. Corporate Banking
Kyle G. Hranicky, Energy Group
Robert W. Belson, Wholesale Banking
Adam B. Davis, Chief Credit Officer Real
John R. Hukari, Equity Funds Group
Estate
David B. Marks, Chief Credit Officer
Corporate Banking
Kevin J. Martin, Group Compliance and
Operational Risk Officer
William J. Mayer, Chief Credit Officer
Commercial Banking/Wells Fargo
Capital Finance/Equipment Finance
Kenneth C. McCorkle, AgriBusiness
Barry Neal, Environmental Finance
Michael P. Sadilek, Loan Workout
Wholesale Services
Stephen M. Ellis
Michael J. Kennedy, Payment Strategies
Daniel C. Peltz, Treasury
Management Group
Jay J. Kornmayer, Gaming Division
Brian J. Van Elslander,
Financial Sponsors Group
Daniel P. Weiler, Financial Institutions
Group; Power and Utilities Group
Insurance Group
Laura Schupbach
Kevin M. Brogan, National Product and
Special Risk Group
Michael P. Day, Rural Community
Insurance Services, Inc.
Anne J. Doss, Personal and
Small Business Insurance
Ken Fraser, National Product and
Special Risk Group
Scott R. Isaacson,
Insurance Strategy Group
Kevin T. Kenny, Insurance Brokerage
and Consulting
H. David Wood,
Insurance Operations Group
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
30
34
45
48
50
89
93
96
Critical Accounting Policies
102 Current Accounting Developments
103
Forward-Looking Statements
104 Risk Factors
Controls and Procedures
119 Disclosure Controls and Procedures
119
Internal Control over Financial Reporting
119 Management’s Report on Internal Control over
Financial Reporting
Financial Statements
121
Consolidated Statement of Income
123 Consolidated Balance Sheet
124 Consolidated Statement of Changes in Equity
128 Consolidated Statement of Cash Flows
Notes to Financial Statements
Summary of Significant Accounting Policies
129
141
1
2
Business Combinations
142
142
143
151
168
169
183
184
184
185
187
190
193
222
226
233
235
237
239
242
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
8
Securitizations and Variable Interest Entities
180
9 Mortgage Banking Activities
10
Intangible Assets
11 Deposits
12 Short-Term Borrowings
13 Long-Term Debt
15 Legal Actions
16 Derivatives
14 Guarantees, Pledged Assets and Collateral
200
17 Fair Values of Assets and Liabilities
220
18 Preferred Stock
19 Common Stock and Stock Plans
20 Employee Benefits and Other Expenses
21
Income Taxes
236
23 Other Comprehensive Income
24 Operating Segments
25 Parent-Only Financial Statements
243 Report of Independent Registered
Public Accounting Firm
244 Quarterly Financial Data
246 Glossary of Acronyms
120
Report of Independent Registered Public Accounting Firm
22 Earnings Per Common Share
122 Consolidated Statement of Comprehensive Income
26 Regulatory and Agency Capital Requirements
Wells Fargo & Company
2012 Financial Report
Financial Review
Overview
Earnings Performance
Balance Sheet Analysis
Off-Balance Sheet Arrangements
Risk Management
Capital Management
Regulatory Reform
Critical Accounting Policies
30
34
45
48
50
89
93
96
102 Current Accounting Developments
103
Forward-Looking Statements
104 Risk Factors
Controls and Procedures
119 Disclosure Controls and Procedures
119
Internal Control over Financial Reporting
119 Management’s Report on Internal Control over
Financial Reporting
120
Report of Independent Registered Public Accounting Firm
Financial Statements
121
Consolidated Statement of Income
122 Consolidated Statement of Comprehensive Income
123 Consolidated Balance Sheet
124 Consolidated Statement of Changes in Equity
128 Consolidated Statement of Cash Flows
Notes to Financial Statements
129
141
1
2
Summary of Significant Accounting Policies
Business Combinations
142
142
143
151
168
169
3 Cash, Loan and Dividend Restrictions
4
5
6
7
Federal Funds Sold, Securities Purchased under
Resale Agreements and Other Short-Term Investments
Securities Available for Sale
Loans and Allowance for Credit Losses
Premises, Equipment, Lease Commitments and Other Assets
8
Securitizations and Variable Interest Entities
180
9 Mortgage Banking Activities
183
184
184
185
187
190
193
10
Intangible Assets
11 Deposits
12 Short-Term Borrowings
13 Long-Term Debt
14 Guarantees, Pledged Assets and Collateral
15 Legal Actions
16 Derivatives
200
17 Fair Values of Assets and Liabilities
220
18 Preferred Stock
222
226
233
235
19 Common Stock and Stock Plans
20 Employee Benefits and Other Expenses
21
Income Taxes
22 Earnings Per Common Share
236
23 Other Comprehensive Income
237
239
242
24 Operating Segments
25 Parent-Only Financial Statements
26 Regulatory and Agency Capital Requirements
243 Report of Independent Registered
Public Accounting Firm
244 Quarterly Financial Data
246 Glossary of Acronyms
29
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 in the “Regulation and Supervision” section of our Annual Report on Form 10-K for the year ended
December 31, 2012 (2012 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 nationwide, diversified,
community-based financial services company with $1.4 trillion
in assets. Founded in 1852 and headquartered in San Francisco,
we provide banking, insurance, investments, mortgage, and
consumer and commercial finance through more than
9,000 stores, 12,000 ATMs and the Internet (wellsfargo.com),
and we have offices in more than 35 countries to support our
customers who conduct business in the global economy. With
more than 265,000 active, full-time equivalent team members,
we serve one in three households in the United States and
ranked No. 26 on Fortune’s 2012 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, 2012.
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 our 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.
Financial Performance
We generated strong financial results in 2012 even with
regulatory changes and an uncertain economic and political
environment. We had higher net income and revenue, solid loan
and deposit growth, an improved efficiency ratio and improved
credit quality in 2012 compared with 2011. Our 2012 results
reflected our resolution of mortgage origination, servicing, and
foreclosure matters with various regulators and government
entities; Super Storm Sandy, which impacted many of our
customers in the northeast; and new regulatory guidance that
affected our credit metrics. Our return on average assets of 1.41%
was up 16 basis points from 2011, the highest it has been in five
30
years, and our return on equity increased to 12.95%, up 102 basis
points from 11.93% for 2011.
Wells Fargo net income was $18.9 billion and our diluted
earnings per common share was $3.36 for 2012, each up 19%
from 2011. Our earnings per share have grown for 12 consecutive
quarters through the end of 2012. The increase in our net income
for 2012 over 2011 was driven by a 6% increase in total revenue
and the benefit of improving our efficiency ratio to 58.5% from
61.0% in 2011.
Our total revenue increased to $86.1 billion in 2012, up
$5.1 billion, or 6%, from 2011. The 6% revenue increase
predominantly reflected the diversity of our business model and
included:
(cid:120)
$3.8 billion increase in mortgage banking income as
discussed below;
$693 million increase in net gains from trading activities, a
major portion resulting from customer accommodations;
and
$586 million increase in trust and investment fee income
due to growth in assets under management reflecting higher
market values and net asset inflows as well as transaction
activity on volume-driven fees.
(cid:120)
(cid:120)
Mortgage banking income increased due to higher net gains
on higher mortgage loan origination/sales activities reflecting
increased margins and a lower interest rate environment for
2012 compared with 2011. Our mortgage loan originations in
2012 totaled $524 billion (of which we retained $19.4 billion in
conforming loans on balance sheet), compared with $357 billion
in 2011. Our unclosed mortgage loan pipeline was $81 billion at
December 31, 2012, up 13% from $72 billion at the end of 2011.
Noninterest expense totaled $50.4 billion in 2012, up from
$49.4 billion in 2011. The increase from 2011 reflected elevated
operating losses and other costs due to mortgage servicing
regulatory consent orders, a $175 million settlement with the
Department of Justice that resolved claims related to mortgage
lending practices, a $766 million accrual for the Independent
Foreclosure Review (IFR) settlement and other remediation-
related costs, and a $250 million contribution to the Wells Fargo
Foundation. In addition, our expenses in 2012 were also driven
by additional revenue opportunities from mortgage banking
volume and other revenue generating activities. Because
pursuing revenue opportunities can increase expenses, we
believe our efficiency ratio, which measures our noninterest
expense as a percentage of total revenue, is an appropriate
measure of our expense management efforts. We improved our
efficiency ratio by 250 basis points to 58.5% for 2012 compared
to 61.0% for 2011. While we have made progress on improving
our efficiency, we believe our expenses are still too high and we
will continue to focus on opportunities to reduce expenses that
do not impact our ability to grow revenue. We have targeted an
efficiency ratio of 55 to 59%, and our efficiency ratio of 58.5% in
2012 was within this target range. Although our quarterly
efficiency ratio may vary due to cyclical or seasonal factors, we
believe we are well positioned to remain within our targeted
range in 2013.
Our total assets grew 8% in 2012 to $1.4 trillion, funded
largely by strong deposit growth. Our core deposits grew
$73.1 billion ($67.2 billion on average) or 8% in 2012. The
predominant areas of asset growth were in short-term
investments, which increased $92.9 billion, and loans, which
increased $29.9 billion. Our loan growth represented core loan
growth of $47.7 billion (including retention of $19.4 billion of
1-4 family conforming first mortgage production on the balance
sheet), partially offset by the planned runoff in our non-
strategic/liquidating loan portfolio of $17.8 billion. We also
increased securities available for sale by $12.6 billion in 2012 as
rates rose and yields became more attractive.
Credit Quality
Credit quality continued to improve during 2012 as the overall
financial condition of businesses and consumers strengthened
and the housing market in many areas of the nation improved.
The improvement in our credit portfolio was also due in part to
the continued decline in balances in our non-
strategic/liquidating loan portfolios, which have declined
$96.3 billion since the beginning of 2009, and totaled
$94.6 billion at December 31, 2012.
Our reported credit metrics in 2012 improved even though
they were adversely affected by guidance issued by bank
regulators in first quarter 2012 relating to junior lien mortgages
(Interagency guidance) and guidance issued by the Office of the
Comptroller of the Currency (OCC) in third quarter 2012 relating
to loans discharged in bankruptcy (OCC guidance). The
Interagency guidance requires junior lien mortgages to be placed
on nonaccrual status if the related first lien mortgage is
nonaccruing. The OCC guidance requires consumer loans
discharged in bankruptcy to be written down to net realizable
collateral value (fair value of collateral less estimated costs to
sell) and classified as nonaccrual troubled debt restructurings
(TDRs), regardless of their delinquency status. The Interagency
guidance increased our nonperforming assets by $960 million as
of December 31, 2012. The OCC guidance increased
nonperforming assets by $1.8 billion as of December 31, 2012,
and increased loan charge-offs by $888 million for 2012.
Including the combined adverse effect of the new junior lien and
bankruptcy regulatory guidance:
(cid:120) net charge-offs were $9.0 billion in 2012 (1.17% of average
loans) compared with $11.3 billion in 2011 (1.49% of average
loans);
(cid:120) nonperforming assets were $24.5 billion at
(cid:120)
December 31, 2012, down from $26.0 billion at December 31,
2011; and
loans 90 days or more past due and still accruing (excluding
government insured/guaranteed loans) were $1.4 billion at
December 31, 2012, compared with $2.0 billion at
December 31, 2011.
Our $7.2 billion provision for credit losses in 2012, which was
$682 million less than 2011, incorporated an estimate for losses
attributable to Super Storm Sandy, which occurred during the
last week of October 2012. The provision for 2012 was
$1.8 billion lower than net loan charge-offs due to continued
strong credit performance.
Capital
Total equity increased $17.2 billion in 2012 to $158.9 billion and
our Tier I common equity totaled $109.0 billion under Basel I, or
10.12% of risk-weighted assets. Our other capital ratios also
remained strong with a Tier 1 risk-based capital ratio of 11.75%,
total risk-based capital ratio of 14.63% and Tier 1 leverage ratio
of 9.47% at December 31, 2012, compared with 11.33%, 14.76%
and 9.03%, respectively, at December 31, 2011.
We increased our common stock dividend by 83%, and for
2012, paid dividends of $0.88 per common share and
repurchased approximately 120 million shares of common stock.
During fourth quarter 2012 we also entered into a $200 million
private forward repurchase contract to repurchase
approximately 6 million shares that is expected to settle in first
quarter 2013.
31
38
19
19
19
83
6 %
4
18
19
7
7
(6)
26
16
26
14
20
25
5
27
37
27
Overview (continued)
Table 1: Six-Year Summary of Selected Financial Data (1)
(in millions, except per share amounts)
2012
2011
2010
2009
2008
2007
2011
rate
%
Five-year
Change
2012/
compound
growth
Income statement
Net interest income
Noninterest income
Revenue
$
43,230
42,856
42,763
38,185
44,757
40,453
46,324
42,362
25,143
16,734
20,974
18,546
86,086
80,948
85,210
88,686
41,877
39,520
Provision for credit losses
7,217
7,899
15,753
21,668
15,979
4,939
50,398
49,393
50,456
49,020
22,598
22,746
1 %
12
6
(9)
2
16
18
17
8
17
19,368
16,211
12,663
12,667
2,698
8,265
19
19
Noninterest expense
Net income before
noncontrolling interests
Less: Net income from
noncontrolling interests
Wells Fargo net income
Earnings per common share
Diluted earnings per common share
Dividends declared per common share
Balance sheet (at year end)
471
342
301
392
43
208
18,897
15,869
12,362
12,275
2,655
8,057
3.40
3.36
0.88
2.85
2.82
0.48
2.23
2.21
0.20
1.76
1.75
0.49
0.70
0.70
1.30
2.41
2.38
1.18
Securities available for sale
$
235,199
222,613
172,654
172,710
151,569
72,951
Loans
799,574
769,631
757,267
782,770
864,830
382,195
Allowance for loan losses
17,060
19,372
23,022
24,516
21,013
5,307
(12)
Goodwill
Assets
Core deposits (2)
Long-term debt
25,637
25,115
24,770
24,812
22,627
13,106
1,422,968 1,313,867 1,258,128 1,243,646 1,309,639
575,442
945,749
872,629
798,192
780,737
745,432
311,731
127,379
125,354
156,983
203,861
267,158
99,393
Wells Fargo stockholders' equity
157,554
140,241
126,408
111,786
99,084
47,628
Noncontrolling interests
Total equity
1,357
1,446
1,481
2,573
3,232
286
158,911
141,687
127,889
114,359
102,316
47,914
2
8
8
2
12
(6)
12
(1) The Company acquired Wachovia Corporation (Wachovia) on December 31, 2008. Because the acquisition was completed on December 31, 2008, Wachovia's results are
included in the income statement, average balances and related metrics beginning in 2009. Wachovia's assets and liabilities are included in the consolidated balance sheet
beginning on December 31, 2008.
(2) Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits
(Eurodollar sweep balances).
32
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,
2012
2011
2010
1.41 %
1.25
1.01
12.95
58.5
11.93
10.33
61.0
59.2
10.23
11.17
9.87
9.41
10.78
10.16
11.75
14.63
9.47
10.12
10.36
11.27
11.33
14.76
9.03
9.46
9.91
10.80
11.16
15.01
9.19
8.30
9.17
9.96
26.2
17.0
9.0
$
27.64
24.64
22.49
36.60
27.94
34.18
34.25
22.58
27.56
34.25
23.02
30.99
(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.
33
Noninterest expense was $50.4 billion in 2012, compared
with $49.4 billion in 2011 and $50.5 billion in 2010. Noninterest
expense as a percentage of revenue (efficiency ratio) was 58.5%
in 2012, 61.0% in 2011 and 59.2% in 2010, reflecting our expense
management efforts and revenue growth in 2012. The increase in
noninterest expense from the prior year was due to increased
revenue generating activities and elevated operating losses and
other costs associated with mortgage servicing regulatory
consent orders, the IFR settlement, additional remediation-
related costs and the contribution to the Wells Fargo
Foundation.
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 2012 was $18.9 billion ($3.36 diluted
earnings per common share), compared with $15.9 billion
($2.82 diluted per share) for 2011 and $12.4 billion ($2.21
diluted per share) for 2010. Our 2012 earnings reflected strong
execution of our business strategy and growth in many of our
businesses. The key drivers of our financial performance in 2012
were net interest and fee income growth, diversified sources of
fee income, a diversified loan portfolio and strong underlying
credit performance.
Revenue, the sum of net interest income and noninterest
income, was $86.1 billion in 2012, compared with $80.9 billion
in 2011 and $85.2 billion in 2010. In 2012, net interest income of
$43.2 billion represented 50% of revenue, compared with
$42.8 billion (53%) in 2011 and $44.8 billion (53%) in 2010. The
increase in revenue for 2012 was due to strong growth in
noninterest income, predominantly from mortgage banking.
Noninterest income was $42.9 billion in 2012, representing
50% of revenue, compared with $38.2 billion (47%) in 2011 and
$40.5 billion (47%) in 2010. The increase in 2012 was driven
predominantly by a 49% increase in mortgage banking income
due to increased net gains on mortgage loan origination/sales
activities, but also included higher trust and investment and
other fees on higher retail brokerage asset-based fees and strong
investment banking activity. Mortgage loan originations were
$524 billion in 2012, up from $357 billion a year ago.
34
Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
% of
2012 revenue
% of
2011 revenue
% of
revenue
2010
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
$
1,380
8,757
1,825
41
36,517
587
49,107
1,727
94
3,110
245
5,176
2 %
$
10
2
-
42
1
57
2
-
4
-
6
51
(1)
50
5
14
3
5
14
2
2
-
2
1
2
1,463
9,107
1,644
58
37,302
548
50,122
2,275
94
3,978
316
6,663
43,459
(696)
42,763
4,280
11,304
3,653
4,193
7,832
1,960
1,014
54
1,482
524
1,889
2 %
$
1,121
1 %
11
2
-
46
1
62
3
-
5
-
8
54
(1)
53
5
14
5
5
10
2
1
-
2
1
2
10,236
1,736
101
39,808
437
53,439
2,832
106
4,888
227
8,053
45,386
(629)
44,757
4,916
10,934
3,652
3,990
9,737
2,126
1,648
(324)
779
815
2,180
12
2
-
47
1
63
3
-
6
-
9
54
(1)
53
6
12
4
5
11
2
2
-
1
1
3
Net interest income (on a taxable-equivalent basis)
43,931
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
(701)
43,230
4,683
11,890
2,838
4,519
11,638
1,850
1,707
(128)
1,485
567
1,807
Total noninterest income (B)
42,856
50
38,185
47
40,453
47
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
14,689
9,504
4,611
2,068
2,857
1,674
1,356
13,639
50,398
17
11
6
2
3
2
2
16
59
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
14,182
50,456
16
10
5
3
4
3
1
17
59
Revenue (A) + (B)
$
86,086
$
80,948
$
85,210
(1) See Table 7 – Noninterest Income in this Report for additional detail.
(2) See Table 8 – Noninterest Expense in this Report for additional detail.
35
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.
While the Company believes that it has the ability to increase
net interest income over time, net interest income and the net
interest margin in any one period can be significantly affected by
a variety of factors including the mix and overall size of our
earning asset portfolio and the cost of funding those assets. In
addition, some variable sources of interest income, such as
resolutions from purchased credit-impaired (PCI) loans, 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
$43.9 billion in 2012, compared with $43.5 billion in 2011, and
$45.4 billion in 2010. The net interest margin was 3.76% in
2012, down 18 basis points from 3.94% in 2011 and down
50 basis points from 4.26% in 2010. The increase in net interest
income for 2012 compared with 2011, was largely driven by
growth in loans and available-for-sale securities, disciplined
deposit pricing, debt maturities and redemptions of higher
yielding trust preferred securities, which partially offset the
impact of higher yielding loan and investment securities runoff.
The decline in net interest margin in 2012 compared with a year
ago, was largely driven by strong deposit growth, which elevated
short-term investment balances, and the continued runoff of
higher yielding assets.
Table 4 presents the components of earning assets and
funding sources as a percentage of earning assets to provide a
more meaningful analysis of year-over-year changes that
influenced net interest income.
Average earning assets increased $67.4 billion in 2012 from a
year ago, as average securities available for sale increased
$39.4 billion and average mortgages held for sale increased
$11.7 billion for the same period, respectively. In addition, the
increase in commercial and industrial loans contributed
$16.3 billion to higher average loans in 2012 compared with a
year ago. These increases in average securities available for sale,
mortgages held for sale and average loans were partially offset by
a $3.1 billion decline in average short-term investments.
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, market rate and other
savings, and certain foreign deposits (Eurodollar sweep
balances). Average core deposits rose to $893.9 billion in 2012
compared with $826.7 billion in 2011 and funded 115% of
average loans compared with 109% a year ago. Average core
deposits increased to 76% of average earning assets in 2012,
compared with 75% a year ago. The cost of these deposits has
continued to decline due to a sustained low interest rate
environment and a shift in our deposit mix from higher cost
certificates of deposit to lower yielding checking and savings
products. About 94% of our average core deposits are in
checking and savings deposits, one of the highest industry
percentages.
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 2012, are
analyzed in Table 6.
36
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
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 and equity securities
Total securities available for sale
Mortgages held for sale (1)
Loans held for sale (1)
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 (1)
Other
Funding sources
Deposits:
2012
% of
earning
assets
7 %
4
$
-
3
8
3
11
4
18
4
-
15
9
2
1
4
31
20
7
2
7
36
67
-
Year ended December 31,
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
-
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
$
Average
balance
84,081
41,950
3,604
34,875
92,887
33,545
126,432
49,245
214,156
48,955
661
173,913
105,437
17,963
12,771
39,852
349,936
234,619
80,840
22,772
87,057
425,288
775,224
4,438
Total earning assets
$
1,169,465
100 %
$
1,102,062
100 %
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) Nonaccrual loans are included in their respective loan categories.
$
30,564
505,310
59,484
13,363
67,920
676,641
51,196
127,547
10,032
865,416
304,049
3 %
$
43
5
1
6
58
4
11
1
74
26
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
$
1,169,465
100 %
$
1,102,062
100 %
$
$
$
$
$
16,303
25,417
130,450
172,170
263,863
61,214
151,142
(304,049)
172,170
1,341,635
17,388
24,904
125,911
168,203
215,242
57,399
137,251
(241,689)
168,203
1,270,265
37
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 (4)
Securities available for sale (5):
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 (6)
Loans held for sale (6)
Loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total loans (6)
Other
Funding sources
Deposits:
Average
balance
Yields/
rates
84,081
41,950
3,604
34,875
92,887
33,545
126,432
49,245
214,156
48,955
661
173,913
105,437
17,963
12,771
39,852
349,936
234,619
80,840
22,772
87,057
425,288
775,224
4,438
0.45 % $
3.29
1.31
4.48
3.12
6.75
4.08
4.04
4.09
3.73
6.22
4.01
4.18
4.98
7.22
2.47
4.06
4.55
4.28
12.67
6.10
5.25
4.71
4.70
2012
Interest
income/
expense
378
1,380
47
1,561
2,893
2,264
5,157
1,992
8,757
1,825
41
6,981
4,411
894
921
984
14,191
10,671
3,457
2,885
5,313
22,326
36,517
209
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
331,148
226,980
90,705
21,463
86,848
425,996
757,144
4,929
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
4.24
4.89
4.33
13.02
6.29
5.46
4.93
4.12
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
14,029
11,090
3,926
2,794
5,463
23,273
37,302
203
Total earning assets
$
1,169,465
4.20 % $
49,107
1,102,062
4.55 % $
50,122
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
$
30,564
505,310
59,484
13,363
67,920
676,641
51,196
127,547
10,032
865,416
304,049
Total funding sources
$
1,169,465
Net interest margin and net interest income
on a taxable-equivalent basis (7)
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
$
$
$
$
$
16,303
25,417
130,450
172,170
263,863
61,214
151,142
(304,049)
172,170
1,341,635
0.06 % $
0.12
1.31
1.68
0.16
0.26
0.18
2.44
2.44
0.60
-
0.44
19
592
782
225
109
1,727
94
3,110
245
5,176
-
5,176
47,705
464,450
69,711
13,126
61,566
656,558
51,781
141,079
10,955
860,373
241,689
1,102,062
0.08 % $
0.18
1.43
2.04
0.22
0.35
0.18
2.82
2.88
0.77
-
0.61
40
836
995
268
136
2,275
94
3,978
316
6,663
-
6,663
3.76 % $
43,931
3.94 % $
43,459
17,388
24,904
125,911
168,203
215,242
57,399
137,251
(241,689)
168,203
1,270,265
(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%, 3.25%, and 5.09% for 2012, 2011, 2010, 2009, and 2008, respectively. The average three-month London Interbank
Offered Rate (LIBOR) was 0.43%, 0.34%, 0.34%, 0.69%, and 2.93% for the same years, respectively.
(3) Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(4) Interest income/expense for trading assets represents interest and dividend income earned on trading securities.
38
Average
balance
Yields/
rates
2010
Interest
income/
expense
Average
balance
Yields/
rates
$
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
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
$
1,064,158
5.02 % $
53,439
1,098,139
5.19 % $
56,993
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
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
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
Average
balance
Yields/
rates
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
10,587
5,008
4,934
2,378
4,744
17,064
27,651
91
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
6.08
6.67
6.55
12.13
8.72
7.60
6.94
4.73
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
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
174,000
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
4.26 % $
45,386
4.28 % $
47,030
4.83 % $
25,431
19,218
23,997
121,000
164,215
171,712
48,193
117,879
(173,569)
164,215
1,262,354
11,175
13,353
53,056
77,584
87,820
28,658
53,753
(92,647)
77,584
604,396
(5) The average balance amounts represent amortized cost for the periods presented.
(6) Nonaccrual loans and related income are included in their respective loan categories.
(7) Includes taxable-equivalent adjustments of $701 million, $696 million, $629 million, $706 million and $288 million for 2012, 2011, 2010, 2009 and 2008, respectively,
primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.
39
$
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
$
$
$
$
$
17,618
24,824
120,338
162,780
183,008
47,877
122,238
(190,343)
162,780
1,226,938
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
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 on a pro-rata
basis based on the absolute value of the change due to average
volume and average rate.
Table 6: Analysis of Changes in Net Interest Income
2012 over 2011
2011 over 2010
Year ended December 31,
(in millions)
Volume
Rate
Total
Volume
Rate
Total
Increase (decrease) in interest income:
Federal funds sold, securities purchased under resale
agreements and other short-term investments
$
Trading assets
Debt securities available for sale:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt securities
(12)
78
(25)
499
45
(161)
3
(161)
687
(1,051)
129
(482)
816
475
(1,533)
(424)
33
(83)
(22)
338
(364)
(353)
(717)
51
89
363
26
(21)
62
424
(54)
(181)
115
342
8
243
135
9
144
349
(575)
(788)
(440)
(779)
(1,363)
(510)
(1,219)
(161)
Total debt securities available for sale
1,765
(2,115)
(350)
979
(2,108)
(1,129)
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
465
(26)
(284)
9
181
(17)
24
(116)
(100)
57
(92)
(43)
680
133
(182)
(13)
77
(593)
115
21
(42)
(34)
695
(533)
367
(786)
(424)
167
13
(45)
(76)
87
248
(161)
(55)
43
162
(419)
(469)
91
(163)
(150)
373
147
(385)
(45)
215
(665)
180
389
(218)
(311)
(292)
327
4
(263)
(96)
305
(625)
(320)
(440)
(473)
(120)
(111)
(676)
(120)
(73)
(173)
(1,116)
(593)
(193)
(284)
123
(1,070)
(947)
(1,144)
(1,042)
(2,186)
818
(1,603)
(785)
(839)
(1,667)
(2,506)
(21)
27
6
(35)
31
(4)
Total increase (decrease) in interest income
3,067
(4,082)
(1,015)
481
(3,798)
(3,317)
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
(12)
65
(135)
5
13
(9)
(309)
(78)
(48)
(40)
(21)
(244)
(213)
(43)
(27)
(13)
112
(252)
(30)
13
(19)
(364)
-
(4)
-
(64)
(484)
(548)
(170)
(387)
-
-
-
9
(362)
(506)
(868)
(1,227)
(25)
(46)
(71)
122
(21)
317
(33)
(32)
(252)
(252)
(34)
13
(557)
(12)
(910)
89
Total increase (decrease) in interest expense
(451)
(1,036)
(1,487)
(1,266)
(124)
(1,390)
Increase (decrease) in net interest income
on a taxable-equivalent basis
$
3,518
(3,046)
472
1,747
(3,674)
(1,927)
40
Noninterest Income
Table 7: Noninterest Income
(in millions)
Service charges on
deposit accounts
Trust and investment fees:
Brokerage advisory, commissions
Year ended December 31,
2012
2011
2010
$
4,683
4,280
4,916
and other fees
6,386
6,241
5,930
Trust, investment and IRA fees
4,218
4,099
4,038
Investment banking fees
1,286
964
966
Total trust and
investment fees
11,890 11,304 10,934
Card fees
Other fees:
2,838
3,653
3,652
Charges and fees on loans
1,746
1,641
1,690
Merchant transaction
processing fees
Cash network fees
Commercial real estate
brokerage commissions
Letters of credit fees
All other fees
583
470
478
389
444
260
307
441
972
236
472
977
176
523
897
Total other fees
4,519
4,193
3,990
Mortgage banking:
Servicing income, net
1,378
3,266
3,340
Net gains on mortgage loan
origination/sales activities
10,260
4,566
6,397
Total mortgage banking
11,638
7,832
9,737
Insurance
1,850
1,960
2,126
Net gains from trading activities
1,707
1,014
1,648
Net gains (losses) on debt
securities available for sale
(128)
54
(324)
Net gains from equity investments
1,485
1,482
Life insurance investment income
Operating leases
All other
757
567
700
524
779
697
815
1,050
1,189
1,483
Total
$
42,856 38,185 40,453
Noninterest income of $42.9 billion represented 50% of revenue
for 2012 compared with $38.2 billion, or 47%, for 2011 and
$40.5 billion, or 47%, for 2010. The increase in noninterest
income from 2011 was primarily due to higher net gains on
higher mortgage loan origination/sales activities reflecting
increased margins and a lower interest rate environment
in 2012.
Our service charges on deposit accounts increased in 2012 by
$403 million, or 9%, from 2011, predominantly due to product
and account changes including changes to service charges and
fewer fee waivers, continued customer adoption of overdraft
services and customer account growth. The decrease in service
charges in 2011 from 2010 was predominantly due to changes
implemented in third quarter 2010 mandated by Regulation E
(which limited certain overdraft fees) and related overdraft
policy changes.
We receive brokerage advisory, commissions and other fees
for providing services to full-service and discount brokerage
customers. Brokerage advisory, commissions and other fees
increased to $6.4 billion in 2012 from $6.2 billion in 2011 and
$5.9 billion in 2010, and includes transactional commissions
based on the number of transactions executed at the customer’s
direction, and asset-based fees, which are based on the market
value of the customer’s assets. Brokerage client assets totaled
$1.2 trillion at December 31, 2012, up 8% from $1.1 trillion at
December 31, 2011, due to growth in assets under management
and higher market values.
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, 2012,
these assets totaled $2.2 trillion, up 3% from December 31, 2011,
due to growth in assets under management and higher market
values. 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
$4.2 billion in 2012 from $4.1 billion in 2011, which increased
from $4.0 billion in 2010.
We earn investment banking fees from underwriting debt
and equity securities, loan syndications, and performing other
related advisory services. Investment banking fees increased to
$1.3 billion in 2012 from $964 million in 2011 and $966 million
in 2010 due to increased volume.
Card fees were $2.8 billion in 2012, compared with
$3.7 billion in both 2011 and 2010. Card fees decreased because
of lower debit card interchange rates resulting from the Federal
Reserve Board (FRB) rules implementing the debit interchange
provision of the Dodd-Frank Act, which became effective in
fourth quarter 2011. The reduction in debit card interchange
income was partially offset by growth in purchase volume and
new accounts.
Mortgage banking noninterest income, consisting of net
servicing income and net gains on loan origination/sales
activities, totaled $11.6 billion in 2012, compared with
$7.8 billion in 2011 and $9.7 billion in 2010. The increase in
mortgage banking noninterest income from 2011 was
predominantly driven by an increase in net gains on higher
mortgage loan origination volumes and margins reflecting the
impact of limited industry capacity in a lower interest rate
environment and various other factors, while the decline in 2011
from 2010 was primarily driven by a decline in net gains on
mortgage loan originations reflecting lower volume and margins.
Net mortgage loan servicing income includes amortization of
commercial mortgage servicing rights (MSRs), changes in the
fair value of residential MSRs during the period, as well as
changes in the value of derivatives (economic hedges) used to
hedge the residential MSRs. Net servicing income for 2012
included a $681 million net MSR valuation gain ($2.9 billion
decrease in the fair value of the MSRs offset by a $3.6 billion
hedge gain) and for 2011 included a $1.6 billion net MSR
valuation gain ($3.7 billion decrease in the fair value of MSRs
offset by a $5.3 billion hedge gain). The 2012 MSRs valuation
included a $677 million reduction reflecting the additional costs
associated with implementation of the servicing standards
developed in connection with our settlement with the
Department of Justice (DOJ) and other state and federal
agencies relating to our mortgage servicing and foreclosure
41
Earnings Performance (continued)
practices, as well as higher foreclosure costs. Our portfolio of
loans serviced for others was $1.91 trillion at December 31, 2012,
and $1.85 trillion at December 31, 2011. At December 31, 2012,
the ratio of MSRs to related loans serviced for others was 0.67%,
compared with 0.76% at December 31, 2011. 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 and the “Risk
Management – Credit Risk Management –Risks Relating to
Servicing Activities” section in this Report for information on the
DOJ settlement and the regulatory consent orders that we
entered into relating to our mortgages servicing and foreclosure
practices.
Net gains on mortgage loan origination/sale activities were
$10.3 billion in 2012, compared with $4.6 billion in 2011 and
$6.4 billion in 2010. The increase in 2012 was driven by higher
loan origination volume and margins while the decrease in 2011
was the result of lower origination volume and margins on loan
originations. Mortgage loan originations were $524 billion in
2012, compared with $357 billion a year ago. During 2012 we
retained for investment $19.4 billion of 1-4 family conforming
first mortgage loans, forgoing approximately $575 million of fee
revenue that could have been generated had the loans been
originated for sale along with other agency conforming loan
production. While retaining these mortgage loans on our balance
sheet reduced mortgage revenue, we expect to generate spread
income in future quarters from mortgage loans with higher
yields than mortgage-backed securities we could have purchased
in the market. While we do not currently plan to hold additional
conforming mortgages on balance sheet (other than $3.3 billion
from our unclosed pipeline at December 31, 2012), we have a
large mortgage business and strong capital that provides us with
the flexibility to make such choices in the future to benefit our
long-term results. Mortgage applications were $736 billion in
2012, compared with $537 billion in 2011. The 1-4 family first
mortgage unclosed pipeline was $81 billion at December 31,
2012, and $72 billion at December 31, 2011. For additional
information about our mortgage banking activities and results,
see the “Risk Management – Mortgage Banking Interest Rate
and Market Risk” section and Note 9 (Mortgage Banking
Activities) and Note 17 (Fair Values of Assets and Liabilities) to
Financial Statements in this Report.
Net gains on mortgage loan origination/sales activities
include the cost of 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 2012
totaled $1.9 billion (compared with $1.3 billion for 2011), of
which $1.7 billion ($1.2 billion for 2011) was for subsequent
increases in estimated losses on prior period 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.
We engage in trading activities primarily to accommodate the
investment activities of our customers, execute economic
hedging to manage certain of our balance sheet risks and for a
very limited amount of proprietary trading for our own account.
Net gains (losses) from trading activities, which reflect
unrealized changes in fair value of our trading positions and
realized gains and losses, were $1.7 billion in 2012, $1.0 billion
in 2011 and $1.6 billion in 2010. The year-over-year increase in
trading activities in 2012 was driven by gains on customer
accommodation trading activities and economic hedging gains,
which included higher gains on deferred compensation plan
investments based on participant elections (offset entirely in
employee benefits expense). Net gains (losses) from trading
activities do not include interest and dividend income on trading
securities. Those amounts are reported within net interest
income from trading assets. Proprietary trading generated
$15 million of net gains in 2012, compared with a $14 million net
loss in 2011. 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.
Net gains on debt and equity securities totaled $1.4 billion for
2012, $1.5 billion for 2011 and $455 million for 2010, after
other-than-temporary impairment (OTTI) write-downs of
$416 million, $711 million and $940 million, respectively, for the
same periods.
42
Core deposit and other intangibles
1,674
1,880
Noninterest Expense
Table 8: Noninterest Expense
(in millions)
Salaries
Commission and incentive
compensation
Employee benefits
Equipment
Net occupancy
FDIC and other deposit
assessments
Outside professional services
Operating losses
Foreclosed assets
Contract services
Outside data processing
Travel and entertainment
Postage, stationery and supplies
Advertising and promotion
Telecommunications
Insurance
Operating leases
All other
Total
Year ended December 31,
2012
2011
2010
$
14,689
14,462
13,869
9,504
4,611
2,068
2,857
8,857
4,348
2,283
3,011
1,356
2,729
2,235
1,061
1,266
2,692
1,261
1,354
1,011
1,407
910
839
799
578
500
453
109
935
821
942
607
523
515
112
8,692
4,651
2,636
3,030
2,199
1,197
2,370
1,258
1,537
1,642
1,046
783
944
630
596
464
109
2,415
2,117
2,803
$
50,398
49,393
50,456
Noninterest expense was $50.4 billion in 2012, up 2% from
$49.4 billion in 2011, which was down 2% from $50.5 billion in
2010. The increase was driven predominantly by higher
personnel expense ($28.8 billion, up from $27.7 billion in 2011)
and higher operating losses ($2.2 billion, up from $1.3 billion in
2011), partially offset by lower merger integration costs
($218 million in 2012, down from $1.7 billion in 2011). The
decrease in 2011 from 2010 was driven by lower merger
integration costs, decreases in equipment expense, contract
services expense and foreclosed assets expense.
Personnel expenses were up $1.1 billion, or 4%, in 2012
compared with 2011, due to higher revenue-based compensation
and a $263 million increase in employee benefits due primarily
to higher deferred compensation expense which was offset in
trading income, and increased staffing, primarily to support
strong mortgage banking activities. For 2011 these expenses
were up 2% compared with 2010, also due to higher revenue-
based compensation as well as severance expense related to our
expense reduction initiative.
Outside professional services were elevated for 2012 and 2011
reflecting investments by our businesses in their service delivery
systems and higher costs associated with regulatory driven
mortgage servicing and foreclosure matters.
The completion of Wachovia integration activities in first
quarter 2012 significantly contributed to year-over-year
reductions in equipment, occupancy, contract services, and
postage, stationery and supplies. Equipment expense in 2012
also declined due to lower annual software license fees and
savings in equipment purchases and maintenance.
Foreclosed assets expense was down $293 million, or 22%, in
2012 compared with 2011, mainly due to lower write-downs and
gains on sale of foreclosed properties.
Operating losses were up $974 million, or 77%, in 2012
compared with the prior year, predominantly due to additional
mortgage servicing and foreclosure-related matters, including
the Attorneys General settlement announced in February 2012,
our $175 million settlement in July 2012 with the U.S.
Department of Justice (DOJ), which resolved alleged claims
related to our mortgage lending practices, a $766 million accrual
for the IFR settlement and additional remediation-related costs.
See “Risk Management – Credit Risk Management – Other
Mortgage Matters” and Note 15 (Legal Actions) to Financial
Statements in this Report for additional information regarding
these items.
All other expenses of $2.4 billion in 2012 were up from
$2.1 billion in 2011, primarily due to a $250 million charitable
contribution to the Wells Fargo Foundation.
Income Tax Expense
The 2012 annual effective tax rate was 32.5% compared with
31.9% in 2011 and 33.9% in 2010. The lower effective tax rates
for 2012 and 2011, compared with 2010, were primarily due to
the realization, for tax purposes, of tax benefits on previously
written down investments. For 2012 this includes a $332 million
tax benefit resulting from the surrender of previously written-
down Wachovia life insurance investments. In addition, the 2011
effective tax rate was lower than the 2010 effective tax rate due
to a decrease in tax expense associated with leveraged leases, as
well as tax benefits related to charitable donations of appreciated
securities.
43
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 first quarter 2012, we modified internal funds
transfer rates and the allocation of funding. The 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.
Table 9: Operating Segment Results – Highlights
(in billions)
Revenue
Net income
Average loans
Average core deposits
Year ended December 31,
Wealth, Brokerage
Community Banking
Wholesale Banking
and Retirement
2012
2011
2012
2011
2012
2011
$
53.4
10.5
50.8
9.1
24.1
7.8
21.6
7.0
12.2
1.3
12.2
1.3
487.1
496.3
273.8
249.1
42.7
43.0
591.2
556.3
227.0
202.1
137.5
130.0
Community Banking offers a complete line of diversified
financial products and services for consumers and small
businesses. These products include 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 Lending business units. Cross-
sell of our products is an important part of our strategy to
achieve our vision to satisfy all our customers’ financial needs.
Our retail bank household cross-sell was 6.05 products per
household in fourth quarter 2012, up from 5.93 a year ago. 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. In
fourth quarter 2012, one of every four of our retail banking
households had eight or more of our products.
Community Banking reported net income of $10.5 billion in
2012, up $1.4 billion, or 15%, from 2011. Revenue was
$53.4 billion for 2012, an increase of $2.6 billion, or 5%,
compared with 2011, as a result of higher mortgage banking
revenue and growth in deposit service charges, partially offset by
lower debit card revenue due to regulatory changes enacted in
October 2011, and lower net interest income. Average core
deposits increased $35 billion, or 6%, from a year ago.
Noninterest expense increased $1.6 billion, or 5%, from 2011,
largely the result of higher mortgage volume-related expenses,
costs associated with settling mortgage servicing and
foreclosure-related matters, including the DOJ and the IFR
settlements, and a $250 million contribution to the Wells Fargo
Foundation. The provision for credit losses was $1.1 billion, or
14%, lower than 2011 due to improved portfolio performance.
Wholesale Banking provides financial solutions to businesses
across the United States and globally with annual sales generally
in excess of $20 million. Products and business segments
include Middle Market Commercial Banking, Government and
Institutional Banking, Corporate Banking, Commercial Real
Estate, Treasury Management, Wells Fargo Capital Finance,
44
Insurance, International, Real Estate Capital Markets,
Commercial Mortgage Servicing, Corporate Trust, Equipment
Finance, Wells Fargo Securities, Principal Investments, Asset
Backed Finance, and Asset Management.
Wholesale Banking reported net income of $7.8 billion in
2012, up $787 million, or 11%, from $7.0 billion in 2011. The
year over year increase in net income was the result of strong
revenue growth partially offset by increased noninterest expense
and a higher provision for loan losses.
Revenue in 2012 of $24.1 billion increased $2.5 billion, or
12%, from 2011, due to broad-based business growth as well as
growth from acquisitions. Net interest income of $12.6 billion
increased $1.0 billion or 9% driven by strong loan and deposit
growth. Average loans of $273.8 billion increased $24.7 billion,
or 10%, driven by strong customer demand and acquisitions.
Average core deposits of $227.0 billion in 2012 increased
$24.9 billion, or 12%, from 2011 reflecting continued strong
customer liquidity. Noninterest income of $11.4 billion increased
$1.5 billion, or 15%, due to strong growth in asset backed
finance, commercial banking, commercial real estate,
investment banking, real estate capital markets and sales &
trading.
Total noninterest expense in 2012 increased $905 million, or
8%, compared with 2011 due to higher personnel expenses
related to revenue growth and higher non-personnel expenses
related to growth initiatives and compliance and regulatory
requirements as well as increased operating losses. The
provision for credit losses increased $396 million from 2011, as a
$319 million decline in loan losses was more than offset by a
provision for increase in loans, particularly from acquisitions.
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.
Abbot Downing, a Wells Fargo business, provides
comprehensive wealth management services to ultra high net
worth families and individuals as well as their endowments and
foundations. Brokerage serves customers' advisory, brokerage
and financial needs as part of one of the largest full-service
brokerage firms in the United States. Retirement is a national
leader in providing institutional retirement and trust services
(including 401(k) and pension plan record keeping) for
businesses, retail retirement solutions for individuals, and
reinsurance services for the life insurance industry.
Wealth, Brokerage and Retirement reported net income of
$1.3 billion in 2012, up $47 million, or 4%, from 2011. The prior
year results include the H.D. Vest Financial Services business
that was sold in fourth quarter 2011 at a gain of $153 million.
Revenue of $12.2 billion decreased $17 million from 2011. Net
Balance Sheet Analysis
interest income decreased due to lower interest rates on the loan
and investment portfolios partially offset by the impact of
growth in low-cost core deposits. Average core deposits of
$137.5 billion in 2012 increased 6% from 2011. Noninterest
income increased year over year due to higher asset-based fees
and gains on deferred compensation plan investments (offset in
expense). The increase was partially offset by the 2011 gain on
the sale of H.D. Vest, lower transaction revenue and reduced
securities gains in the brokerage business. Noninterest expense
was flat, including the impact of deferred compensation plan
expense (offset in revenue), for 2012 compared with 2011. The
provision for credit losses decreased $45 million, or 26%, from
2011, due to improved credit quality and lower net charge-offs.
Our total assets grew 8% in 2012 to $1.4 trillion, funded
predominantly by strong deposit growth. Our core deposits grew
$73.1 billion ($67.2 billion on average) or 8% in 2012. The
predominant areas of asset growth were in short-term
investments, which increased $92.9 billion, and loans, which
increased $29.9 billion. The strong loan growth represents core
loan growth of $47.7 billion (including retention of $19.4 billion
of 1-4 family conforming first mortgage production on the
balance sheet), partially offset by the runoff in our non
strategic/liquidating loan portfolio of $17.8 billion. We also
increased securities available for sale by $12.6 billion in 2012.
The strength of our business model produced record earnings
and continued internal capital generation as reflected in our
capital ratios, substantially all of which improved from
December 31, 2011. Tier 1 capital as a percentage of total risk-
weighted assets increased to 11.75%, total capital decreased to
14.63%, Tier 1 leverage increased to 9.47%, and Tier 1 common
equity increased to 10.12% at December 31, 2012, compared with
11.33%, 14.76%, 9.03%, and 9.46%, respectively, at
December 31, 2011.
The following discussion provides additional information
about the major components of our balance sheet. Information
regarding our capital and changes in our asset mix is included in
the “Earnings Performance – Net Interest Income” and “Capital
Management” sections and Note 26 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report.
Securities Available for Sale
Table 10: Securities Available for Sale – Summary
(in millions)
Debt securities available for sale
Marketable equity securities
Net
unrealized
Cost
gain
2012
Fair
value
December 31,
Net
unrealized
Cost
gain
2011
Fair
value
$
220,946
11,468
232,414
212,642
6,554 219,196
2,337
448
2,785
2,929
488
3,417
Total securities available for sale
$
223,283
11,916
235,199
215,571
7,042 222,613
Table 10 presents a summary of our securities available-for-
sale portfolio, which consists of both debt and marketable equity
securities. The total net unrealized gains on securities available
for sale were $11.9 billion at December 31, 2012, up from net
unrealized gains of $7.0 billion at December 31, 2011, due mostly
to a decline in long-term yields and tightening of credit spreads.
The size and composition of the available-for-sale portfolio is
largely dependent upon the Company’s liquidity and interest rate
risk management objectives. Our business generates assets and
liabilities, such as loans, deposits and long-term debt, which
have different maturities, yields, re-pricing, prepayment
characteristics and other provisions that expose us to interest
rate and liquidity risk. The available-for-sale securities portfolio
consists primarily of liquid, high quality federal agency debt,
privately issued mortgage-backed securities (MBS), securities
issued by U.S. states and political subdivisions and corporate
debt securities. Due to its highly liquid nature, the available-for-
sale portfolio can be used to meet funding needs that arise in the
normal course of business or due to market stress. Changes in
our interest rate risk profile may occur due to changes in overall
economic or market conditions that could influence drivers such
as loan origination demand, prepayment speeds, or deposit
balances and mix. In response, the available-for-sale securities
portfolio can be rebalanced to meet the Company’s interest rate
risk management objectives. In addition to meeting liquidity and
interest rate risk management objectives, the available-for-sale
securities portfolio may provide yield enhancement over other
short-term assets. See the “Risk Management - Asset/Liability
45
Balance Sheet Analysis (continued)
Management” section of this Report for more information on
liquidity and interest rate risk.
We analyze securities for OTTI quarterly or more often if a
potential loss-triggering event occurs. Of the $416 million in
OTTI write-downs recognized in 2012, $240 million related to
debt securities. There was $16 million in OTTI write-downs for
marketable equity securities and $160 million in OTTI write-
downs related to nonmarketable equity investments. For a
discussion of our OTTI accounting policies and underlying
considerations and analysis see Note 1 (Summary of Significant
Accounting Policies – Investments) and Note 5 (Securities
Available for Sale) to Financial Statements in this Report.
At December 31, 2012, debt securities available for sale
included $38.7 billion of municipal bonds, of which 82% were
rated “A-” or better based predominantly on external and, in
some cases, internal ratings. Additionally, some of the securities
in our total municipal bond portfolio 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
are 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 5.5 years at December 31, 2012. Because
57% of this portfolio is MBS, the expected remaining maturity is
shorter than the remaining contractual maturity because
borrowers generally have the right to prepay obligations before
the underlying mortgages mature. The estimated effect of a
200 basis point increase or decrease in interest rates on the fair
value and the expected remaining maturity of the MBS available
for sale are shown in Table 11.
Table 11: Mortgage-Backed Securities
(in billions)
At December 31, 2012
Expected
Net
remaining
Fair
unrealized maturity
value
gain (loss)
(in years)
Actual
$
133.2
7.7
3.7
Assuming a 200 basis point:
Increase in interest rates
Decrease in interest rates
123.6
135.8
(1.9)
10.3
5.3
2.8
See Note 5 (Securities Available for Sale) to Financial
Statements in this Report for securities available for sale by
security type.
46
Loan Portfolio
Total loans were $799.6 billion at December 31, 2012, up
$29.9 billion from December 31, 2011. Table 12 provides a
summary of total outstanding loans for our commercial and
consumer loan portfolios. Excluding the runoff in the non-
strategic/liquidating portfolios of $17.8 billion, loans in the core
portfolio grew $47.7 billion during 2012. Our core loan growth in
2012 included:
(cid:120)
an $18.3 billion increase in the commercial segment, mostly
due to growth in commercial and industrial loans, which
included:
o $6.9 billion from our second quarter 2012 acquisitions
of BNP Paribas’ North American energy lending
business and WestLB’s subscription finance loan
portfolio; and
Table 12: Loan Portfolios
o $858 million of commercial asset-based loans acquired
with the acquisition of Burdale Financial Holdings
Limited (Burdale) and the portfolio of Burdale Capital
Finance Inc. in first quarter 2012; and
a $29.4 billion increase in consumer loans with growth in
first mortgage (including the retention of $19.4 billion of 1-4
family conforming first mortgages), auto, credit card and
private student lending.
(cid:120)
Additional information on the non-strategic and liquidating
loan portfolios is included in Table 17 in the “Credit Risk
Management” section of this Report.
(in millions)
Commercial
Consumer
Total loans
December 31, 2012
December 31, 2011
Core
Liquidating
Total
Core
Liquidating
Total
$
358,028
3,170
361,198
346,984
91,392
438,376
339,755
317,550
5,695
345,450
106,631
424,181
$
705,012
94,562
799,574
657,305
112,326
769,631
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 shows contractual loan maturities for selected loan
categories and sensitivities of those loans to changes in interest
rates.
Table 13: Maturities for Selected Loan Categories
(in millions)
Selected loan maturities:
Commercial and industrial
$
Real estate mortgage
Real estate construction
Foreign
Within
one
year
45,212
22,328
7,685
27,219
After
one year
through
five years
After
five
years
2012
Total
December 31,
2011
After
Within
one year
one
through
year
five years
After
five
years
Total
123,578
18,969
187,759
44,258
101,273
21,685
167,216
56,085
7,961
27,927
1,258
106,340
16,904
7,460
3,092
37,771
22,537
10,059
35,258
54,201
8,178
29,237
1,145
105,975
19,382
3,142
1,360
39,760
Total selected loans
$
102,444
195,084
51,246
348,774
112,112
166,794
53,427
332,333
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
$
195,084
51,246
174,190
39,859
$
20,894
11,387
19,319
13,712
147,475
39,715
166,794
53,427
47
Balance Sheet Analysis (continued)
Deposits
Deposits totaled $1.0 trillion at December 31, 2012, compared
with $920.1 billion at December 31, 2011. Table 14 provides
additional information regarding deposits. Information
regarding the impact of deposits on net interest income and a
comparison of average deposit balances is provided in
Table 14: Deposits
($ 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
“Earnings Performance – Net Interest Income” and Table 5
earlier in this Report. Total core deposits were $945.7 billion at
December 31, 2012, up $73.1 billion from $872.6 billion at
December 31, 2011.
Dec. 31,
2012
% of
total
deposits
% of
Dec. 31,
2011
total
deposits
%
Change
$
288,207
29 %
$
243,961
26 %
35,275
517,464
55,966
48,837
945,749
33,755
23,331
4
52
6
4
95
3
2
37,027
485,534
63,617
42,490
872,629
20,745
26,696
4
53
7
5
95
2
3
18
(5)
7
(12)
15
8
63
(13)
9
Total deposits
$
1,002,835
100 %
$
920,070
100 %
(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. Generally, SPEs are 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.
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, Pledged Assets and
Collateral) to Financial Statements in this Report.
48
Contractual Cash 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 that may require future
cash payments in the ordinary course of business, including
debt issuances for the funding of operations and leases for
premises and equipment.
Table 15: Contractual Cash Obligations
Table 15 summarizes these contractual obligations as of
December 31, 2012, excluding the projected cash payments for
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 (1)
Long-term debt (2)
Interest (3)
Operating leases
Unrecognized tax obligations
Commitments to purchase debt securities
Purchase and other obligations (4)
Note(s) to
Financial
Statements
Less than
1 year
1-3
years
3-5
years
than Indeterminate
maturity
5 years
Total
More
11
$
56,921
20,197
9,030
3,959
912,728
1,002,835
7, 13
15,961
28,342
31,318
51,758
7
21
3,056
1,311
19
1,523
518
4,415
2,154
-
-
727
3,206
17,498
1,465
2,594
-
-
57
-
-
10
-
-
-
2,725
-
-
127,379
28,175
7,524
2,744
1,523
1,312
Total contractual obligations
$
79,309
55,835
45,076
75,819
915,453
1,171,492
(1) Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
(2) Balances are presented net of unamortized debt discounts and premiums and purchase accounting adjustments.
(3) Represents the future interest obligations related to interest-bearing time deposits and long-term debt in the normal course of business including a net reduction of
$17 billion related to hedges used to manage interest rate risk. These interest obligations assume no early debt redemption. We estimated variable interest rate payments
using December, 31 2012 rates, which we held constant until maturity. We have excluded interest related to structured notes where our payment obligation is contingent on
the performance of certain benchmarks.
(4) Represents agreements to purchase goods or services.
Transactions with Related Parties
The Related Party Disclosures topic of the Codification requires
disclosure of material related party transactions, other than
compensation arrangements, expense allowances and other
similar items in the ordinary course of business. We had no
related party transactions required to be reported for the years
ended December 31, 2012, 2011 and 2010.
We are subject to the income tax laws of the U.S., its states
and municipalities, and those of the foreign jurisdictions in
which we operate. We have various unrecognized tax
obligations related to these operations that may require future
cash tax payments to various taxing authorities. Because of
their uncertain nature, the expected timing and amounts of
these payments generally are not reasonably estimable or
determinable. We attempt to estimate the amount payable in
the next 12 months based on the status of our tax examinations
and settlement discussions. See Note 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.
49
Risk Management
All financial institutions must manage and control a variety of
business risks that can significantly affect their financial
performance. Among the key risks that we must manage are
credit risks, asset/liability interest rate and market risks, and
operational risks. Our Board of Directors (Board) and executive
management have overall and ultimate responsibility for
management of these risks, which they carry out through
committees with specific and well-defined risk management
functions. For example, the Board’s Credit Committee oversees
the annual credit quality plan and lending policies, credit
trends, the allowance for credit loss policy, and high risk
portfolios and concentrations. The Finance Committee
oversees the Company’s major financial risks, including
market, interest rate, and liquidity and funding risks, as well as
equity exposure and fixed income investments, and also
oversees the Company’s capital management and planning
processes. The Audit and Examination Committee oversees
operational, legal and compliance risk, in addition to the
policies and management activities relating to the Company’s
financial reporting. The Risk Committee oversees the
Company’s enterprise-wide risk management framework,
including the strategies, policies, processes and systems used to
identify, assess, measure and manage the major risks facing the
Company. The Risk Committee does not duplicate the risk
oversight of the Board’s other committees, but rather helps
ensure end-to-end ownership of oversight of all risk issues in
one Board committee and enhances the Board’s and
management’s understanding of the Company’s aggregate
enterprise-wide risk appetite.
The Board and its committees work closely with
management in overseeing risk. Each Board committee
receives reports and information regarding risk issues directly
from management and, in some cases, management
committees have been established to inform the risk
management framework and provide governance and advice
regarding risk management functions. These management
committees include the Company’s Operating Committee,
which consists of the Company’s senior executives who report
to the CEO and who meet weekly to, among other things,
discuss strategic, operational and risk issues at the enterprise
level, and the Enterprise Risk Management Committee, which
is chaired by the Company’s Chief Risk Officer and includes
other senior executives responsible for managing risk across
the Company. Management’s corporate risk organization is
headed by the Chief Risk Officer who, among other things,
oversees the Company’s credit, market and operational risks.
The Chief Risk Officer and the Chief Credit, Market and
Operational Risk Officers, who report to the Chief Risk Officer,
work closely with the Board’s Risk, Credit and Audit and
Examination Committees and frequently provide reports to
these and other Board committees and update the committee
chairs and other Board members on risk issues outside of
regular committee meetings, as appropriate. The full Board
receives reports at each of its meetings from the committee
chairs about committee activities, including risk oversight
matters, and receives a quarterly report from the Enterprise
50
Risk Management Committee regarding current or emerging
risk issues.
Operating Risk Management
Effective management of operational risks, which include risks
relating to management information systems, security systems,
and information security, is also an important focus for
financial institutions such as Wells Fargo. Wells Fargo and
reportedly other financial institutions have been the target of
various denial-of-service or other cyber attacks as part of what
appears to be a coordinated effort to disrupt the operations of
financial institutions and potentially test their cybersecurity in
advance of future and more advanced cyber attacks. To date
Wells Fargo has not experienced any material losses relating to
these or other cyber attacks. Cybersecurity and the continued
development and enhancement of our controls, processes and
systems to protect our networks, computers, software, and data
from attack, damage or unauthorized access remain a priority
for Wells Fargo. See the “Risk Factors” section of this Report
for additional information regarding the risks associated with a
failure or breach of our operational or security systems or
infrastructure, including as a result of cyber attacks.
Credit Risk Management
Loans represent the largest component of assets on our balance
sheet and their related credit risk is among the most significant
risks we manage. We define credit risk as the risk of loss
associated with a borrower or counterparty default (failure to
meet obligations in accordance with agreed upon terms). Table
16 presents our total loans outstanding by portfolio segment
and class of financing receivable.
Table 16: Total Loans Outstanding by Portfolio Segment and
Class of Financing Receivable
(in millions)
Commercial:
December 31,
2012
2011
Commercial and industrial
$
187,759
167,216
Real estate mortgage
Real estate construction
Lease financing
Foreign (1)
106,340
105,975
16,904
12,424
37,771
19,382
13,117
39,760
Total commercial
361,198
345,450
Consumer:
Real estate 1-4 family first mortgage
249,900
228,894
Real estate 1-4 family
junior lien mortgage
Credit card
Other revolving credit and installment
75,465
24,640
88,371
85,991
22,836
86,460
Total consumer
438,376
424,181
Total loans
$
799,574
769,631
(1) Substantially all of our foreign loan portfolio is commercial loans. Loans are
classified as foreign if the borrower’s primary address is outside of the United
States.
We 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 existing loan
portfolios. 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:
(cid:120)
(cid:120) Counterparty credit risk
(cid:120) Economic and market conditions
(cid:120)
Legislative or regulatory mandates
(cid:120) Changes in interest rates
(cid:120) Merger and acquisition activities
(cid:120) Reputation risk
Loan concentrations and related credit quality
Our credit risk management oversight 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.
A key to our credit risk management is adherence to a well
controlled underwriting process, which we believe is
Table 17: Non-Strategic and Liquidating Loan Portfolios
(in millions)
Commercial:
appropriate for the needs of our customers as well as investors
who purchase the loans or securities collateralized by the loans.
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 PCI loans acquired from Wachovia, certain
portfolios from legacy Wells Fargo Home Equity and Wells
Fargo Financial, and our education finance government
guaranteed loan portfolio. The total balance of our non-
strategic and liquidating loan portfolios has decreased 50%
since the merger with Wachovia at December 31, 2008, and
decreased 16% from the end of 2011.
The home equity portfolio of loans generated through third
party channels is designated as liquidating. Additional
information regarding this portfolio, as well as the liquidating
PCI and Pick-a-Pay loan portfolios, is provided in the
discussion of loan portfolios that follows.
2012
2011
2010
2009
2008
Outstanding balance
December 31,
Legacy Wachovia commercial and industrial, CRE and foreign PCI loans (1)
$
3,170
5,695
7,935
12,988
18,704
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
Legacy Wachovia other PCI loans (1)
Total consumer
3,170
5,695
7,935
12,988
18,704
58,274
65,652
74,815
85,238
4,647
830
5,710
2,455
6,904
6,002
8,429
11,253
14,519
16,542
19,020
22,364
12,465
15,376
17,510
21,150
657
896
1,118
1,688
95,315
10,309
18,221
25,299
20,465
2,478
91,392
106,631
125,369
150,122
172,087
Total non-strategic and liquidating loan portfolios
$
94,562
112,326
133,304
163,110
190,791
(1) Net of purchase accounting adjustments related to PCI 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 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 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
received from its resolution with its contractual amount. Any
51
Risk Management – Credit Risk Management (continued)
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 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 2012, we recognized as income $85 million released
from the nonaccretable difference related to commercial PCI
loans due to payoffs and other resolutions. We also transferred
$1.1 billion from the nonaccretable difference to the accretable
yield for PCI loans with improving credit-related cash flows and
absorbed $2.5 billion of losses in the nonaccretable difference
from loan resolutions and write-downs. Our cash flows expected
to be collected have been favorably affected by lower expected
defaults and losses as a result of observed economic
strengthening, particularly in housing prices, and our loan
modification efforts. See the “Real Estate 1-4 Family First and
Junior Lien Mortgage Loans” section in this Report for
additional information. These factors led to the reduction in
expected losses on PCI loans, primarily Pick-a-Pay, which
resulted in a reclassification from nonaccretable difference to
accretable yield in 2012, which has also occurred in prior years.
Table 18 provides an analysis of changes in the nonaccretable
difference.
52
Table 18: Changes in Nonaccretable Difference for PCI Loans
(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)
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, 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)
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, 2011
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)
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)
(726)
-
-
-
-
(817)
(172)
(2,356)
(317)
(3,399)
(1,698)
(2,959)
(391)
(5,048)
1,590
10,925
914
13,429
188
(198)
(41)
(352)
-
-
-
-
-
-
-
(21)
188
(198)
(41)
(373)
(258)
(1,799)
(241)
(2,298)
929
9,126
652
10,707
7
(81)
(4)
-
-
-
-
-
-
7
(81)
(4)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
(315)
(648)
(178)
(1,141)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)(5)
(114)
(2,246)
(164)
(2,524)
Balance, December 31, 2012
$
422
6,232
310
6,964
(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.
(5) The year ended December 31, 2012, includes $462 million resulting from the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in
bankruptcy to be written down to net realizable collateral value, regardless of their delinquency status.
53
Risk Management – Credit Risk Management (continued)
Since December 31, 2008, we have released $7.2 billion in
nonaccretable difference, including $5.4 billion transferred from
the nonaccretable difference to the accretable yield and
$1.8 billion released to income through loan resolutions. Also,
we have provided $1.8 billion for losses on 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 $5.4 billion
reduction from December 31, 2008, through December 31, 2012,
in our initial projected losses of $41.0 billion on all PCI loans.
At December 31, 2012, the allowance for credit losses on
certain PCI loans was $117 million. The allowance is necessary to
absorb credit-related decreases in cash flows expected to be
collected and primarily relates to individual PCI commercial
loans. Table 19 analyzes the actual and projected loss results on
PCI loans since acquisition through December 31, 2012.
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 Since Acquisition of Wachovia
(in millions)
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)
Commercial Pick-a-Pay
consumer
Total
Other
$
1,426
303
1,531
-
-
3,031
-
85
792
1,426
388
5,354
Total releases of nonaccretable difference due to better than expected losses
3,260
3,031
877
7,168
Provision for losses due to credit deterioration (4)
(1,693)
-
(123)
(1,816)
Actual and projected losses on PCI loans less than originally expected
$
1,567
3,031
754
5,352
(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 is 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.
Across our non-PCI commercial loans and leases, the
commercial and industrial loans and lease financing portfolio
generally experienced credit improvement in 2012. Of the total
commercial and industrial loans and lease financing non-PCI
portfolio, 0.02% was 90 days or more past due and still accruing
at December 31, 2012, compared with 0.09% at
December 31, 2011, 0.72% (1.22% at December 31, 2011) was
nonaccruing and 9.43% (12.5% at December 31, 2011) was
criticized. The net charge-off rate for this portfolio declined to
0.46% in 2012 from 0.70% for 2011.
A majority of our commercial and industrial loans and lease
financing portfolio is secured by short-term 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 additional credit metric information.
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 discussion
provides additional characteristics and analysis 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 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 20 summarizes commercial and industrial loans
and lease financing by industry with the related nonaccrual
totals. We generally subject commercial and industrial loans and
lease financing 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.
54
Table 20: Commercial and Industrial Loans and Lease
Financing by Industry
December 31, 2012
Nonaccrual
Total
loans portfolio (1)
% of
total
loans
$
$
$
(in millions)
PCI loans (1):
Healthcare
Technology
Aerospace and defense
Home furnishings
Steel and metal products
Leisure
Other
Total PCI loans
All other loans:
Oil and gas
Investors
Cyclical retailers
Financial institutions
Food and beverage
Healthcare
Industrial equipment
Real estate lessor
Technology
Transportation
Business services
Securities firms
Other
-
-
-
-
-
-
-
-
36
2
30
76
42
39
50
32
20
12
30
65
1,015
48
39
37
23
22
17
73 (2)
259
13,634
13,570
12,459
12,228
11,804
10,044
9,941
9,370
6,767
6,597
5,754
5,534
82,222 (3)
* %
*
*
*
*
*
*
* %
2 %
2
2
2
1
1
1
1
*
*
*
*
10
25 %
25 %
Total all other loans
Total
$
$
1,449
199,924
1,449
200,183
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 $11.4 million.
(3) No other single category had loans in excess of $4.7 billion.
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. As appropriate, we also
charge the loan down in accordance with our charge-off policies,
generally to the net realizable 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.
COMMERCIAL REAL ESTATE (CRE) The CRE portfolio, consisting
of both CRE mortgage loans and CRE construction loans, totaled
$123.2 billion, or 15%, of total loans at December 31, 2012. CRE
construction loans totaled $16.9 billion and CRE mortgage loans
totaled $106.3 billion at December 31, 2012. Table 21
summarizes CRE loans by state and property type with the
related nonaccrual totals. CRE nonaccrual loans totaled 4% of
the non-PCI CRE outstanding balance at December 31, 2012
compared with 5% at December 31, 2011. 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 27% and 9% of the
total CRE portfolio, respectively. By property type, the largest
concentrations are office buildings at 26% and
industrial/warehouse at 10% of the portfolio. At
December 31, 2012, we had $17.2 billion of criticized non-PCI
CRE mortgage loans, a decrease of 24% from December 31, 2011,
and $3.8 billion of criticized non-PCI CRE construction loans, a
decrease of 44% from December 31, 2011. See Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report for additional information on criticized loans.
At December 31, 2012, the recorded investment in PCI CRE
loans totaled $2.8 billion, down from $12.3 billion when
acquired at December 31, 2008, reflecting the reduction
resulting from principal payments, loan resolutions and write-
downs.
55
Risk Management – Credit Risk Management (continued)
Table 21: CRE Loans by State and Property Type
December 31, 2012
Real estate mortgage
Real estate construction
Total
Nonaccrual
Total
Nonaccrual
Total
Nonaccrual
Total
loans portfolio (1)
loans portfolio (1)
loans portfolio (1)
(in millions)
By state:
PCI loans (1):
New York
Florida
California
Pennsylvania
Texas
Other
Total PCI loans
All other loans:
California
Florida
Texas
New York
North Carolina
Arizona
Georgia
Virginia
Washington
Colorado
Other
Total all other loans
Total
By property:
PCI loans (1):
Office buildings
Apartments
Retail (excluding shopping center)
Shopping center
1-4 family land
Other
Total PCI loans
All other loans:
Office buildings
Industrial/warehouse
Apartments
Retail (excluding shopping center)
Real estate - other
Shopping center
Hotel/motel
Land (excluding 1-4 family)
Institutional
Agriculture
Other
Total all other loans
Total
-
-
-
-
-
-
-
794
374
283
35
228
129
222
84
32
146
995
438
290
302
112
120
708
1,970
29,291
8,800
7,708
6,561
4,003
4,265
3,276
2,677
2,869
2,875
-
-
-
-
-
-
-
157
133
32
2
84
28
78
28
17
16
91
150
52
93
65
426
877
3,301
1,353
1,416
880
921
489
509
981
508
427
-
-
-
-
-
-
-
951
507
315
37
312
157
300
112
49
162
% of
total
loans
*%
*
*
*
*
*
529
440
354
205
185
1,134 (2)
2,847
*%
32,592
10,153
9,124
7,441
4,924
4,754
3,785
3,658
3,377
3,302
4 %
1
1
*
*
*
*
*
*
*
32,045
428
5,242
1,423
37,287 (3)
5
3,322
104,370
1,003
16,027
4,325
120,397
3,322
106,340
1,003
16,904
4,325
123,244
2,847
*%
-
-
-
-
-
-
-
803
432
165
439
363
353
166
5
91
157
348
646
474
360
167
-
323
1,970
30,009
12,130
9,873
10,590
10,212
10,008
8,250
94
2,764
2,614
7,826
-
-
-
-
-
-
-
74
20
20
40
52
35
30
85
120
5
83
187
397
877
1,040
477
1,679
323
353
537
687
248
7,380
-
-
328
17
484
3,206
-
-
-
-
-
-
-
877
452
185
479
415
388
196
253
91
157
832
731
594
365
250
187
720
31,049
12,607
11,552
10,913
10,565
10,545
8,937
7,474
3,092
2,631
11,032
3,322
104,370
1,003
16,027
4,325
120,397
3,322
106,340
1,003
16,904
4,325
123,244
15 %
15 %
*%
*
*
*
*
*
4 %
2
1
1
1
1
1
*
*
*
1
15 %
15 %
$
$
$
$
$
$
$
$
$
$
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 32 states; no state had loans in excess of $157 million.
(3) Includes 40 states; no state had loans in excess of $2.9 billion.
56
FOREIGN LOANS AND EUROPEAN EXPOSURE We classify
loans as foreign if the borrower’s primary address is outside of
the United States. At December 31, 2012, foreign loans totaled
$37.8 billion, representing approximately 5% of our total
consolidated loans outstanding and approximately 3% of our
total assets.
Our foreign country risk monitoring process incorporates
frequent dialogue with our foreign financial institution
customers, counterparties and with regulatory agencies,
enhanced by centralized monitoring of macroeconomic and
capital markets conditions. We establish exposure limits for
each country through 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 evaluate our individual country risk exposure on an
ultimate country of risk basis which is normally based on the
country of residence of the guarantor or collateral location. Our
largest foreign country exposure on an ultimate risk basis was
the United Kingdom, which amounted to approximately
$15.9 billion, or 1% of our total assets, and included $2.3
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.
Table 22: European Exposure
At December 31, 2012, our Eurozone exposure, including
cross-border claims on an ultimate risk basis, and foreign
exchange and derivative products, aggregated approximately
$10.5 billion, including $232 million of sovereign claims,
compared with approximately $11.4 billion at
December 31, 2011, which included $364 million of sovereign
claims. Our Eurozone exposure is relatively small compared to
our overall credit risk exposure and is diverse by country, type,
and counterparty.
We conduct periodic stress tests of our significant country
risk exposures, analyzing the direct and indirect impacts on the
risk of loss from various macroeconomic and capital markets
scenarios. We do not have significant exposure to foreign
country risks because our foreign portfolio is relatively small.
However, we have identified exposure to increased loss from
U.S. borrowers associated with the potential impact of a
European downturn on the U.S. economy. We mitigate these
potential impacts on the risk of loss through our normal risk
management processes which include active monitoring and, if
necessary, the application of aggressive loss mitigation
strategies.
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.
Lending (1)(2)
Securities (3)
Derivatives and other (4)
Total exposure
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign
sovereign
Sovereign
Non-
Non-
sovereign (5)
Total
(in millions)
December 31, 2012
Eurozone
Netherlands
Germany
France
Luxembourg
Ireland
Spain
Austria
Italy
Belgium
Other (6)
Total Eurozone exposure
United Kingdom
Other European countries
$
-
61
27
-
39
-
105
-
-
-
232
2,274
-
2,542
1,934
920
891
721
735
250
238
156
104
8,491
6,541
3,887
-
-
-
-
-
-
-
-
-
-
-
-
10
10
334
210
461
82
37
59
6
88
32
82
1,391
6,492
250
8,133
-
-
-
-
-
-
-
-
-
-
-
-
12
12
18
159
147
5
41
3
-
1
9
2
385
574
564
-
61
27
-
39
-
105
-
-
-
232
2,894
2,303
1,528
978
799
797
256
327
197
188
2,894
2,364
1,555
978
838
797
361
327
197
188
10,267
10,499
2,274
13,607
15,881
22
4,701
4,723
1,523
2,528
28,575
31,103
Total European exposure
$
2,506
18,919
(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 $871 million in PCI loans, largely to customers in Germany and United Kingdom territories, and $2.4 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, 2012, the gross notional amount of our CDS sold that reference assets domiciled in Europe was $7.5 billion, which was offset by the notional amount of CDS
purchased of $7.6 billion. We did not have any CDS purchased or sold where the reference asset was solely the sovereign debt of a European country. Certain CDS purchased
or sold reference pools of assets that contain sovereign debt, however the amount of referenced sovereign European debt was insignificant at December 31, 2012.
(5) Total non-sovereign exposure comprises $13.1 billion exposure to financial institutions and $15.5 billion to non-financial corporations at December 31, 2012.
(6) Includes non-sovereign exposure to Greece and Portugal in the amount of $6 million and $30 million, respectively. We had no sovereign debt exposure to these countries at
December 31, 2012.
57
Risk Management – Credit Risk Management (continued)
REAL ESTATE 1-4 FAMILY FIRST AND JUNIOR LIEN MORTGAGE
LOANS Our real estate 1-4 family first and junior lien 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
variable interest entities (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 18% of
total loans at December 31, 2012, compared with 21% at
December 31, 2011.
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. Since our acquisition of
the Pick-a-Pay loan portfolio at the end of 2008, we have
reduced the option payment portion of the portfolio, from 86%
to 49% of the portfolio at December 31, 2012. For more
information, see the “Pick-a-Pay Portfolio” section in this
Report.
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
58
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. As announced in February 2012,
we reached a settlement regarding our mortgage servicing and
foreclosure practices with the DOJ and other federal and state
government entities, which became effective on April 5, 2012,
where we committed to provide relief to borrowers with real
estate 1-4 family first and junior lien mortgage loans. Also, in
January 2013, we announced the IFR settlement under which,
we will provide foreclosure prevention actions that may include
modifications for borrowers. See the “Risk Management – Credit
Risk Management – Risks Relating to Servicing Activities”
section in this Report for more details. In addition, 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 Pick-a-Pay specific 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. See Note 1
(Summary of Significant Accounting Policies) to Financial
Statements in this Report for discussion on how we determine
the allowance attributable to our modified residential real estate
portfolios.
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 (2% of this amount were PCI
loans from Wachovia) at December 31, 2012, located mostly
within the larger metropolitan areas, with no single California
metropolitan area consisting of more than 3% of total loans. We
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 credit risk
indicators, which exclude government insured/guaranteed loans,
continued to improve in 2012 on the non-PCI mortgage
portfolio. Loans 30 days or more delinquent at
December 31, 2012, totaled $15.5 billion, or 5%, of total non-PCI
mortgages, compared with $18.4 billion, or 6%, at
December 31, 2011. Loans with FICO scores lower than 640
totaled $37.7 billion at December 31, 2012, or 13% of total non-
PCI mortgages, compared with $44.1 billion, or 15%, at
December 31, 2011. Mortgages with a LTV/CLTV greater than
100% totaled $58.7 billion at December 31, 2012, or 20% of total
non-PCI mortgages, compared with $74.2 billion, or 26%, at
December 31, 2011. Information regarding credit risk indicators
can be found in Note 6 (Loans and Allowance for Credit Losses)
to Financial Statements in this Report.
We monitor the credit performance of our junior lien
mortgage portfolio for trends and factors that influence the
frequency and severity of loss. In first quarter 2012, in
accordance with Interagency Supervisory Guidance on
Allowance for Loan and Lease Losses Estimation Practices for
Loans and Lines of Credit Secured by Junior Liens on 1-4
Family Residential Properties issued by bank regulators on
January 31, 2012 (Interagency Guidance), we aligned our
nonaccrual reporting so that a junior lien is reported as a
nonaccrual loan if the related first lien is 120 days past due or is
in the process of foreclosure regardless of the junior lien
delinquency status. This action had minimal financial impact as
the expected loss content of these loans was already considered
in the allowance for loan losses. At December 31, 2012,
$960 million of performing junior liens subordinate to
delinquent senior liens were classified as nonaccrual. For
additional information, see Note 1 (Summary of Significant
Accounting Policies) to Financial Statements in this Report.
In addition, credit metrics for 2012 were affected by the
guidance in the Office of the Comptroller of the Currency (OCC)
update to the Bank Accounting Advisory Series (OCC guidance)
issued in third quarter 2012, which requires consumer loans
discharged in bankruptcy to be written down to net realizable
collateral value and classified as nonaccrual TDRs, regardless of
their delinquency status. At December 31, 2012, $1.8 billion of
the loans affected were classified as nonaccrual and $5.2 billion
were reported as TDRs. The OCC guidance also increased
charge-offs by $888 million in 2012. Loans affected were
predominantly real estate 1-4 family mortgage loans.
See the “Risk Management – Credit Risk Management –
Nonperforming Assets” section in this Report for more
information.
Table 23: Real Estate 1-4 Family First and Junior Lien
Mortgage Loans by State
December 31, 2012
Real estate Real estate
Total real
1-4 family 1-4 family estate 1-4 % of
first
junior lien
family
total
(in millions)
mortgage mortgage mortgage
loans
PCI loans:
California
Florida
New Jersey
Other (1)
$
17,372
2,383
1,254
5,830
33
26
19
74
17,405
2 %
2,409
1,273
5,904
*
*
*
Total PCI loans
$
26,839
152
26,991
3 %
All other loans:
California
Florida
New Jersey
New York
Virginia
Pennsylvania
North Carolina
Texas
Georgia
Other (2)
Government insured/
guaranteed loans (3)
Total all
other loans
Total
$
$
$
64,466
21,017
85,483
11 %
15,509
9,731
11,574
6,742
6,072
6,050
7,528
4,869
6,752
5,646
3,214
3,944
3,519
3,180
1,115
2,958
22,261
15,377
14,788
10,686
9,591
9,230
8,643
7,827
3
2
2
1
1
1
1
1
60,801
23,968
84,769
11
29,719
-
29,719
4
223,061
75,313
298,374
38 %
249,900
75,465
325,365
41 %
Less than 1%.
*
(1) Consists of 45 states; no state had loans in excess of $710 million.
(2) Consists of 41 states; no state had loans in excess of $7.0 billion.
(3) Represents loans whose repayments are predominantly insured by the FHA or
guaranteed by the VA.
59
Risk Management – Credit Risk Management (continued)
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 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
Table 24: Pick-a-Pay Portfolio - Comparison to Acquisition Date
with Pick-a-Pay loans are reported in the home equity portfolio.
Table 24 provides balances by types of loans as of
December 31, 2012, as a result of modification efforts, compared
to the types of loans included in the portfolio at acquisition.
Total PCI Pick-a-Pay loans were $32.0 billion at
December 31, 2012, compared with $61.0 billion at acquisition.
Modification efforts have predominantly involved option
payment PCI loans, which have declined to 20% of the Pick-a-
Pay portfolio at December 31, 2012, compared with 51% at
acquisition.
(in millions)
Option payment loans
Non-option payment adjustable-rate
and fixed-rate loans (3)
Full-term loan modifications
Total adjusted unpaid principal balance (3)
Total carrying value
2012 (1)
December 31,
2008
Adjusted
unpaid
principal
Adjusted
unpaid
principal
balance (2) % of total
balance (2) % of total
$
31,510
49 %
$
99,937
86 %
8,781
23,528
14
37
15,763
-
14
-
63,819
100 %
$
115,700
100 %
58,274
$
95,315
$
$
(1) Reflects $477 million in write-downs resulting from OCC guidance issued in 2012, which requires consumer loans discharged in bankruptcy to be written down to net
realizable collateral value, regardless of their delinquency status.
(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) Includes loans refinanced under the Consumer Relief Refinance Program
Pick-a-Pay loans may have fixed or adjustable rates with
payment options that include a minimum payment, an interest-
only payment or fully amortizing payment (both 15 and 30 year
options). Total interest deferred due to negative amortization on
Pick-a-Pay loans was $1.4 billion at December 31, 2012, and
$2.0 billion at December 31, 2011. Approximately 90% of the
Pick-a-Pay customers making a minimum payment in
December 2012 did not defer interest, compared with 83% in
December 2011.
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. Substantially all
the Pick-a-Pay portfolio has a cap of 125% 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 generally the 10-year
anniversary of the loan. 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: $21 million in 2013, $58 million in
2014 and $109 million in 2015. 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: $101 million in 2013, $332 million in 2014 and
$951 million in 2015. In 2012, the amount of loans reaching their
recast anniversary date and also having a payment change over
the annual 7.5% reset was $12 million.
Table 25 reflects the geographic distribution of the Pick-a-
Pay portfolio broken out between PCI loans and all other loans.
The LTV ratio is a useful metric in predicting future real estate
1-4 family first mortgage loan performance, including potential
charge-offs. Because PCI loans were initially recorded at fair
value, including write-downs for expected credit losses, the ratio
of the carrying value to the current collateral value will be lower
compared with the LTV based on the adjusted unpaid principal
balance. For informational purposes, we have included both
ratios for PCI loans in the following table.
60
Table 25: Pick-a-Pay Portfolio (1)
(in millions)
California
Florida
New Jersey
New York
Texas
Other states
Adjusted
unpaid
Current
December 31, 2012
PCI loans
All other loans
Ratio of
carrying
value to
Ratio of
carrying
value to
principal
LTV
Carrying
current
Carrying
current
balance (2)
ratio (3)
value (4)
value (5)
value (4)
value (5)
$
21,642
113 % $
17,337
90 % $
15,586
82 %
2,824
1,213
697
303
112
92
90
79
5,324
102
2,262
1,204
680
284
4,567
85
88
85
73
86
3,265
2,056
916
1,290
8,827
93
79
79
64
84
Total Pick-a-Pay loans
$
32,003
$
26,334
$
31,940
(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 2012.
(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.
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 2012, we completed more than 11,800 proprietary and
HAMP Pick-a-Pay loan modifications. We have completed more
than 111,000 modifications since the Wachovia acquisition,
resulting in $5.1 billion of principal forgiveness to our Pick-a-Pay
customers as well as an additional $427 million of conditional
forgiveness that can be earned by borrowers through
performance over the next three years.
Due to better than expected performance observed on the
Pick-a-Pay PCI portfolio compared with the original acquisition
estimates, we have reclassified $3.0 billion from the
nonaccretable difference to the accretable yield since acquisition
including $648 million in 2012. Our cash flows expected to be
collected have been favorably affected by lower expected defaults
and losses as a result of observed and forecasted economic
strengthening, particularly in housing prices, and our loan
modification efforts. These factors are expected to reduce the
frequency and severity of defaults and keep these loans
performing for a longer period, thus increasing future principal
and interest cash flows. 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 remaining life of
approximately 12.5 years at December 31, 2012. The weighted-
average remaining life increased 1.5 years in 2012 due to
estimated lower loan defaults, which extended the average life of
the portfolio. The accretable yield percentage at
December 31, 2012, was 4.70%, up from 4.45% at the end of
2011. 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 rate and the
estimated weighted-average life of the portfolio.
The Pick-a-Pay portfolio is a significant portion of our PCI
loans. For further information on the judgment involved in
estimating expected cash flows for PCI loans, please see “Critical
Accounting Policies – Purchased Credit-Impaired Loans” in
Note 1 (Summary of Significant Accounting Policies) to Financial
Statements in this Report.
61
Risk Management – Credit Risk Management (continued)
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 21% 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. At December 31, 2012, our lines of credit
portfolio had an outstanding balance of $84.6 billion, of which
$2.1 billion (2% of our total outstanding balance) is in its
amortization period, another $8.2 billion (10%) will reach their
end of draw period during 2013 through 2014, $29.4 billion
(35%) during 2015 through 2017, and $44.9 billion (53%) will
convert in subsequent years. This portfolio had unfunded credit
commitments of $77.8 billion at December 31, 2012. The lines
that enter their amortization period may experience higher
delinquencies and higher loss rates than the ones in their draw
period. At December 31, 2012, $223 million, or 11% of
outstanding lines of credit that are amortizing, primarily due to
reaching the end of draw period, were 30 or more days past due,
compared with $1.9 billion, or 2% for lines in their draw period.
In anticipation of our customers reaching their contractual end
of draw we have created a process to help borrowers effectively
make the transition from interest-only to fully-amortizing
payments.
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
has historically been 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 hold 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. Our allowance process for junior liens
ensures 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,
our allowance process for junior liens that are current, but are in
their revolving period, appropriately reflects the inherent loss
where the borrower is delinquent on the corresponding first lien
mortgage loans.
Table 26 summarizes delinquency and loss rates by the
holder of the lien. For additional information regarding current
junior liens behind delinquent first lien loans, see the “Risk
Management – Credit Risk Management – Real Estate 1-4
Family First and Junior Lien Mortgage Loans” section in this
Report.
Table 26: Home Equity Portfolios Performance by Holder of 1st Lien (1)
(in millions)
First lien lines
Junior lien mortgages and lines behind:
Wells Fargo owned or
serviced first lien
Third party first lien
Outstanding balance (2)
% of loans
two payments
or more past due
Loss rate (annualized) quarter ended
December 31,
December 31,
Dec. 31, Sept. 30,
June 30,
Mar. 31, Dec. 31,
2012
2011
2012
2011
2012 (3) 2012 (3)
2012
2012
2011
$
19,744
20,786
3.08 %
3.10
1.00
0.95
0.88
1.35
0.95
37,913
42,810
37,417
42,996
2.65
2.86
2.91
3.59
3.81
3.15
4.96
5.40
3.34
3.44
3.54
3.72
3.48
3.83
Total
$
95,074 106,592
2.82
3.22
2.97
4.32
2.89
3.18
3.13
(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 predominantly insured by the FHA.
(2) Includes $1.3 billion and $1.5 billion at December 31, 2012 and 2011, respectively, associated with the Pick-a-Pay portfolio.
(3) Reflects the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be written down to net realizable collateral value, regardless
of their delinquency status. The junior lien loss rates for third quarter 2012 reflect losses based on estimates of collateral value to implement the OCC guidance, which were then
adjusted in the fourth quarter to reflect actual appraisals. Fourth quarter 2012 losses on the junior liens where Wells Fargo own or services first lien remained elevated primarily
due to the OCC guidance.
62
We monitor the number of borrowers paying the minimum
amount due on a monthly basis. In December 2012,
approximately 44% of our borrowers with a home equity
outstanding balance paid only the minimum amount due; 93%
paid the minimum or more.
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, 2012,
and contains some of the highest risk in our home equity
portfolio, with a loss rate of 9.03% compared with 3.03% for the
core (non-liquidating) home equity portfolio at
December 31, 2012.
Table 27 shows the credit attributes of the core and
liquidating home equity portfolios and lists the top five states by
Table 27: Home Equity Portfolios (1)
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, 2012, 34% 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 15% of the core
home equity portfolio at December 31, 2012.
($ in millions)
Core portfolio (3)
California
Florida
New Jersey
Virginia
Pennsylvania
Other
Total
Liquidating portfolio
California
Florida
Arizona
Texas
Minnesota
Other
Total
Outstanding balance
% of loans
two payments
or more past due
Loss rate
December 31,
December 31,
December 31,
2012
2011
2012
2011
2012 (2)
2011
$
22,900
25,555
2.46 %
9,763
10,870
7,338
4,758
4,683
7,973
5,248
5,071
40,985
46,165
90,427
100,882
1,633
2,024
223
95
77
64
265
116
97
75
2,555
3,133
4,647
5,710
4.15
3.43
2.04
2.67
2.59
2.77
3.99
5.79
3.85
1.47
3.62
3.62
3.82
3.03
4.99
3.73
2.15
2.82
2.79
3.13
5.50
7.02
6.64
0.93
2.83
4.13
4.73
3.59
4.10
2.50
1.83
1.72
2.84
3.03
11.87
8.15
12.74
3.02
8.84
7.33
9.03
3.34
3.61
4.99
2.31
1.68
1.40
2.66
3.02
12.64
11.56
17.51
2.89
7.67
6.88
9.36
3.37
Total core and liquidating portfolios
$
95,074
106,592
2.82
3.22
(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 predominantly insured by the FHA.
(2) Reflects the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be written down to net realizable collateral value,
regardless of their delinquency status. Excluding the impact of OCC guidance, total core and liquidating portfolio loss rate at December 31, 2012 was 2.76%. We believe that
the presentation of certain information in this Report excluding the impact of the OCC guidance provides useful disclosure regarding the underlying credit quality of the
Company’s loan portfolios.
(3) Includes $1.3 billion and $1.5 billion at December 31, 2012, and December 31, 2011, respectively, associated with the Pick-a-Pay portfolio.
CREDIT CARDS Our credit card portfolio totaled $24.6 billion at
December 31, 2012, which represented 3% of our total
outstanding loans. The net charge-off rate for our credit card
loans was 4.02% for 2012, compared with 5.58% for 2011.
OTHER REVOLVING CREDIT AND INSTALLMENT Other
revolving credit and installment loans totaled $88.4 billion at
December 31, 2012, and predominantly include automobile,
student and security-based margin loans. The loss rate for other
revolving credit and installment loans was 1.00% for 2012,
compared with 1.22% for 2011. Excluding government
guaranteed student loans, the loss rates were 1.15% and 1.46%
for 2012 and 2011, respectively. Our automobile portfolio,
predominantly composed of indirect loans, totaled $46.0 billion
and $43.5 billion at December 31, 2012 and 2011, respectively,
and had a loss rate of 0.64% and 0.82% in 2012 and 2011,
respectively.
63
Risk Management – Credit Risk Management (continued)
NONPERFORMING ASSETS (NONACCRUAL LOANS AND
FORECLOSED ASSETS) Table 28 summarizes nonperforming
assets (NPAs) for each of the last five years. We generally place
loans on nonaccrual status when:
(cid:120)
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
or principal, unless both well-secured and in the process of
collection;
part of the principal balance has been charged off;
effective first quarter 2012, for junior lien mortgages, we
have evidence that the related first lien mortgage may be
120 days past due or in the process of foreclosure regardless
of the junior lien delinquency status; or
(cid:120)
(cid:120)
(cid:120)
(cid:120)
effective third quarter 2012, performing consumer loans are
discharged in bankruptcy, regardless of their delinquency
status.
In first quarter 2012, we implemented the Interagency
Guidance, which requires us to place junior liens on nonaccrual
status if the related first lien is nonaccruing. At
December 31, 2012, $960 million of such junior liens were
classified as nonaccrual.
In third quarter 2012, we implemented the OCC guidance
related to loans discharged in bankruptcy, which increased
nonperforming assets by $1.8 billion as of December 31, 2012,
and increased loan charge-offs by $888 million for 2012.
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 (3)
Other revolving credit and installment
2012
2011
2010
2009
2008
December 31,
$
1,422
3,322
1,003
27
50
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
5,824
8,217
11,351
11,723
2,985
11,455
2,922
10,913
1,975
12,289
2,302
10,100
2,263
285
199
300
332
2,648
894
273
Total consumer (4)
14,662
13,087
14,891
12,695
3,815
Total nonaccrual loans (5)(6)(7)
As a percentage of total loans
Foreclosed assets:
Government insured/guaranteed (8)
Non-government insured/guaranteed
Total foreclosed assets
20,486
21,304
26,242
24,418
6,800
2.56 %
2.77
3.47
3.12
0.79
$
1,509
2,514
1,319
3,342
1,479
4,530
960
667
2,199
1,526
4,023
4,661
6,009
3,159
2,193
Total nonperforming assets
$
24,509
25,965
32,251
27,577
8,993
As a percentage of total loans
3.07 %
3.37
4.26
3.52
1.04
(1) Includes LHFS of $16 million, $25 million, $3 million and $27 million at December 31, 2012, 2011, 2010, and 2009 respectively.
(2) Includes MHFS of $336 million, $301 million, $426 million, $339 million, and $193 million at December 31, 2012, 2011, 2010, 2009, and 2008 respectively.
(3) Includes $960 million at December 31, 2012, resulting from the Interagency Guidance issued in 2012 which requires performing junior liens to be classified as nonaccrual if
the related first mortgage is nonaccruing.
(4) Includes $1.8 billion at December 31, 2012 consisting of $1.4 billion of first mortgages, $205 million of junior liens and $140 million of auto and other loans, resulting from
the OCC guidance issued in third quarter 2012, which requires performing consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to
net realizable collateral value, regardless of their delinquency status.
(5) Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.
(6) Real estate 1-4 family mortgage loans predominantly insured by the FHA or guaranteed by the VA and student loans predominantly guaranteed by agencies on behalf of the
U.S. Department of Education under the Federal Family Education Loan Program are not placed on nonaccrual status because they are insured or guaranteed.
(7) See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans.
(8) Consistent with regulatory reporting requirements, foreclosed real estate securing government insured/guaranteed loans are classified as nonperforming. Both principal and
interest for government insured/guaranteed loans secured by the foreclosed real estate are collectible because the loans are predominantly insured by the FHA or
guaranteed by the VA.
64
Table 29: Nonperforming Assets During 2012
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
% of
total
% of
total
% of
total
% of
total
Balance
loans
Balance
loans
Balance
loans
Balance
loans
($ in millions)
Nonaccrual loans:
Commercial:
Commercial and industrial
$
Real estate mortgage
Real estate construction
Lease financing
Foreign
1,422
3,322
1,003
27
50
0.76 % $
1,404
0.79 % $
1,549
0.87 % $
1,726
1.02 %
3.12
5.93
0.22
0.13
3,599
3.44
1,253
7.08
49
66
0.40
0.17
3,832
1,421
43
79
3.63
8.08
0.34
0.20
4,081
3.85
1,709
9.21
45
38
0.34
0.10
Total commercial
5,824
1.61
6,371
1.81
6,924
1.96
7,599
2.20
Consumer:
Real estate 1-4 family
first mortgage
Real estate 1-4 family
junior lien mortgage
Other revolving credit and installment
11,455
4.58
11,195
4.65
10,368
4.50
10,683
4.67
2,922
285
3.87
0.32
3,140
4.02
3,091
3.82
3,558
4.28
338
0.39
195
0.22
186
0.21
Total consumer
14,662
3.34
14,673
3.41
13,654
3.24
14,427
3.43
Total nonaccrual loans
20,486
2.56
21,044
2.69
20,578
2.65
22,026
2.87
Foreclosed assets:
Government insured/guaranteed
Non-government insured/guaranteed
Total foreclosed assets
Total nonperforming assets
Change in NPAs from prior quarter
$
$
1,509
2,514
4,023
1,479
2,730
4,209
1,465
2,842
4,307
1,352
3,265
4,617
24,509
3.07 % $
25,253
3.23 % $
24,885
3.21 % $
26,643
3.48 %
(744)
368
(1,758)
678
Total NPAs were $24.5 billion (3.07% of total loans) at
December 31, 2012, and included $20.5 billion of nonaccrual
loans and $4.0 billion of foreclosed assets. Nonaccrual loans
decreased $818 million in 2012; however, apart from the
increase of $960 million resulting from the Interagency
Guidance and $1.8 billion from the OCC guidance, total
nonaccrual loans declined during the year by $3.6 billion.
Table 30 provides an analysis of the changes in nonaccrual
loans.
65
Risk Management – Credit Risk Management (continued)
Table 30: Analysis of Changes in Nonaccrual Loans
(in millions)
Commercial nonaccrual loans
Balance, beginning of period
Inflows
Outflows:
Returned to accruing
Foreclosures
Charge-offs
Payments, sales and other (1)
Total outflows
Balance, end of period
Consumer nonaccrual loans
Balance, beginning of period
Inflows (2)
Outflows:
Returned to accruing
Foreclosures
Charge-offs
Payments, sales and other (1)
Total outflows
Balance, end of period
Quarter ended
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
Year ended Dec. 31,
2012
2012
2012
2012
2012
2011
$
6,371
6,924
7,599
746
976
952
8,217
1,138
8,217
11,351
3,812
5,980
(135)
(107)
(322)
(729)
(90)
(151)
(364)
(924)
(242)
(92)
(402)
(891)
(188)
(119)
(347)
(655)
(469)
(1,457)
(683)
(1,435)
(1,700)
(1,102)
(3,646)
(5,274)
(1,293)
(1,529)
(1,627)
(1,756)
(6,205)
(9,114)
5,824
6,371
6,924
7,599
5,824
8,217
14,673
13,654
14,427
13,087
13,087
14,891
2,943
4,111
2,750
4,765
14,569
14,407
(893)
(1,039)
(1,344)
(151)
(1,053)
(857)
(182)
(987)
(884)
(186)
(943)
(226)
(4,219)
(5,920)
(745)
(985)
(1,137)
(1,364)
(4,541)
(5,828)
(856)
(892)
(3,489)
(3,478)
(2,954)
(3,092)
(3,523)
(3,425)
(12,994)
(16,211)
14,662
14,673
13,654
14,427
14,662
13,087
Total nonaccrual loans
$
20,486
21,044
20,578
22,026
20,486
21,304
(1) Other outflows include the effects of VIE deconsolidations and adjustments for loans carried at fair value.
(2) Quarter ended September 30, 2012, includes $1.4 billion of performing loans moved to nonaccrual status as a result of OCC guidance issued in third quarter 2012, which
requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency
status. Quarter ended March 31, 2012, includes $1.7 billion moved to nonaccrual status as a result of implementing Interagency Guidance issued January 31, 2012.
Typically, changes to nonaccrual loans period-over-period
represent inflows for loans that are placed on nonaccrual status
in accordance with our policy, offset by reductions for loans
that are paid down, 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.
Also, reductions can come from borrower repayments even if
the loan stays on nonaccrual.
While nonaccrual loans are not free of loss content, we
believe exposure to loss is significantly mitigated by five
factors. First, 97% of the $5.8 billion of commercial nonaccrual
loans and 99% of the $14.7 billion of consumer nonaccrual
loans are secured at December 31, 2012. Of the consumer
nonaccrual loans, 98% are secured by real estate and 45% have
a combined LTV (CLTV) ratio of 80% or below. Second, losses
of $1.8 billion and $4.9 billion have already been recognized on
41% of commercial nonaccrual loans and 50% of consumer
nonaccrual loans, respectively. Generally, when a consumer
real estate loan is 120 days past due (except when required
earlier by the Interagency or OCC guidance), we transfer it to
nonaccrual status. When the loan reaches 180 days past due, or
is discharged in bankruptcy, 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 reevaluate each loan regularly
and recognize additional write-downs if needed. Third, as of
66
December 31, 2012, 63% of commercial nonaccrual loans were
current on interest. Fourth, the risk of loss for all nonaccrual
loans has been considered and we believe is appropriately
covered by the allowance for loan losses. And fifth, $2.8 billion
of the consumer loans classified as nonaccrual at
December 31, 2012, by the Interagency and OCC guidance are
performing loans.
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, some states,
including California and New Jersey, have enacted legislation
or the courts have changed the foreclosure process in ways that
significantly increases the time to complete the foreclosure
process, meaning that loans will remain in nonaccrual status
for longer periods. In certain other states, including New York
and Florida, the foreclosure timeline has been significantly
increased due to backlogs in an already complex process.
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 $938 million
of interest would have been recorded as income on these loans,
compared with $406 million actually recorded as interest
income in 2012 versus $1.1 billion and $344 million,
respectively, in 2011.
Table 31 provides a summary of foreclosed assets and an
analysis of changes in foreclosed assets.
Table 31: Foreclosed Assets
(in millions)
Dec. 31, Sept. 30,
June 30, Mar. 31, Dec. 31,
2012
2012
2012
2012
2011
Government insured/guaranteed (1)
$
1,509
1,479
1,465
1,352
1,319
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 (3)
Reductions:
Sales
Write-downs and loss on sales
Total reductions
Balance, end of quarter
667
219
886
707
263
777
321
875
431
840
465
970
1,098
1,306
1,305
$
$
1,073
1,175
1,147
1,289
1,379
555
585
597
670
658
1,628
1,760
1,744
1,959
2,037
4,023
4,209
4,307
4,617
4,661
4,209
4,307
4,617
4,661
4,944
30
537
(710)
(43)
14
692
113
664
33
926
(17)
934
(750)
(1,003)
(896)
(1,123)
(54)
(84)
(107)
(77)
(753)
(804)
(1,087)
(1,003)
(1,200)
$
4,023
4,209
4,307
4,617
4,661
(1) Consistent with regulatory reporting requirements, foreclosed real estate securing government insured/guaranteed loans are classified as nonperforming. Both principal and
interest for government insured/guaranteed loans secured by the foreclosed real estate are collectible because the loans are predominantly 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 mortgages held for investment and MHFS, and outflows when we are reimbursed by FHA/VA.
(3) Predominantly include loans moved into foreclosure from nonaccrual status, PCI loans transitioned directly to foreclosed assets and repossessed automobiles.
Foreclosed assets at December 31, 2012, included
$1.5 billion of foreclosed real estate that is FHA insured or VA
guaranteed and expected to have little to no loss content. The
remaining balance of $2.5 billion of foreclosed assets has been
written down to estimated net realizable value. Foreclosed
assets were down $638 million, or 14%, at December 31, 2012,
compared with December 31, 2011. At December 31, 2012, 68%
of our foreclosed assets of $4.0 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 an elevated level of NPAs on our balance sheet.
67
Risk Management – Credit Risk Management (continued)
TROUBLED DEBT RESTRUCTURINGS (TDRs)
Table 32: Troubled Debt Restructurings (TDRs) (1)
(in millions)
Commercial TDRs
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
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 (1)
Total consumer TDRs (2)
Total TDRs
TDRs on nonaccrual status
TDRs on accrual status
Total TDRs
2012
2011
2010
2009
2008
December 31,
1,683
2,625
801
20
17
2,026
2,262
1,008
33
20
613
725
407
-
6
82
73
110
-
-
5,146
5,349
1,751
265
28
2
35
-
-
65
17,804
13,799
11,603
2,390
1,986
1,626
869
705
872
651
778
-
6,685
1,566
17
-
1,179
461
8
-
21,768
17,308
14,007
8,268
1,648
26,914
22,657
15,758
8,533
1,713
10,149
6,811
5,185
16,765
15,846
10,573
2,289
6,244
467
1,246
$
$
$
$
26,914
22,657
15,758
8,533
1,713
(1) 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.
(2) December 31, 2012, includes $5.2 billion of loans, consisting of $4.5 billion of first mortgages, $506 million of junior liens and $140 million of auto and other loans, resulting
from the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be classified as TDRs, as well as written down to net
realizable collateral value.
Table 33: TDRs Balance by Quarter During 2012
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
2012
2012
2012
2012
$
1,683
2,625
1,877
2,498
1,937
2,457
1,967
2,485
801
949
980
1,048
20
17
26
28
27
28
29
19
5,146
5,378
5,429
5,548
17,804
17,861
13,919
13,870
2,390
2,437
1,975
1,981
869
705
981
733
856
745
873
723
21,768
22,012
17,495
17,447
26,914
27,390
22,924
22,995
10,149
9,990
6,900
7,136
16,765
17,400
16,024
15,859
$
$
$
26,914
27,390
22,924
22,995
(in millions)
Commercial TDRs
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
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
Total consumer TDRs
Total TDRs
TDRs on nonaccrual status
TDRs on accrual status
Total TDRs
68
Table 32 and Table 33 provide information regarding the
recorded investment of loans modified in TDRs. The allowance
for loan losses for TDRs was $5.0 billion and $5.2 billion at
December 31, 2012 and 2011, respectively. See Note 6 (Loans
and Allowance for Credit Losses) to Financial Statements in this
Report for additional information regarding TDRs. 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 re-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
Table 34: Analysis of Changes in TDRs
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 generally 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.
Table 34 provides an analysis of the changes in TDRs.
(in millions)
Commercial TDRs
Balance, beginning of period
Inflows
Outflows
Charge-offs
Foreclosure
Payments, sales and other (1)
Balance, end of period
Consumer TDRs
Balance, beginning of period
Inflows (2)
Outflows
Charge-offs (3)
Foreclosure (3)
Payments, sales and other (1)
Net change in trial modifications (4)
Balance, end of period
Total TDRs
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
Year ended Dec. 31,
2012
2012
2012
2012
2012
2011
Quarter ended
$
5,378
542
5,429
620
5,548
687
5,349
710
(66)
(14)
(84)
(20)
(694)
(567)
(112)
(24)
(670)
(119)
(2)
(390)
5,349
2,559
(381)
(60)
1,751
5,379
(252)
(64)
(2,321)
(1,465)
5,146
5,378
5,429
5,548
5,146
5,349
22,012
17,495
17,447
17,308
1,247
5,212
762
829
17,308
8,050
14,929
5,673
(542)
(333)
(588)
(28)
(244)
(35)
(404)
(12)
(319)
(25)
(392)
22
(295)
(33)
(434)
72
(1,400)
(1,091)
(426)
(144)
(1,818)
(1,788)
54
(271)
21,768
22,012
17,495
17,447
21,768
17,308
$
26,914
27,390
22,924
22,995
26,914
22,657
(1) Other outflows include normal amortization/accretion of loan basis adjustments and loans transferred to held-for-sale.
(2) Quarter ended September 30, 2012, includes $4.3 billion of loans, resulting from the implementation of OCC guidance issued in third quarter 2012, which requires consumer
loans discharged in bankruptcy to be classified as TDRs, as well as written down to net realizable collateral value. Fourth quarter 2012 inflows remain elevated primarily due
to the OCC guidance.
(3) Fourth quarter 2012 outflows reflect the impact of loans discharged in bankruptcy being reported as TDRs in accordance with the OCC guidance starting in third
quarter 2012.
(4) Net change in trial modifications includes: inflows of new TDRs entering the trial payment period, net of outflows for modifications that either (i) successfully perform and
enter into a permanent modification, or (ii) did not successfully perform according to the terms of the trial period plan and are subsequently charged-off, foreclosed upon or
otherwise resolved. Our recent experience is that most of the mortgages that enter a trial payment period program are successful in completing the program requirements.
69
Risk Management – Credit Risk Management (continued)
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 $6.0 billion, $8.7 billion, $11.6 billion and
$16.1 billion, at December 31, 2012, 2011, 2010 and 2009,
respectively, are not included in these past due and still accruing
loans 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, 2012, were down
$613 million, or 30%, from December 31, 2011, due to loss
Table 35: Loans 90 Days or More Past Due and Still Accruing
mitigation activities including modifications, decline in non-
strategic and liquidating portfolios, and credit stabilization.
Loans 90 days or more past due and still accruing whose
repayments are predominantly insured by the Federal Housing
Administration (FHA) or 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 (FFELP) were $21.8 billion, $20.5 billion,
$15.8 billion, $16.3 billion, and $9.0 billion at
December 31, 2012, 2011, 2010, 2009 and 2008, respectively.
Table 35 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)
2012
2011
2010
2009
2008
December 31,
Loans 90 days or more past due and still accruing:
Total (excluding PCI):
Less: FHA insured/guaranteed by the VA (1)(2)
Less: Student loans guaranteed under the FFELP (3)
$
23,245
22,569
18,488
22,188
11,831
20,745
19,240
14,733
15,336
8,185
1,065
1,281
1,106
994
765
Total, not government insured/guaranteed
$
1,435
2,048
2,649
5,858
2,881
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 (2)
Real estate 1-4 family junior lien mortgage (2)(4)
Credit card
Other revolving credit and installment
$
47
228
27
1
153
256
89
6
308
104
193
22
590
1,014
909
73
303
504
627
2,586
564
133
310
125
781
279
346
138
941
366
516
199
1,623
515
795
339
218
70
250
34
572
883
457
687
282
Total consumer
1,132
1,544
2,022
3,272
2,309
Total, not government insured/guaranteed
$
1,435
2,048
2,649
5,858
2,881
(1) Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
(2) Includes MHFS 90 days or more past due and still accruing.
(3) Represents loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the FFELP.
(4) The balance at December 31, 2012, includes the impact from the transfer of certain 1-4 family junior lien mortgages to nonaccrual loans in accordance with the Interagency
Guidance issued on January 31, 2012.
70
NET CHARGE-OFFS
Table 36: Net Charge-offs
($ in millions)
2012
Commercial:
Commercial and
industrial
Year ended
Quarter ended
December 31,
December 31,
September 30,
June 30,
March 31,
Net loan % of
Net loan % of
Net loan % of Net loan % of Net loan % of
charge-
avg.
charge-
avg.
charge-
avg.
charge-
avg.
charge-
avg.
offs
loans
offs loans (1)
offs loans (1)
offs loans (1)
offs loans (1)
$
845 0.49 % $
Real estate mortgage
Real estate construction
Lease financing
Foreign
219 0.21
67 0.37
5 0.04
79 0.20
209
38
(18)
2
24
0.46 % $
131
0.29 % $
249
0.58 % $
256
0.62 %
0.14
(0.43)
0.04
0.25
54
1
1
30
0.21
0.03
0.03
0.29
81
17
-
11
0.31
0.40
-
0.11
46
67
2
14
0.17
1.43
0.06
0.14
Total commercial
1,215 0.35
255
0.29
217
0.24
358
0.42
385
0.45
Consumer:
Real estate 1-4 family
first mortgage
2,856 1.22
649
1.05
673
1.15
743
1.30
791
1.39
Real estate 1-4 family
junior lien mortgage
Credit card
Other revolving credit
3,178 3.93
916 4.02
690
222
3.57
3.71
1,036
212
5.17
3.67
689
240
3.38
4.37
763
242
3.62
4.40
and installment
869 1.00
265
1.21
220
1.00
170
0.79
214
0.99
Total consumer (2)
7,819 1.84
1,826
1.68
2,141
2.01
1,842
1.76
2,010
1.91
Total
$
9,034 1.17 % $
2,081
1.05 % $
2,358
1.21 % $ 2,200
1.15 % $ 2,395
1.25 %
2011
Commercial:
Commercial and 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
0.74 % $
261
0.65 % $
310
117
0.44
(5)
(0.09)
4
45
0.13
0.45
96
55
3
8
0.37
1.06
0.11
0.08
254
128
72
1
47
0.66 % $
0.50
1.32
0.01
0.52
354
152
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
Credit card
Other revolving credit
3,545
3.91
1,198
5.58
800
256
3.64
4.63
842
266
3.75
4.90
909
294
3.97
5.63
994
382
4.25
7.21
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 %
(1) Quarterly net charge-offs as a percentage of average loans are annualized.
(2) The year ended December 31, 2012, includes $888 million resulting from the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in
bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status. Upon initial implementation of the
OCC guidance in third quarter 2012, $567 million was charged off.
71
Risk Management – Credit Risk Management (continued)
Table 36 presents net charge-offs for the four quarters and
full year of 2012 and 2011. Net charge-offs in 2012 were
$9.0 billion (1.17% of average total loans outstanding) compared
with $11.3 billion (1.49%) in 2011. Net charge-offs in 2012
included $888 million resulting from the OCC guidance issued
in third quarter 2012. Excluding the impact of this guidance, net
charge-offs in 2012 were $8.1 billion (1.05% of average total
loans outstanding), and total net charge-offs as a percentage of
average loans decreased in each of the four quarters of the year,
as we saw signs of stabilization in the housing market although
the economic recovery remained uneven.
Net charge-offs in the real estate 1-4 family first mortgage
portfolio totaled $2.9 billion in 2012, compared with $3.5 billion
a year ago.
Net charge-offs in the real estate 1-4 family junior lien
portfolio decreased $367 million to $3.2 billion in 2012. 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 of this Report and the related
discussion.
Credit card net charge-offs decreased $282 million to
$916 million in 2012.
Commercial net charge-offs were $1.2 billion in 2012
compared with $2.0 billion in 2011, 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 and complex judgments. In addition, we review a
variety of credit metrics and trends. These credit metrics and
trends, however, do not solely determine the amount of the
allowance 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,
Note 1 (Summary of Significant Accounting Policies) and Note 6
(Loans and Allowance for Credit Losses) to Financial Statements
in this Report.
Table 37 presents an analysis of the allowance for credit
losses by loan segments and classes for the last five years.
72
Table 37: Allocation of the Allowance for Credit Losses (ACL)
2012
Loans
as %
of total
2011
Loans
as %
2010
Loans
as %
2009
Loans
as %
December 31,
2008
Loans
as %
of total
of total
of total
of total
ACL
loans
ACL
loans
ACL
loans
ACL
loans
ACL
loans
(in millions)
Commercial:
Commercial and industrial
$
2,543
23 % $ 2,649
22 % $ 3,299
20 % $ 4,014
20 % $ 4,129
23 %
Real estate mortgage
Real estate construction
Lease financing
Foreign
2,283
13
2,550
14
3,072
13
2,398
12
931
11
552
85
251
2
2
5
893
82
184
2
2
5
1,387
4
1,242
5
1,103
173
238
2
4
181
306
2
4
135
265
5
2
4
Total commercial
5,714
45
6,358
45
8,169
43
8,141
43
6,563
45
Consumer:
Real estate 1-4 family first mortgage
6,100
31
6,934
30
7,603
30
6,449
29
4,938
28
Real estate 1-4 family
junior lien mortgage
Credit card
3,462
10
3,897
11
4,557
13
5,430
13
4,496
13
1,234
3
1,294
3
1,945
3
2,745
3
2,463
3
Other revolving credit and installment
967
11
1,185
11
1,189
11
2,266
12
3,251
11
Total consumer
11,763
55
13,310
55
15,294
57
16,890
57
15,148
55
Total
$ 17,477
100 % $
19,668
100 % $ 23,463
100 % $
25,031
100 % $
21,711
100 %
Components:
Allowance for loan losses
Allowance for unfunded
credit commitments
Allowance for credit losses
Allowance for loan losses as a percentage
$
$
2012
2011
2010
2009
2008
December 31,
17,060
19,372
23,022
24,516
21,013
417
296
441
515
698
17,477
19,668
23,463
25,031
21,711
of total loans
2.13 %
2.52
3.04
3.13
2.43
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
189
2.19
85
171
2.56
92
130
3.10
89
135
268
3.20
2.51
103
319
73
Risk Management – Credit Risk Management (continued)
In addition to the allowance for credit losses there was
$7.0 billion, $10.7 billion and $13.4 billion of nonaccretable
difference at December 31, 2012, 2011 and 2010 respectively, to
absorb losses for PCI loans. The allowance for credit losses is
lower than otherwise would have been required without PCI
loan accounting. As a result of PCI loans, certain ratios of the
Company may not be directly comparable with periods prior to
the Wachovia merger and credit-related metrics for other
financial institutions. For additional information on PCI loans,
see the “Risk Management – Credit Risk Management –
Purchased Credit-Impaired Loans” section, Note 1 (Summary of
Significant Accounting Policies) 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 at December 31, 2012.
The 2012 provision of $7.2 billion was $1.8 billion less than
net charge-offs as a result of continued strong credit
performance. The provision incorporated estimated losses
attributable to Super Storm Sandy, which caused destruction
along the northeast coast of the U.S. in late October 2012 and
affected primarily our consumer real estate loan portfolios.
Based on available damage assessments, the extent of insurance
coverage, the availability of government assistance for our
borrowers, and our estimate of the potential impact on
borrowers’ ability and willingness to repay their loans, we
estimated the increase in net charge-offs attributable to Super
Storm Sandy to be between $200 million and $800 million.
After considering various factors, including our estimate of the
probabilities associated with various outcomes, we incorporated
$425 million into our provision for 2012. The OCC guidance
issued in 2012 requires consumer loans discharged in
bankruptcy to be placed on nonaccrual status and written down
to net realizable collateral value, regardless of their delinquency
status. While the impact of the OCC guidance accelerated
charge-offs of performing consumer loans discharged in
bankruptcy in 2012, the allowance had coverage for these
charge-offs. Total provision for credit losses was $7.2 billion in
2012, $7.9 billion in 2011 and $15.8 billion in 2010.
The 2011 provision of $7.9 billion was $3.4 billion less than
net charge-offs. Primary drivers of the 2011 allowance release
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.
In 2010, the provision of $15.8 billion was $2.0 billion less
than net charge-offs. The allowance release 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.
74
In determining the appropriate allowance attributable to our
residential real estate portfolios, our process considers the
associated credit cost, including re-defaults of modified loans
and projected loss severity for loan modifications that occur or
are probable to occur. In addition, our process incorporates the
estimated allowance associated with recent events including our
settlements announced in February 2012 and January 2013 with
federal and state government entities relating to our mortgage
servicing and foreclosure practices and high risk portfolios
defined in the Interagency Guidance relating to junior lien
mortgages.
Changes in the allowance reflect changes in statistically
derived loss estimates, historical loss experience, current trends
in borrower risk and/or general economic activity on portfolio
performance, and management’s estimate for imprecision and
uncertainty.
We believe the allowance for credit losses of $17.5 billion at
December 31, 2012, was appropriate to cover credit losses
inherent in the loan portfolio, including unfunded credit
commitments, at that date. 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
economy and business environment, it is possible that we will
incur incremental credit losses not anticipated as of the balance
sheet date. Absent significant deterioration in the economy, we
continue to expect future allowance releases in 2013, but at a
lower level than 2012. Our process for determining the
allowance for credit losses is discussed in the “Critical
Accounting Policies – Allowance for Credit Losses” section and
Note 1 (Summary of Significant Accounting Policies) to Financial
Statements in this Report.
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 the Government National Mortgage
Association (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 probable 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 of repurchase demands associated with
mortgage insurance rescission activity. Our mortgage
repurchase liability considers all vintages, however, repurchase
demands have predominantly related to 2006 through 2008
vintages and to GSE-guaranteed MBS.
During 2012, we continued to experience elevated levels of
repurchase activity measured by the number of investor
repurchase demands. We repurchased or reimbursed investors
for incurred losses on mortgage loans with original balances of
$2.5 billion in 2012, compared with $2.8 billion in 2011.
Additionally, we negotiated settlements on pools of mortgage
loans with original sold balances of $341 million in 2011, to
eliminate the risk of repurchase on these loans. We had no such
settlements in 2012. We incurred net losses on repurchased
loans and investor reimbursements totalling $1.1 billion in 2012,
compared with $1.2 billion in 2011.
Table 38 provides the number of unresolved repurchase
demands and mortgage insurance rescissions. We do not
typically receive repurchase requests from GNMA, FHA and the
Department of Housing and Urban Development (HUD) or VA.
As an originator of an FHA-insured or VA-guaranteed loan, we
are responsible for obtaining the insurance with FHA or the
guarantee with the VA. To the extent we are not able to obtain
the insurance or the guarantee we must request permission to
repurchase the loan from the GNMA pool. Such repurchases
from GNMA pools typically represent a self-initiated process
upon discovery of the uninsurable loan (usually within 180 days
from funding of the loan). Alternatively, in lieu of repurchasing
loans from GNMA pools, we may be asked by the FHA/HUD or
the VA to indemnify them (as applicable) for defects found in the
Post Endorsement Technical Review process or audits
performed by FHA/HUD or the VA. The Post Endorsement
Technical Review is a process whereby the HUD performs
underwriting audits of closed/insured FHA loans for potential
deficiencies. Our liability for mortgage loan repurchase losses
incorporates probable losses associated with such
indemnification.
Table 38: Unresolved Repurchase Demands and Mortgage Insurance Rescissions
Government
sponsored entities (1)
Private
rescissions with no demand (2)
Total
Mortgage insurance
($ in millions)
loans
balance (3)
loans
balance (3)
loans
balance (3)
loans
balance (3)
Number of
Original loan
Number of
Original loan
Number of
Original loan
Number of
Original loan
2012
December 31,
September 30,
June 30,
March 31,
2011
December 31,
September 30,
June 30,
March 31,
6,621 $
6,525
5,687
6,333
7,066
6,577
6,876
6,210
1,503
1,489
1,265
1,398
1,575
1,500
1,565
1,395
1,306 $
1,513
913
857
470
582
695
1,973
281
331
213
241
167
208
230
424
753 $
817
840
970
1,178
1,508
2,019
2,885
160
183
188
217
268
314
444
674
8,680 $
8,855
7,440
8,160
8,714
8,667
9,590
11,068
1,944
2,003
1,666
1,856
2,010
2,022
2,239
2,493
(1) Includes repurchase demands of 661 and $132 million, 534 and $111 million, 526 and $103 million, 694 and $131 million, 861 and $161 million, 878 and $173 million,
892 and $179 million and 685 and $132 million for December 31, September 30, June 30 and March 31, 2012, and December 31, September 30, June 30 and
March 31, 2011, 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. The number of repurchase demands from GSEs
that are from mortgage loans originated in 2006 through 2008 totaled 81% at December 31, 2012.
(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 rescission notices received in 2011, approximately 80% have resulted in repurchase demands through December 2012.
Not all mortgage insurance rescissions received as far back as 2011 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.
The overall level of unresolved repurchase demands and
mortgage insurance rescissions outstanding at
December 31, 2012, was down from a year ago in both number of
outstanding loans and in total dollar balances as we continued to
work through the new demands and mortgage insurance
rescissions. 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, 2012, presented in Table 38,
approximately 25% relate to loans purchased from
correspondent lenders. Due primarily to the financial difficulties
of some correspondent lenders, we are currently recovering on
average approximately 45% of losses from these lenders.
Historical recovery rates as well as projected lender performance
are incorporated in the establishment of our mortgage
repurchase liability.
We believe we have a high quality residential mortgage loan
servicing portfolio. Of the $1.9 trillion in the residential
mortgage loan servicing portfolio at December 31, 2012, 93%
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 7.04% at
December 31, 2012, compared with 7.96% at December 31, 2011.
75
Risk Management – Credit Risk Management (continued)
Four percent of this portfolio is private label securitizations for
which we originated the loans and therefore have some
repurchase risk. Although we have observed an increase in
outstanding demands, compared to December 31, 2011,
associated with our private label securitizations as some
investors have reviewed defaulted loans for potential breaches of
our loan sale representations and warranties, we continue to
believe the risk of repurchase in our private label securitizations
is substantially reduced, relative to other private label
securitizations, because approximately one-half of this portfolio
of private label securitizations 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 4%
private label securitization segment of our residential mortgage
loan servicing portfolio (weighted average age of 86 months),
58% are loans from 2005 vintages or earlier; 78% were prime at
origination; and approximately 64% are jumbo loans. The
weighted-average LTV as of December 31, 2012 for this private
Table 39: Changes in Mortgage Repurchase Liability
securitization segment was 75%. 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 private label
securitization portion of the residential mortgage servicing
portfolio. We had $180 million of repurchases related to private
label securitizations in 2012 compared with $110 million in 2011.
Of the servicing portfolio, 4% is non-agency acquired
servicing and 1% 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 loans, 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 39 summarizes the changes in our mortgage
repurchase liability.
Dec. 31, Sept. 30, June 30, Mar. 31,
Year ended Dec. 31,
Quarter ended
(in millions)
2012
2012
2012
2012
2012
2011
2010
Balance, beginning of period
Provision for repurchase losses:
Loan sales
Change in estimate (1)
Total additions
Losses
$
2,033
1,764
1,444
1,326
1,326
1,289
1,033
66
313
75
387
72
597
62
368
275
101
144
1,665
1,184
1,474
379
(206)
462
(193)
669
(349)
430
(312)
1,940
(1,060)
1,285
(1,248)
1,618
(1,362)
Balance, end of period
$
2,206
2,033
1,764
1,444
2,206
1,326
1,289
(1) Results from changes in investor demand and mortgage insurer practices, credit deterioration and changes in the financial stability of correspondent lenders.
The mortgage repurchase liability of $2.2 billion at
December 31, 2012, represents our best estimate of the probable
loss that we expect to incur for various representations and
warranties in the contractual provisions of our sales of mortgage
loans. The mortgage repurchase liability estimation process
requires management to make difficult, subjective and complex
judgments about matters that are inherently uncertain,
including demand expectations, economic factors, and the
specific characteristics of the loans subject to repurchase. Our
evaluation considers all vintages and the collective actions of the
GSEs and their regulator, the Federal Housing Finance Agency
(FHFA), mortgage insurers and our correspondent lenders. We
maintain regular contact with the GSEs, the FHFA, and other
significant investors to monitor their repurchase demand
practices and issues as part of our process to update our
repurchase liability estimate as new information becomes
available.
Our liability for mortgage repurchases, included in “Accrued
expenses and other liabilities” in our consolidated balance sheet,
was $2.2 billion at December 31, 2012, and $1.3 billion at
December 31, 2011. In 2012, we provided $1.9 billion, which
reduced net gains on mortgage loan origination/sales activities,
compared with a provision of $1.3 billion for 2011 and
$1.6 billion for 2010. Our provision in 2012 reflected an increase
in projections of future GSE repurchase demands, net of appeals,
for the pre-2009 vintages to incorporate the impact of recent
trends in file requests and repurchase demand activity
(comprising approximately 58% of the 2012 provision), an
increase in probable loss estimates for mortgage insurance
rescissions (approximately 10%), new loan sales (approximately
14%), an increase in probable loss estimates for non-agency risk
(approximately 9%), and various other observed trends affecting
our repurchase liability including higher than anticipated loss
severity (approximately 9%). The increase in projected future
GSE repurchase demands in 2012 was predominantly a result of
an increase in the expected file reviews by the GSEs as well as an
increase in observed demand rates on these file reviews based on
our most recent experience with them.
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
76
reasonably possible losses in excess of our recorded liability was
$2.4 billion at December 31, 2012, and was determined based
upon modifying the assumptions (particularly to assume
significant changes in investor repurchase demand practices)
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.
Table 40: Mortgage Repurchase Liability –
Sensitivity/Assumptions
(in millions)
Mortgage
repurchase
liability
Balance at December 31, 2012
$
2,206
Loss on repurchases (1)
Increase in liability from:
10% higher losses
25% higher losses
Repurchase rate assumption (2)
Increase in liability from:
10% higher repurchase rates
25% higher repurchase rates
39.5 %
207
518
0.5 %
194
485
$
$
(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.
(2) Represents the combination of the estimated investor audit/file review rate,
the investor demand rate on those audited loans, and the unsuccessful appeal
rate on those demands. As such, the repurchase rate can be significantly
impacted by changes in investor behavior if they decide to review/audit more
loans or demand more repurchases on the loans they audit. These behavior
changes drive a significant component of our estimated high end of the range
of reasonably possible losses in excess of our recorded repurchase liability,
which includes adverse assumptions in excess of the sensitivity ranges
presented in this table.
To the extent that economic conditions and the housing
market do not continue to stabilize 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 on the 2006 through
2008 vintages, which significantly contributed to the recent
levels of repurchase demands, were tightened starting in mid to
late 2008. Accordingly, we have not experienced and we do not
expect a similar rate of repurchase requests from the pre-2006
and the 2009 and later vintages.
RISKS RELATING TO SERVICING ACTIVITIES In addition to
servicing loans in our portfolio, we act as servicer and/or master
servicer of residential mortgage loans included in GSE-
guaranteed mortgage securitizations, GNMA-guaranteed
mortgage securitizations of FHA-insured/VA-guaranteed
mortgages 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 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
77
Risk Management – Credit Risk Management (continued)
remedies could include indemnification or repurchase of an
affected mortgage loan.
Consent Orders and Settlement Agreements for
Mortgage Servicing and Foreclosure Practices
In April 2011, the 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 implemented all of the
operational changes that resulted from the expanded servicing
responsibilities outlined in the Consent Orders.
On February 9, 2012, a federal/state settlement was
announced among the DOJ, 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 did not participate in
the larger settlement, it settled separately with the five servicers
under a simplified agreement. Under the terms of the larger
settlement, which will remain in effect for three and a half years
(subject to a trailing review period) we have agreed to the
following programmatic commitments, consisting of three
components totaling approximately $5.3 billion:
(cid:120) Consumer Relief Program commitment of $3.4 billion
(cid:120) Refinance Program commitment of $900 million
(cid:120)
Foreclosure Assistance Program of $1 billion
Additionally and simultaneously, the OCC and FRB
announced the imposition of civil money penalties of
$83 million and $87 million, respectively, pursuant to the
Consent Orders. While still subject to FRB confirmation, Wells
Fargo believes the civil money obligations were satisfied through
payments made under the Foreclosure Assistance Program to
the federal government and participating states for their use to
address the impact of foreclosure challenges as they determine
and which may include direct payments to consumers.
We are in the process of successfully executing activities
under both the Consumer Relief and the Refinance Programs in
accordance with the terms of our commitments. In our
February 14, 2013, submission to the Monitor of the National
Mortgage Settlement, we reported $1.9 billion of earned credits
toward our Consumer Relief commitment and $1.1 billion of
earned credits toward our Refinance Program commitment.
Refinance Program earned credits in excess of our required
commitment of $900 million can be applied towards our
Consumer Relief commitment obligations, subject to a limit of
$343 million of earned credits. Our earned credits are subject to
review and approval by the Monitor.
Consumer Relief Program
We began conducting creditable activities towards
satisfaction of the requirements of the Consumer Relief Program
on March 1, 2012. We can also receive an additional 25% credit
78
for 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 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, primarily through our first and second lien
modification and short sale and other deficiency balance waiver
programs. Given the types of relief provided, we consider these
loan modifications to be TDRs. 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, 2012.
Refinance Program
We have started receiving credit under the Refinance
Program for activities taken on or after March 1, 2012. The
Refinance Program allows for an additional 25% credit for all
refinance credits earned in the first 12 months of the program.
As of December 31, 2012, subject to the Monitor of the National
Mortgage Settlement review and approval, we have completed
the number of refinances necessary to satisfy our commitment
under the Refinance Program. Upon completion of the Refinance
Program we estimate our total calculated credit will be
approximately $1.7 billion to $1.9 billion, although we can only
receive earned credits for this program of $1.2 billion due to
certain limits within the agreement.
Including refinances that are still in the process of
completion, we expect that we will refinance approximately
31,000 to 34,000 borrowers with an unpaid principal balance of
approximately $6.7 billion to $7.4 billion under the Refinance
Program. Based on the mix of loans we have refinanced and are
in the process of completion, we estimate their weighted average
note rate will be reduced by approximately 260 basis points and
that their weighted average estimated remaining life will be
approximately 10 years. 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. We expect the future reduction in
interest income to be approximately $1.7 billion to $1.9 billion or
$173 million to $191 million annually. As a result of refinancings
under the Refinance Program, we will be forgoing interest that
we may not otherwise have agreed to forgo. No loss was
recognized in our consolidated financial statements for this
estimated forgone interest income at the time of the settlement
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. The impact of this forgone 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. The Refinance Program also affects our fair
value for these loans. The estimated reduction of the fair value of
our loans for the Refinance Program is approximately
$1.0 billion to $1.2 billion, based upon the range of loans we
estimate will be refinanced.
The expectations discussed above about the volume of loans
that we are refinancing, the resulting reduction in our lifetime
and annual interest income, and the reductions in fair value of
loans for the Refinance Program exceed the amounts that would
result from just meeting our minimum commitments under the
Program due to the significantly higher than expected response
we have received from our customers, which was partially driven
by product changes and the decision to hold interest rates
consistent with the prevailing market environment.
Although the Refinance Program relates to borrowers in good
standing as to their payment history who are not experiencing
financial difficulty, we evaluate each borrower to confirm their
ability to repay their mortgage obligation. This evaluation
includes 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 are not generally be considered a TDR. To the extent
we determine that an eligible borrower is experiencing financial
difficulty, we generally consider alternative modification
programs that are intended for loans that may be classified and
accounted for as a TDR.
Independent Foreclosure Review (IFR) Settlement
On January 7, 2013, we announced that, along with nine
other mortgage servicers, we entered into term sheets with the
OCC and the FRB that provide the parties will enter into
amendments to the Consent Orders, which would end our IFR
programs created by Article VII of an April 2011 Interagency
Consent Order and replace it with an accelerated remediation
process. The amendments to the Consent Orders have not yet
been entered into with the OCC or FRB.
In aggregate, the servicers have agreed to make direct, cash
payments of $3.3 billion and to provide $5.2 billion in additional
assistance, such as loan modifications, to consumers. Our
portion of the cash settlement is $766 million, which is based on
the proportionate share of Wells Fargo-serviced loans in the
overall IFR population. We fully accrued the cash portion of the
settlement in 2012, along with other remediation-related costs.
We also committed to foreclosure prevention actions which
include first and second lien modifications and short
sales/deeds-in-lieu of foreclosure on $1.2 billion of loans. We
anticipate meeting this commitment primarily through first lien
modification and short sale activities. We are required to meet
this commitment within two years of signing the agreement and
we anticipate that we will be able to meet our commitment
within the required timelines. This commitment did not result in
any charge as we believe that this commitment is covered
through the existing allowance for credit losses and the
nonaccretable difference relating to the purchased credit-
impaired loan portfolios. With this settlement, after incurring
some trailing expenses in the first quarter of 2013, we will no
longer incur costs associated with the independent foreclosure
reviews, which approximated $125 million per quarter during
2012 for external consultants and additional staffing.
79
Asset/Liability Management
Asset/liability management involves evaluating, monitoring and
managing 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 Board’s Finance Committee, 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:
(cid:120)
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);
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); or
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.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
expense is largely driven by mortgage activity, and tends to move
in the opposite direction of our net interest income. So, in
response to higher interest rates, mortgage activity, primarily
refinancing activity, generally declines. And in response to lower
rates, mortgage activity generally increases. Mortgage results are
also impacted by the valuation of MSRs and related hedge
positions. See the “Risk Management – Mortgage Banking
Interest Rate and Market Risk” section in this Report for more
information.
The degree to which these sensitivities offset each other is
dependent upon the timing and magnitude of changes in interest
rates, and the slope of the yield curve. During a transition to a
higher interest rate environment, a slowdown in interest
sensitive earnings from the mortgage banking business could
occur quickly, while the benefit from balance sheet repricing
may take more time to develop. For example, our “slightly
strong” scenario measures the impact of such a transition
involving an increase in long-term market rates while short-term
rates remain relatively low. If on the other hand rates decline
further, we would expect a near-term increase in interest
sensitive earnings from mortgage banking activity, while
pressure on net interest income would take place over a longer
period as the balance sheet reprices as described above.
As of December 31, 2012, our most recent simulations
estimate earnings at risk over the next 24 months under a range
of both lower and higher interest rates. The results of the
simulations are summarized in Table 41, indicating cumulative
net income after tax earnings sensitivity relative to the most
likely earnings plan over the 24 month horizon (a positive range
indicates a beneficial earnings sensitivity measurement relative
to the most likely earnings plan).
Table 41: Earnings Sensitivity Over 24 Month Horizon Relative
to Most Likely Earnings Plan
Most
likely
Weak
Slightly Slightly
strong
weak
Ending rates:
Fed funds
0.50 % 0 - 0.25 0 - 0.25
0.50
10-year treasury (1)
2.50
1.45
1.98
3.50
Strong
4.00
5.10
We assess interest rate risk by comparing outcomes under
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. These simulations require assumptions
regarding how changes in interest rates and related market
conditions could influence drivers of earnings and balance sheet
composition such as loan origination demand, prepayment
speeds, deposit balances and mix, as well as pricing strategies.
Our risk measures include both net interest income
sensitivity and interest rate sensitive noninterest income and
expense impacts. We refer to the combination of these exposures
as interest rate sensitive earnings. In general, the Company is
positioned to benefit from higher interest rates. Currently, our
profile is such that net interest income will benefit from higher
interest rates as our assets reprice faster and to a greater degree
than our liabilities, and, in response to lower market rates, our
assets will reprice downward and to a greater degree than our
liabilities. Our interest rate sensitive noninterest income and
Earnings relative to
most likely
N/A
0 - 5% 0 - 5%
-0.9%
>5%
(1) U.S. Constant Maturity Treasury Rate
We use the available-for-sale securities portfolio and
exchange-traded and over-the-counter (OTC) interest rate
derivatives to hedge our interest rate exposures. See the “Balance
Sheet Analysis – Securities Available for Sale” section of this
Report for more information on the use of the available-for-sale
securities portfolio. The notional or contractual amount, credit
risk amount and estimated net fair value of the derivatives used
to hedge our interest rate risk exposures as of December 31, 2012
and 2011, are presented in Note 16 (Derivatives) to Financial
Statements in this Report. We use derivatives for asset/liability
management in three main ways:
(cid:120)
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;
80
(cid:120)
(cid:120)
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 2012.
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 2012 and 2011, 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 2012 and 2011, 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
81
Risk Management – Asset/Liability Management (continued)
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 forward
hedging instruments at any point in time is designed to reduce
the volatility of the mortgage business’s earnings over various
time frames within a range of mortgage interest rates. Because
market factors, the composition of the mortgage servicing
portfolio and the relationship between the origination and
servicing sides of our mortgage business change continually, the
types of instruments used in our hedging are reviewed daily and
rebalanced based on our evaluation of current market factors
and the interest rate risk inherent in our MSRs portfolio.
Throughout 2012, 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 and
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
spot price including both the yield earned on the reference
securities and the market implied cost of financing during the
period. The actual amount of carry income earned on the hedge
each quarter will depend on the amount of the underlying asset
that is hedged and the particular instruments included in the
hedge. The level of carry income is driven by the slope of the
yield curve and other market driven supply and demand factors
affecting the specific reference securities. A steep yield curve
generally produces higher carry income while a flat or inverted
yield curve can result in lower or potentially negative carry
income. The level of carry income is also affected by the type of
instrument used. In general, mortgage forward contracts tend to
produce higher carry income than interest rate swap contracts.
Carry income is recognized over the life of the mortgage forward
as a component of the contract’s mark to market gain or loss.
Hedging the various sources of interest rate risk in mortgage
banking is a complex process that requires sophisticated
modeling and constant monitoring. While we attempt to balance
these various aspects of the mortgage business, there are several
potential risks to earnings:
(cid:120) 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
82
(cid:120)
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.
(cid:120) 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. Additional factors that can
impact the valuation of the MSRs include changes in
servicing and foreclosure costs due to changes in investor or
regulatory guidelines and changes in discount rates due to
market participants requiring a higher return due to
updated market expectations on costs and risks associated
with investing in MSRs. Many of these factors are hard to
predict and we may not be able to directly or perfectly hedge
their effect.
(cid:120) 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 we earn 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 $12.7 billion and $14.0 billion at December 31, 2012
and 2011, respectively. The weighted-average note rate on our
portfolio of loans serviced for others was 4.77% and 5.14% at
December 31, 2012 and 2011, respectively. The carrying value of
our total MSRs represented 0.67% and 0.76% of mortgage loans
serviced for others at December 31, 2012 and 2011, respectively.
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 We engage in trading
activities primarily to accommodate the investment and risk
management activities of our customers, execute economic
hedging to manage certain of our balance sheet risks and for a
very limited amount of proprietary trading for our own account.
These activities primarily occur within our trading businesses
and include entering into transactions with our customers that
are recorded as trading assets and liabilities on our balance
sheet. All of our trading assets and liabilities, including
securities, foreign exchange transactions, commodity
transactions and derivatives are carried at fair value. Income
earned related to these trading activities include net interest
income and changes in fair value related to trading assets and
liabilities. Net interest income earned on trading assets and
liabilities is reflected in the interest income and interest expense
components of our income statement. Changes in fair value of
trading assets and liabilities are reflected in net gains (losses) on
trading activities, a component of noninterest income in our
income statement.
From a market risk perspective, our net income is exposed to
changes in the fair value of trading assets and liabilities due to
changes in interest rates, credit spreads, foreign exchange rates,
equity and commodity prices. Our Market Risk Committee,
which is a sub-committee of Corporate ALCO, provides
governance and oversight over market risk-taking activities
across the Company and establishes and monitors risk limits.
Table 42 presents total revenue from trading activities.
Table 42: Income from Trading Activities
Year ended December 31,
(in millions)
2012
2011
2010
Interest income (1)
$
1,358
1,440
1,098
Less: Interest expense (2)
245
316
227
Net interest income
1,113
1,124
871
Noninterest income:
Net gains (losses) from
trading activities (3):
Customer accommodation
Economic hedging and other
Proprietary trading
1,347
1,029
1,448
345
15
(1)
(14)
178
22
Total net trading gains
1,707
1,014
1,648
Total trading-related net interest
and noninterest income
$
2,820
2,138
2,519
(1) Represents interest and dividend income earned on trading securities.
(2) Represents interest and dividend expense incurred on trading securities we have
sold but have not yet purchased.
(3) Represents realized gains (losses) from our trading activity and unrealized gains
(losses) due to changes in fair value of our trading positions, attributable to the
type of business activity.
For further information regarding the fair value of our
trading assets and liabilities, refer to Note 16 (Derivatives) and
Note 17 (Fair Values of Assets and Liabilities) to Financial
Statements in this Report.
Customer accommodation Customer accommodation activities
are conducted to help customers manage their investment needs
and risk management and hedging activities. We engage in
market-making activities or act as an intermediary to purchase
or sell financial instruments in anticipation or in response to
customer needs. This category also includes positions we use to
manage our exposure to such transactions.
For the majority of our customer accommodation trading, we
serve as intermediary between buyer and seller. For example, we
may purchase or sell a derivative to a customer who wants to
manage interest rate risk exposure. We typically enter into
offsetting derivative(s) or security positions with a separate
counterparty or exchange to manage our exposure to the
derivative with our customer. We earn income on this activity
based on the transaction price difference between the customer
and offsetting derivative or security positions, which is reflected
in the fair value changes of the positions recorded in net gains
(losses) on trading activities.
Customer accommodation trading also includes net gains
related to market-making activities in which we take positions to
facilitate customer order flow. For example, we may own
securities recorded as trading assets (long positions) or sold
securities we have not yet purchased, recorded as trading
liabilities (short positions), typically on a short-term basis, to
facilitate anticipated buying and selling demand from our
customers. As market-maker in these securities, we earn income
due (1) to the difference between the price paid or received for
the purchase and sale of the security (bid-ask spread) and (2) the
net interest income and change in fair value of the long or short
positions during the short-term period held on our balance
83
Risk Management – Asset/Liability Management (continued)
updated on a daily basis. The historical simulation approach
employs historical scenarios of the risk factors from each trading
day in the previous year, and estimates the value of the portfolio
on the scenarios to obtain a daily net trading revenue
distribution.
The Company calculates VaR for management purposes as
well as for regulatory purposes. The management view of VaR is
used for trading limits and is a wider view of risk compared to
Total Regulatory VaR. Total Regulatory VaR is calculated
according to regulatory rules and is used to calculate market risk
regulatory capital. It includes both General VaR and Specific
Risk VaR. Regulatory General VaR is the risk of loss due to broad
market movements such as movements in interest rates, equity
prices or foreign exchange rates. Specific Risk VaR is the risk of
loss on a position that could result from factors other than broad
market movements and includes event risk, default risk and
idiosyncratic risk.
Table 43 below shows the results of the Company’s
Regulatory General VaR measures for 2012.
Table 43: Regulatory General Value-at-Risk (VaR)
(in millions)
Risk Categories
Credit
Interest rate
Equity
Commodity
Foreign exchange
$
Period
end
19
13
5
1
4
Year ended December 31, 2012
Average
Low
High
23
19
5
2
2
10
7
3
1
-
-
43
41
12
5
6
-
Diversification benefit
(24) (1)
(27) (1)
Total
$
18
24
(1) The period-end VaR and average VaR were less than the sum of the VaR
components described above, which is due to portfolio diversification. The
diversification effect arises because the risks are not perfectly correlated causing
a portfolio of positions to usually be less risky than the sum of the risks of the
positions alone.
sheet. Additionally, we may enter into separate derivative or
security positions to manage our exposure related to our long or
short security positions. Collectively, income earned on this type
of market-making activity is reflected in the fair value changes of
these positions recorded in net gain (losses) on trading activities.
Economic hedges and other Economic hedges in trading are not
designated in a hedge accounting relationship and exclude
economic hedging related to our asset/liability risk management
and substantially all mortgage banking risk management
activities. Economic hedging activities include the use of trading
securities to economically hedge risk exposures related to non-
trading activities or derivatives to hedge risk exposures related
to trading assets or trading liabilities. Economic hedges are
unrelated to our customer accommodation activities. Other
activities include financial assets held for investment purposes
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 Proprietary trading consists of security or
derivative positions executed for our own account based upon
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 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 this section and the
noninterest income section of our financial results, proprietary
trading activity is not significant to our business or financial
results.
Risk Measurement Value-at-Risk (VaR) is a standardized
approach for monitoring and reporting market risk. We use VaR
metrics complemented with sensitivity analysis and stress
testing in managing and measuring the risk associated with
trading activities.
Value-at-Risk VaR is a statistical risk measure used to estimate
the potential loss from adverse market moves on trading and
other positions carried at fair value. VaR is determined using a
historical simulation approach and 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 each
trading day in the previous year.
The historical simulation approach is used to identify the
critical risk driver of each trading position with respect to
interest rates, credit spreads, foreign exchange rates, and equity
and commodity prices. The risk drivers for each position are
84
Table 44 presents the frequency distribution of our daily net
trading revenue included in backtesting of Regulatory VaR
(described below) for 2012. These net revenues represent net
interest income and net gains (losses) from trading activities
related only to trading positions that meet the regulatory
definition of a covered position. Net trading revenues related to
Table 44: Distribution of Daily Net Trading Revenue Used for
Backtesting of Regulatory VaR: Year Ended December 31, 2012
trading positions that do not meet this definition include activity
related to long-term positions held for economic hedging
purposes, credit adjustments and other activity not
representative of daily price changes driven by market risk
factors.
VaR Backtesting Backtesting is one form of validation of the
VaR model. Backtesting compares the daily VaR number to the
actual net trading revenue for each of the trading days in the
preceding year. Because our confidence interval is 99 percent,
statistically, losses will exceed VaR on average, one out of 1oo
trading days or two to three times per year. Any observed loss in
excess of the VaR number is taken as an exception. No
backtesting exceptions occurred in 2012. The number of actual
backtesting exceptions is dependent on current market
performance relative to historic market volatility. Table 45
shows daily net trading revenue and Total Regulatory VaR for
2012.
Table 45: Daily Net Trading Revenue and Total Regulatory VaR: Year Ended December 31, 2012
85
Risk Management – Asset/Liability Management (continued)
Stress Testing While VaR captures the risk of loss due to adverse
changes in markets using recent historical data, stress testing
captures the Company’s exposure to extreme events. Stress
testing measures the impacts from extreme, but low probability
market movements. Stress scenarios estimate the risk of losses
based on management’s assumptions of abnormal but severe
market movements such as severe credit spread widening or a
large decline in equity prices. These scenarios also assume that
the market moves happen instantaneously and no repositioning
or hedging activity takes place to mitigate losses as events
unfold. The stress scenarios are updated with recent market
trends and are reviewed on a daily basis by senior management.
The stress scenarios are used for desk level monitoring as well as
overall company-wide estimates.
Sensitivities Sensitivity analysis is the estimated risk of loss for a
single measure such as a 1 basis point increase in rates or a 1
percent decrease in equity prices. We conduct and monitor
sensitivity on interest rates, credit spreads, volatility, equity,
commodity, and foreign exchange. Because VaR is based upon
previous moves in market risk factors over recent periods, it may
not provide accurate predictions of future market moves.
Sensitivity analysis complements VaR as it provides an
indication of risk relative to each factor irrespective of historical
market moves. Sensitivities are monitored at both the desk level
and at an aggregated level by senior management on a daily
basis. Our corporate market risk management function
aggregates all Company exposures to monitor the risk
sensitivities are within established tolerances. Changes to the
Company’s sensitivities are analyzed and reported on a daily
basis. The Company monitors risk exposure from a variety of
perspectives, which include line of business, product, risk type
and legal entity.
MARKET RISK – EQUITY INVESTMENTS 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.
As part of our business to support our customers, we trade
public equities, listed/OTC equity derivatives and convertible
bonds. We have parameters that govern these activities. We also
have marketable equity securities in the securities available-for-
sale portfolio, including securities relating to our venture capital
86
activities. We manage these investments within capital risk
limits approved by management and the Board and monitored
by Corporate ALCO. Gains and losses on these securities are
recognized in net income when realized and periodically include
OTTI charges.
Changes in equity market prices may also indirectly affect our
net income by (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 46 provides information regarding our marketable and
nonmarketable equity investments.
Table 46: Nonmarketable and Marketable Equity Investments
(in millions)
Nonmarketable equity investments:
Cost method:
Private equity investments
$
Federal bank stock
Total cost method
Equity method and other:
LIHTC investments (1)
Private equity and other
December 31,
2012
2011
2,572
4,227
3,444
4,617
6,799
8,061
4,767
4,077
6,156
4,670
Total equity method and other
10,923
8,747
Total nonmarketable
equity investments (2)
$
17,722
16,808
Marketable equity securities:
Cost
Net unrealized gains
$
2,337
2,929
448
488
Total marketable
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.
2,785
3,417
(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 5.5 years at December 31, 2012. Of the
$220.9 billion (cost basis) of debt securities in this portfolio at
December 31, 2012, $48.0 billion (22%) is expected to mature or
be prepaid in 2013 and an additional $44.4 billion (20%) in
2014. 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 2012, we sold mortgage
loans of $483.5 billion. The amount of mortgage loans and other
consumer loans available to be sold, securitized or pledged was
approximately $211.1 billion at December 31, 2012.
Core customer deposits have historically provided a sizeable
source of relatively stable and low-cost funds. At
December 31, 2012, core deposits were 118% of total loans
compared with 113% a year ago. Additional funding is provided
by long-term debt, other foreign deposits, and short-term
borrowings. Long-term debt averaged $127.5 billion in 2012 and
$141.1 billion in 2011. Short-term borrowings averaged
$51.2 billion in 2012 and $51.8 billion in 2011.
We anticipate making capital expenditures of approximately
$1.4 billion in 2013 for our stores, relocation and remodeling of
our facilities, and routine replacement of furniture, equipment
and servers. We fund expenditures from various sources,
including liquid assets and borrowings.
We access domestic and international capital markets for
long-term funding (generally greater than one year) through
issuances of registered debt securities, private placements and
Table 47: Credit Ratings
Moody's
S&P
Fitch Ratings
DBRS
* middle **high
asset-backed secured funding. Investors in the long-term capital
markets, as well as other market participants, 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.
Generally, rating agencies review a firm’s ratings at least
annually. During 2012, our ratings were affirmed by Moody’s,
Standard & Poor’s and Fitch Ratings, and confirmed by DBRS.
There were no changes to our credit ratings in 2012. See the
“Risk Management – Asset/Liability Management” and “Risk
Factors” sections of this Report for additional information
regarding our credit ratings as of December 31, 2012, and the
potential impact a credit rating downgrade would have 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, 2012, are presented in Table 47.
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
risk management rules. On January 6, 2013, the BCBS endorsed
a revised liquidity framework for banks. These rules have not yet
been adopted and finalized by the FRB. The proposed rules
would require modifications to our existing liquidity risk
management processes. This includes increased frequency of
liquidity reporting and stress testing, maintenance of a 30-day
liquidity buffer comprised of highly-liquid assets and additional
corporate governance requirements. We will continue to analyze
the proposed rules and other regulatory proposals that may
affect liquidity risk 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, our 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
April 2012, 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 2012, the Parent issued $17.0 billion of
senior notes, of which $12.1 billion were registered with the SEC.
In January 2013, the Parent issued an additional $1.1 billion of
senior notes, of which $100 million were registered with the
SEC. In addition, in February 2013, the Parent issued
$2.0 billion of registered subordinated medium-term notes and
$100 million of senior notes.
The Parent’s proceeds from securities issued in 2012 and
January and February 2013 were used for general corporate
purposes, and, unless otherwise specified in the applicable
prospectus or prospectus supplement, we expect the proceeds
87
Risk Management – Asset/Liability Management (continued)
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 2012, WFCC
issued CAD $3.0 billion in medium-term notes. At
December 31, 2012, CAD $4.0 billion remained available for
future issuance. In January 2013, WFCC issued an additional
CAD $500 million in senior medium-term notes. All medium-
term notes issued by WFCC are unconditionally guaranteed by
the Parent.
FEDERAL HOME LOAN BANK MEMBERSHIP We are a member
of the Federal Home Loan Banks based in Dallas, Des Moines
and San Francisco (collectively, the FHLBs). Each member of 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.
The FHLBs are a group of cooperatives that lending
institutions use to finance housing and economic development in
local communities. About 80% of U.S. lending institutions,
including Wells Fargo, rely on the FHLBs for low-cost funds. We
use the funds to support home mortgage lending and other
community investments.
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 48 provides information regarding the Parent’s
medium-term note (MTN) programs. The Parent may issue
senior and subordinated debt securities under Series L & M, 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 48: Medium-Term Note (MTN) Programs
December 31, 2012
Debt Available
Date
issuance
for
established
authority issuance
(in billions)
MTN program:
Series L & M (1)
Series K (1)(3)
European (2)(3)
Australian (2)(4)
May 2012
$
April 2010
December 2009
June 2005
AUD
25.0
25.0
25.0
10.0
21.0
23.1
20.8
6.7
(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 April 2012.
(4) 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.
At December 31, 2012, Wells Fargo Bank, N.A. had available
$100 billion in short-term debt issuance authority and
$102.3 billion in long-term debt issuance authority. In March
2012, Wells Fargo Bank, N.A. established a $100 billion bank
note program under which, subject to any other debt
outstanding under the limits described above, it may issue
$50 billion in outstanding short-term senior notes and
$50 billion in outstanding long-term senior or subordinated
notes. During 2012, Wells Fargo Bank, N.A. issued $4.6 billion
of senior notes. At December 31, 2012, Wells Fargo Bank, N.A.
had remaining issuance capacity under the bank note program of
$50 billion in short-term senior notes and $45.4 billion in long-
term senior or subordinated notes. In February 2013, Wells
Fargo Bank, N.A. issued $3.0 billion of senior floating-rate
extendible notes.
88
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 $13.3 billion from
December 31, 2011, predominantly from Wells Fargo net income
of $18.9 billion, less common and preferred stock dividends of
$5.6 billion. During 2012, we issued approximately 123 million
shares of common stock, substantially all of which related to
employee benefit plans. In August 2012, we issued 30 million
Depositary Shares, each representing a 1/1,000th interest in a
share of the Company’s newly issued Non-Cumulative Perpetual
Class A Preferred Stock, Series N, for an aggregate public
offering price of $750 million. In November 2012, we issued
26 million Depositary Shares, each representing a 1/1,000th
interest in a share of the Company’s newly issued Non-
Cumulative Perpetual Class A Preferred Stock, Series O, for an
aggregate public offering price of $650 million. During 2012, we
repurchased approximately 84 million shares of common stock
in open market transactions and from employee benefit plans, at
a net cost of $2.7 billion, and approximately 36 million shares of
common stock at a net cost of $1.2 billion from the settlement of
forward purchase contracts. During fourth quarter 2012, the
Company entered into a forward purchase contract at a net cost
of $200 million that is expected to settle in first quarter 2013 for
an estimated 6 million shares. For additional information about
our forward repurchase agreements see Note 1 (Summary of
Significant Accounting Policies) to Financial Statements in this
Report.
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, 2012, 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
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 entered the “parallel run phase” of
Basel II in July 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.
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 were intended to 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% consisting of a minimum ratio of
4.5% plus a 2.5% capital conservation buffer.
The BCBS has 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% of risk-
weighted assets depending on the bank’s systemic importance,
which is 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 for G-SIBs, which would be phased in
beginning in January 2016 and become fully effective on
January 1, 2019, would be in addition to the minimum Basel III
7.0% Tier 1 common equity requirement finalized in December
2010. The Financial Stability Board (FSB), in an updated list
published in November 2012 based on year-end 2011 data,
identified the Company as one of the 28 G-SIBs and
provisionally determined that the Company’s surcharge would
be 1.0%. The FSB may revise the list of G-SIBs and their
required surcharges prior to implementation based on
additional or future data.
U.S. regulatory authorities have been considering the BCBS
capital guidelines and proposals, and in June 2012, the U.S.
banking regulators jointly issued three notices of proposed
rulemaking that are essentially intended to implement the BCBS
capital guidelines for U.S. banks. Together these notices of
proposed rulemaking would, among other things:
(cid:120)
implement in the United States the Basel III regulatory
capital reforms including those that revise the definition of
capital, increase minimum capital ratios, and introduce a
minimum Tier 1 common equity ratio of 4.5% and a capital
conservation buffer of 2.5% (for a total minimum Tier 1
common equity ratio of 7.0%) and a potential
countercyclical buffer of up to 2.5%, which would be
89
Capital Management (continued)
imposed by regulators at their discretion if it is determined
that a period of excessive credit growth is contributing to an
increase in systemic risk;
revise “Basel I” rules for calculating risk-weighted assets to
enhance risk sensitivity;
(cid:120)
(cid:120) modify the existing Basel II advanced approaches rules for
(cid:120)
calculating risk-weighted assets to implement Basel III; and
comply with the Dodd-Frank Act provision prohibiting the
reliance on external credit ratings.
Although the proposals contemplated an effective date of
January 1, 2013, with phased in compliance requirements, the
rules have not yet been finalized by the U.S. banking regulators
due to the volume of comments received and concerns expressed
during the comment period. The notices of proposed rulemaking
did not address the BCBS capital surcharge proposals for G-SIBs
or the proposed Basel III liquidity standards. U.S. regulatory
authorities have indicated that these proposals will be addressed
at a later date. The U.S. banking regulators have approved a final
rule to implement changes to the market risk capital rule, which
requires banking organizations with significant trading activities
to adjust their capital requirements to better account for the
market risks of those activities.
Although uncertainty exists regarding final capital rules, 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
capital proposals exceeded the fully phased-in minimum of 7.0%
by 119 basis points at December 31, 2012. The proposed Basel III
capital rules and interpretations and assumptions used in
estimating our Basel III calculations are subject to change
depending on final promulgation of Basel III capital rulemaking.
In October 2012, the FRB issued final rules regarding stress
testing requirements as required under the Dodd-Frank Act
provision imposing enhanced prudential standards on large
bank holding companies (BHCs) such as Wells Fargo. The OCC
issued and finalized similar rules during 2012 for stress testing
of large national banks. These stress testing rules, which became
effective for Wells Fargo on November 15, 2012, set forth the
timing and type of stress test activities large BHCs and banks
must undertake as well as rules governing testing controls,
oversight and disclosure requirements.
Table 49 and Table 50, which appear at the end of this
Capital Management section, provide information regarding our
Tier 1 common equity calculations under Basel I and as
estimated under Basel III, respectively.
Capital Planning
In late 2011, the FRB finalized rules to require large BHCs to
submit capital plans annually for review to determine if the FRB
had any objections before making any 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.
On March 13, 2012, the FRB notified us that it did not object
to our 2012 capital plan included in the 2012 Comprehensive
Capital Analysis and Review (CCAR). Since the FRB notification,
the Company took several capital actions during 2012, including
90
increasing its quarterly common stock dividend rate to
$0.22 per share, completing the redemption of $2.7 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, repurchasing shares of our common stock,
and purchasing an aggregate of $2.2 billion of our subordinated
debt with an effective yield of 2.02% in tender offers for such
securities. In January 2013, the Company increased its dividend
to $0.25 per share and submitted for redemption an additional
$2.8 billion of trust preferred securities. Each of these actions
was contemplated by the capital plan included in the 2012
CCAR.
Under the FRB’s capital plan rule, our 2013 CCAR included 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 used to conduct a CCAR in 2012. As part
of the 2013 CCAR, the FRB also generated 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 is expected to
review the supervisory stress results both as required under the
Dodd-Frank Act using a common set of capital actions for all
large BHCs and by taking into account the Company’s proposed
capital actions. We submitted our board approved 2013 capital
plan to the FRB on January 4, 2013. The FRB has indicated that
it will publish its supervisory stress test results as required
under the Dodd-Frank Act on March 7, 2013, and the related
CCAR results taking into account the Company’s proposed
capital actions on March 14, 2013.
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 and to changes in our risk profile.
In first quarter 2011, the Board authorized the repurchase of
200 million shares of our common stock, which was completed
in 2012. In October 2012, the Board authorized the repurchase
of an additional 200 million shares. At December 31, 2012, we
had remaining authority under this authorization to purchase
approximately 198 million shares, subject to regulatory and legal
conditions. For more information about share repurchases
during 2012, see Part II, Item 5 of our 2012 Form 10-K.
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 Capital Purchase
Program (CPP), a part of the Troubled Asset Relief Program
(TARP), 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 $7.70 per warrant. We have purchased an additional
986,426 warrants, all on the open market, since the U.S.
Treasury auction. At December 31, 2012, there were
39,109,299 warrants outstanding and exercisable and
$452 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.
91
Capital Management (continued)
Table 49: Tier 1 Common Equity Under Basel I (1)
(in billions)
Total equity
Noncontrolling interests
Total Wells Fargo stockholders' equity
Adjustments:
Preferred equity
Goodwill and intangible assets (other than MSRs)
Applicable deferred taxes
MSRs over specified limitations
Cumulative other comprehensive income
Other
Tier 1 common equity
Total risk-weighted assets (2)
Tier 1 common equity to total risk-weighted assets (2)
December 31,
2012
2011
$
158.9
(1.3)
141.7
(1.5)
157.6
140.2
(12.0)
(32.9)
3.2
(0.7)
(5.6)
(0.6)
(10.6)
(34.0)
3.8
(0.8)
(3.1)
(0.4)
(A)
(B)
$
$
109.0
95.1
1,077.1
1,005.6
(A)/(B)
10.12 %
9.46
(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) 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. Effective September 30, 2012, the Company refined its determination of the risk weighting of certain unused lending commitments that provide for the
ability to issue standby letters of credit and commitments to issue standby letters of credit under syndication arrangements where the Company has an obligation to issue in
a lead agent or similar capacity beyond its contractual participation level.
Table 50: Tier 1 Common Equity Under Basel III (Estimated) (1) (2)
(in billions)
Tier 1 common equity under Basel I
Adjustments from Basel I to Basel III (3) (5):
Cumulative other comprehensive income related to AFS securities and defined benefit pension plans
Other
Total adjustments from Basel I to Basel III
Threshold deductions, as defined under Basel III (4) (5)
Tier 1 common equity anticipated under Basel III
Total risk-weighted assets anticipated under Basel III (6)
December 31, 2012
$
109.0
5.3
0.4
5.7
(0.9)
(C)
(D)
$
$
113.8
1,389.2
Tier 1 common equity to total risk-weighted assets anticipated under Basel III
(C)/(D)
8.19 %
(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) The Basel III Tier 1 common equity and risk-weighted assets are calculated based on management’s current interpretation of the Basel III capital rules proposed by
federal banking agencies in notices of proposed rulemaking announced in June 2012. The proposed rules and interpretations and assumptions used in estimating Basel III
calculations are subject to change depending on final promulgations of Basel III capital rules.
(3) Adjustments from Basel I to Basel III represent reconciling adjustments, primarily certain components of cumulative other comprehensive income deducted for Basel I
purposes, to derive Tier 1 common equity under Basel III.
(4) Threshold deductions, as defined under Basel III, include individual and aggregate limitations, as a percentage of Tier 1 common equity, with respect to MSRs, deferred
tax assets and investments in unconsolidated financial companies.
(5) Volatility in interest rates can have a significant impact on the valuation of cumulative other comprehensive income and MSRs and therefore, may impact adjustments
from Basel I to Basel III, and MSRs subject to threshold deductions, as defined under Basel III, in future reporting periods.
(6) 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.
92
Regulatory Reform
The past three 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 2012 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 efforts. 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 either remain open for public
comment or have not otherwise 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 remain uncertain. The
following provides additional information on the Dodd-Frank
Act, including the current status of certain of its rulemaking
initiatives.
(cid:120) 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. The
“push-out” provision has an effective date of July 21, 2013,
but the Dodd-Frank Act granted the OCC the discretion to
provide a transition period of up to two years for banks to
come into compliance with the requirements. On
January 3, 2013, the OCC issued guidance that it would
consider transition period requests and favorably act on
such requests subject to the requesting bank meeting
specified requirements. Wells Fargo Bank, N.A. prepared
and filed a transition period request with the OCC on
January 31, 2013.
The Dodd-Frank Act authorizes the Commodities
Futures Trading Commission (CFTC) and SEC (collectively,
the “Commissions”) to regulate swaps and security-based
swaps, respectively. The Commissions jointly adopted new
rules and interpretations that established the compliance
dates for many of the Commissions’ rules implementing the
new regulatory framework for the regulation of swaps and
other derivative activities, including provisional registration
of Wells Fargo Bank as a swap dealer, which occurred at the
end of 2012.
(cid:120) Volcker Rule. The Volcker Rule will substantially restrict
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 Volcker
Rule became effective in July 2012, but the proposed
implementing regulations have not yet been finalized.
Although the Volcker Rule is now effective, it provides
banking entities with a two year period from its effective
date to come into compliance, with the possibility of limited
further extensions of the compliance period by the FRB. In
April 2012, the FRB issued guidance confirming that
banking entities will have the full two-year compliance
period to conform fully their activities and investments. The
FRB’s guidance also states that banking entities are
expected to engage in “good-faith” planning efforts,
appropriate for their activities and investments, to enable
them to conform all of their activities and investments by no
later than the end of the compliance period. Although
proprietary trading is not significant to our financial results,
and we have reduced or exited certain businesses in
anticipation of the effective date of the Volcker Rule, at this
time and in the absence of final implementing regulations,
the Company cannot predict the ultimate impact of the
Volcker Rule on our trading and investment activities or
financial results.
(cid:120) 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 proposed joint rules in 2011 to
implement this credit risk retention requirement, which
included an exemption for the GSE’s mortgage-backed
securities. The proposed rules have been subject to
extensive public comment, and the agencies have yet to
issue final rules. As a result, the Company cannot predict
the financial impact of the credit risk retention requirement
on our business.
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. For additional information
see the “Capital Management” section of this Report.
(cid:120) 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
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93
Regulatory Reform (continued)
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. During 2012, the FRB and
OCC issued final rules related to stress testing requirements
for large bank holding companies (BHCs) and banks. For
additional information, see the “Capital Management”
section of this Report. The FRB has not issued final rules
implementing the remaining December 2011 proposals. The
Dodd-Frank Act also establishes the Financial Services
Oversight Council (FSOC) and the Office of Financial
Research, which may recommend new systemic risk
management requirements and require new reporting of
systemic risks.
(cid:120) Regulation of consumer financial products. The Dodd-
Frank Act established the Consumer Financial Protection
Bureau (CFPB) to ensure consumers receive clear and
accurate disclosures regarding financial products and to
protect them from hidden fees and unfair or abusive
practices. In January 2013, the CFPB issued eight final
rules, which are generally effective in January 2014. The
Ability-to-Repay and Qualified Mortgage Standards Rule
implements the Dodd-Frank Act requirement that creditors
originating residential mortgage loans make a reasonable
and good faith determination that each applicant has a
reasonable ability to repay. The rule also establishes a
definition of a “qualified mortgage,” which appears to
support a broad access to credit for consumers coupled with
legal protections for lenders and secondary market
purchasers, particularly for prime Qualified Mortgage loans.
The second major set of rules, Mortgage Servicing
Standards under the Real Estate Settlement Procedures Act
(RESPA) and the Truth in Lending Act (TILA), address a
number of requirements, including the obligation of
servicers to correct errors identified by borrowers, to
provide information in response to certain borrower
requests, and to provide protections to borrowers in case of
force-placed insurance. Other provisions in the rules
address policy and procedural requirements, information
requirements on loss mitigation options for delinquent
borrowers, and requirements to evaluate borrower
applications for loss mitigation options. In addition, the
rules establish a number of customer notice or statement
requirements, disclosure requirements to customers
regarding certain interest rate adjustments, and
requirements in responding to customer payoff requests.
We are currently analyzing the rules to consider the
similarities between the rules and the national servicing
settlement requirements that Wells Fargo has already
implemented. Additional rules recently issued by the CFPB
address loan originator compensation restrictions, high-cost
mortgage requirements, appraisal delivery requirements,
appraisals for higher-priced mortgages, and escrow
standards for higher-priced mortgages. We are currently
analyzing the requirements of all the final rules, but at this
time the Company cannot predict the long-term impact of
these final rules on our mortgage origination and servicing
94
activities or on our financial results. In addition to these
recently proposed rules, the CFPB has indicated that in the
coming months it expects to release a rule integrating
disclosures required of lenders and settlement agents under
TILA and RESPA and to propose regulations expanding the
scope of information lenders must report in connection with
mortgage and other housing-related loan applications.
In addition to these rulemaking activities, the CFPB is
continuing its on-going examination activities with respect
to a number of consumer businesses and products,
including an examination of our mortgage origination and
related compliance management activities. We also expect
the CFPB will examine our residential mortgage servicing
activities. At this time, the Company cannot predict the full
impact of the CFPB’s rulemaking and supervisory authority
on our business practices or financial results.
(cid:120) Enhanced regulation of money market mutual funds. In
November 2012, the FSOC proposed new regulations to
address the perceived risks that money market mutual
funds may pose to the financial stability of the United
States. These proposals include implementation of floating
net asset value requirements, redemption holdback
provisions, and capital buffer requirements and would be in
addition to regulatory changes made by the SEC to the
market in January 2010. The proposals were subject to
public comment. Once the FSOC adopts final
recommendations, the SEC must either implement the
recommendations or explain in writing the reasons the
recommendations were not adopted. The Company will
monitor any final recommendations and the SEC’s response
to determine the impact to our business. In addition,
members of the SEC have recently made public statements
indicating that the SEC is working on its own reform
proposals independent of the FSOC’s rulemaking process
and that the SEC could issue its own proposals in the
coming months.
Regulatory Capital Guidelines and Capital Plans
In December 2010, the BCBS finalized the Basel III standards
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 global
systemically important banks (G-SIBs). The Financial Stability
Board (FSB), in an updated list published in November 2012
based on year-end 2011 data, identified the Company as one of
the 28 G-SIBs and provisionally determined that our surcharge
would be 1.0%. The FSB may revise the list of G-SIBs and their
required surcharge prior to implementation based on additional
or future data.
In June 2012, the federal banking regulators jointly
published three notices of proposed rulemaking that will
substantially amend the risk-based capital rules for banks. The
proposed rules are intended to implement the Basel III
regulatory capital reforms in the U.S., comply with changes
required by the Dodd-Frank Act, and replace the existing Basel
I-based capital requirements. Although the proposals
contemplated an effective date of January 1, 2013, with phased
in compliance requirements, the rules have not yet been
finalized by the U.S. banking regulators due to the volume of
comments received and concerns expressed during the comment
period. These proposals did not address the BCBS capital
surcharge for G-SIBs, although 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 the Bankruptcy
Code and other insolvency statutes applicable to particular types
of regulated entities (such as securities broker-dealers or
insurance companies). Under the regulations, resolution plans
must contain detailed strategic analyses of how a distressed or
failing institution could be resolved in a way that does not pose
systemic risks to the U.S. financial system. Under the rules,
Wells Fargo is required to submit its resolution plan to the FRB
and FDIC on or before July 1, 2013.
95
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:
(cid:120)
(cid:120)
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(cid:120)
(cid:120)
(cid:120)
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 appropriateness 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. We apply our judgment to adjust or supplement
these loss factors and estimates to reflect other risks that may be
identified from current conditions and developments in selected
portfolios. These risk ratings are subject to review by an internal
team of credit specialists.
96
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 risk
assessments for our commitments to regulatory and government
agencies regarding settlements of 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 development of these expectations requires significant
management review and judgment. 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).
SENSITIVITY TO CHANGES Changes in the allowance for credit
losses and, therefore, in the related provision for credit losses
can materially affect net income. In applying the review and
judgment required related to determining the allowance for
credit losses, 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 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 $8.0
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
$2.4 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 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 evaluates whether there is evidence of credit
quality deterioration as of the purchase date using indicators
such as past due and nonaccrual status, commercial risk ratings,
recent borrower credit scores and recent loan-to-value
percentages.
The fair value at acquisition is based on an estimate of cash
flows, both principal and interest, expected to be collected,
discounted at the prevailing market rate of interest. We estimate
the cash flows expected to be collected at acquisition using our
internal credit risk, interest rate risk and prepayment risk
models, which incorporates 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
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.
The amount of cash flows expected to be collected and,
accordingly, the appropriateness 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
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Critical Accounting Policies (continued)
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 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 result from
(1) changes in the valuation model inputs or assumptions and (2)
other changes, representing changes due to collection/realization
of expected cash flows. Changes in fair value due to changes in
significant model inputs and assumptions include prepayment
speeds (which are influenced by changes in mortgage interest
rates and borrower behavior, including estimates for borrower
default), discount rates, and servicing and foreclosure costs.
We use a dynamic and sophisticated model to estimate the
value of our MSRs. The model is validated by an 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 including
estimates for borrower default. 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
98
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.
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
liability at the time loans are sold and continually update our
liability estimate during the remaining life of such loans.
Although activity can vary by investor, 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. This lag has
lengthened as some investor audit reviews, particularly by the
GSEs, have changed to reopen or expand reviews on previously
defaulted populations. Accordingly, the majority of repurchase
demands continue to be on loans that default in the first 24 to 36
months following origination of the mortgage loan. The most
significant portion of our 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, 2012,
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 Value 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, substantially all residential MHFS, certain loans held
for investment, securities sold but not yet purchased (short sale
liabilities) and certain long-term debt instruments 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 certain 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.
99
Critical Accounting Policies (continued)
(cid:120)
(cid:120)
(cid:120)
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 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 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
100
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 third party 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. We
have processes in place to approve such vendors to ensure
information obtained and valuation techniques used are
appropriate. Once these vendors are approved to provide pricing
information, we monitor and review the results to ensure the fair
values are reasonable and in line with market experience with
similar asset classes. 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 subject to
our internal price validation procedures, which include, but are
not limited to, one or a combination of the following procedures:
(cid:120)
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
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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 third party 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 available
information, including observable market data, indications of
market liquidity and orderliness, and our understanding of the
valuation techniques and significant inputs used. For securities
in inactive markets, we use a predetermined percentage to
evaluate the impact of fair value adjustments derived from
weighting both external and internal indications of value to
determine if the instrument is classified as Level 2 or Level 3.
Otherwise, the classification of Level 2 or Level 3 is based upon
the specific facts and circumstances of each instrument or
instrument category and judgments are made regarding the
significance of the Level 3 inputs to the instruments’ fair value
measurement in its entirety. If Level 3 inputs are considered
significant, the instrument is classified as Level 3.
Our financial assets valued using Level 3 measurements
consist of certain collateralized debt obligations (CDOs),
collateralized loan obligations (CLOs), asset-backed securities,
including those collateralized by auto leases or loans, cash
reserves, and other asset-backed securities, auction-rate
securities, certain derivative contracts such as credit default
swaps related to collateralized mortgage obligation (CMO), CDO
and CLO exposures and certain MHFS, certain loans, and MSRs.
For additional information on how we value MSRs refer to the
discussion earlier in this section.
Table 51 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 51: Fair Value Level 3 Summary
December 31, 2012 December 31, 2011
Total
balance
Level 3 (1)
balance Level 3 (1)
Total
($ in billions)
Assets carried
at fair value
$
358.7
51.9
373.0
53.3
As a percentage
of total assets
25 %
4
28
4
Liabilities carried
at fair value
$
22.4
3.1
26.4
4.6
As a percentage of
total liabilities
2 %
*
2
*
* Less than 1%.
(1) Before derivative netting adjustments.
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 current and deferred
income tax expense. Current income tax expense represents our
estimated 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. Tax benefits not
meeting our realization criteria represent unrecognized tax
benefits. Our unrecognized tax benefits on uncertain tax
positions are reflected in Note 21 (Income Taxes) to Financial
Statements in this Report. 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.
See Note 17 (Fair Values of Assets and Liabilities) to Financial
We monitor relevant tax authorities and revise our estimate of
Statements in this Report for a complete discussion on our fair
valuation of financial instruments, our related measurement
techniques and the impact to our financial statements.
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.
101
ASU 2013-02 requires companies to disclose the effect on net
income line items from significant amounts reclassified out of
accumulated other comprehensive income and entirely into net
income. However, for those reclassifications that are partially or
entirely capitalized on the balance sheet, then companies must
provide a cross-reference to disclosures that provide information
about the effect of the reclassifications. This guidance is effective
for us in Q1 2013 with prospective application. The Update will
not affect our consolidated financial results as it amends only the
disclosure requirements for accumulated other comprehensive
income.
Current Accounting Developments
The following accounting pronouncements have been issued by
the FASB but are not yet effective:
(cid:120) Accounting Standards Update (ASU or Update) 2011-11,
Disclosures about Offsetting Assets and Liabilities;
(cid:120) ASU 2013-01, Clarifying the Scope of Disclosures about
Offsetting Assets and Liabilities; and
(cid:120) ASU 2013-02, Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income.
ASU 2011-11 expands the disclosure requirements for certain
financial instruments and derivatives that are subject to
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. In January 2013, the FASB
issued ASU 2013-01, which clarifies the scope of ASU 2011-11
by limiting the disclosures to derivatives, repurchase
agreements, and securities lending transactions to the extent
they are subject to an enforceable master netting or similar
arrangement. These changes are effective for us in first quarter
2013 with retrospective application. The Updates will not affect
our consolidated financial results since they amend only the
disclosure requirements for offsetting financial instruments.
102
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 targeted efficiency ratio range 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
appropriateness of the allowance for credit losses, including our
current expectation of future allowance releases in 2013; and the
reduction or mitigation of risk in our loan portfolios and the
effects of loan modification programs; (iv) future capital levels
and our estimate regarding our Tier 1 common equity ratio under
proposed Basel III capital standards as of December 31, 2012; (v)
the quality of our residential mortgage loan servicing portfolio,
our mortgage repurchase exposure and exposure relating to our
mortgage foreclosure practices; (vi) 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; (vii) the expected
outcome and impact of legal, regulatory and legislative
developments, including the Dodd-Frank Act; and (viii) 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:
(cid:120)
current and future economic and market conditions,
including the effects of declines in housing prices, high
unemployment rates, U. S. fiscal debt, budget and tax
matters, the sovereign debt crisis and economic difficulties
in Europe, and the overall slowdown in global economic
growth;
our capital and liquidity requirements (including under
regulatory capital standards, such as the proposed Basel III
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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 other legislation and regulation relating to
bank products and services, as well as the extent of our
ability to mitigate 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 efficiency ratio target as part of our
expense management initiatives when and in the range
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;
losses relating to Super Storm Sandy, including the result of
damage or loss to our collateral for loans in our consumer
and commercial loan portfolios, the extent of insurance
coverage, or the level of government assistance for our
borrowers;
the effect of the current low interest rate environment or
changes in interest rates on our net interest margin and our
mortgage originations, MSRs and MHFS;
hedging gains or losses;
a recurrence of significant turbulence or disruption in the
capital or financial markets, which could result in, among
other things, reduced investor demand for mortgage loans, a
reduction in the availability of funding or increased funding
costs, and declines in asset values and/or recognition of
OTTI on securities held in our available-for-sale portfolio
due to volatility or changes in interest rates, foreign
exchange rates and/or debt, equity and commodity prices;
our ability to sell more products to our existing customers
through our cross-selling efforts;
103
Forward-Looking Statements (continued)
(cid:120)
(cid:120)
(cid:120)
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;
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;
(cid:120) mergers, acquisitions and divestitures;
(cid:120)
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
(cid:120)
(cid:120)
(cid:120)
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
risk factors that could adversely affect our financial results and
condition, and the value of, and return on, an investment in the
Company.
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
levels and home prices. Although the U.S. economy has
continued to gradually improve from the depressed levels of
2008 and early 2009, economic growth has been slow and
uneven. In addition, the negative effects and continued
uncertainty stemming from the sovereign debt crisis and
economic difficulties in Europe, the slowdown in growth in Asia
104
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.
(cid:120)
(cid:120)
In addition to the above factors, we also caution that there is
no assurance that our allowance for credit losses will be
appropriate 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.
and certain other emerging growth markets, and U. S. fiscal and
political matters, including concerns about deficit levels, taxes
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.
Despite the improved U.S. economy the housing market
continues a slow recovery, the unemployment rate remains high
and nonperforming asset levels, which have adversely affected
our credit performance, financial results and condition remain
higher than normal. If unemployment levels worsen or if home
prices fall we would expect to incur elevated 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
deteriorate, 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 commercial loan portfolios by making loans to
creditworthy borrowers at attractive yields. Although we have
significant capacity to add loans to our balance sheet, 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 noninterest 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 of
December 31, 2012, approximately 22% of our revenue was fee
income, which included trust and investment fees, card fees and
other fees. 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. 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 our international operations,
particularly our global financial institution and correspondent
banking services.
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
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 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 short-term lower
yielding loans and securities on our balance sheet, particularly if
we are unable to replace the maturing higher yielding assets,
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 generally do not hedge all of our interest rate risk. There
is always the risk that changes in interest rates could reduce our
net interest income and our earnings in material amounts,
especially if actual conditions turn out to be materially different
than what we assumed. For example, if interest rates rise or fall
faster than we assumed or the slope of the yield curve changes,
we may incur significant losses on debt securities we hold as
investments. To reduce our interest rate risk, we may rebalance
our investment and loan portfolios, refinance our debt and take
other strategic actions. We may incur losses when we take such
actions.
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
105
Risk Factors (continued)
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. 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 financial results.
The value of our public and private equity investments can
fluctuate from quarter to quarter. Certain of these investments
are carried under the cost or equity method, while others are
carried at fair value with unrealized gains and losses reflected in
earnings. Earnings from our equity 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 a company goes 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
OTTI losses for those investments carried under the cost or
equity method. 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.
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.
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Effective liquidity management, which ensures that we
can meet customer loan requests, customer deposit
maturities/withdrawals and other cash commitments,
including principal and interest payments on our debt,
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
events over which we have little or no control. While market
conditions have continued to improve 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 and the so called
“fiscal cliff” concerns in the second half of 2012 associated with
the possibility of U.S. spending cuts and tax increases, which
were scheduled to go into effect on January 1, 2013, caused
uncertainty and some volatility in financial markets. 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, or be required by our regulators, 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 funding.
Credit ratings and credit ratings agencies’ outlooks are based on
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 June 1, 2012, DBRS confirmed both the Parent’s and
Wells Fargo Bank’s long-term and short-term debt ratings,
including the stable trend. On June 22, 2012, Moody’s affirmed
both the Parent’s and Wells Fargo Bank’s long-term and short-
term debt ratings and changed the outlook on Wells Fargo Bank
to stable from negative while affirming the negative outlook for
the Parent. The different outlooks reflect Moody’s view on the
likely regulatory approach to the resolution of large financial
institutions, specifically the contrasting likelihood of support for
creditors of holding companies as compared to support for
creditors of banks. On September 12, 2012, S&P affirmed both
the Parent's and Wells Fargo Bank’s long-term and short-term
debt ratings, including the negative outlook, which outlook
reflects S&P’s outlook on the U.S. sovereign ratings and the one
notch of support factored into our ratings. On October 30, 2012,
Fitch Ratings affirmed both the Parent’s and Wells Fargo Bank’s
long-term and short-term debt ratings and maintained a stable
outlook on those ratings. There can be no assurance, however,
that we will maintain our credit ratings and outlooks and that
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. Although a one or
two notch downgrade in our current credit ratings would not be
expected to trigger a material increase in our collateral or
funding obligations, a more severe credit rating downgrade of
our long-term and short-term credit ratings could increase 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 2012 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.
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Risk Factors (continued)
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.
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)
108
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
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.
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. Although rules to implement the
requirements of the Volcker Rule were proposed in 2011, final
rules have not yet been issued, and the ultimate impact of the
Volcker Rule on our investment activities, including our venture
capital business, is uncertain.
Money market mutual fund reform is also currently being
evaluated. The Financial Stability Oversight Council (FSOC)
proposed new regulations to address the perceived risks that
money market mutual funds may pose to the financial stability of
the United States. These proposals include implementation of
floating net asset value requirements, redemption holdback
provisions, and capital buffer requirements and would be in
addition to regulatory changes made by the Securities and
Exchange Commission (SEC) to the market in January 2010.
Once the FSOC adopts final recommendations, the SEC must
either implement the recommendations or explain in writing the
reasons the recommendations were not adopted. The SEC has
publicly stated that it is working on its own reform proposals
independent of the FSOC’s rulemaking process. Until final
regulations are adopted, the ultimate effect on our business and
financial results remains 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. 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.
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 2012 Form 10-K.
Bank regulations, including Basel capital and liquidity
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 Banking Supervision
(BCBS) 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 BCBS has also
proposed certain liquidity coverage and funding ratios. The
BCBS liquidity framework was initially proposed in 2010 and
included a liquidity coverage ratio (LCR) to measure the stock of
high-quality liquid assets to total net cash outflows over the next
30 calendar day period. The BCBS recently published revisions
to the LCR, including revisions to the definitions of high quality
liquid assets and net cash outflows. As originally proposed, the
LCR would be introduced on January 1, 2015, but the revisions
provided for phased-in implementation over a four year period
beginning January 1, 2015, with full phase-in on January 1, 2019.
In June 2011, the BCBS proposed additional Tier 1 common
equity surcharge requirements for global systemically important
banks (G-SIBs) 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 Financial
Stability Board (FSB), in an updated list published in November
2012 based on year-end 2011 data, identified the Company as
one of 28 G-SIBs and provisionally determined that the
Company’s surcharge would be 1%. The FSB may revise the list of
G-SIBs and their required surcharges prior to implementation
based on additional or future data.
U.S. regulatory authorities have been considering the BCBS
capital guidelines and related proposals, and in June 2012, the
U.S. banking regulators jointly issued three notices of proposed
rulemaking that are essentially intended to implement the BCBS
capital guidelines for U.S. banks. Together these notices of
proposed rulemaking would, among other things:
(cid:120)
implement in the United States the Basel III regulatory
capital reforms including those that revise the definition of
capital, increase minimum capital ratios, and introduce a
minimum Tier 1 common equity ratio of 4.5% and a capital
conservation buffer of 2.5% (for a total minimum Tier 1
common equity ratio of 7.0%) and a potential
countercyclical buffer of up to 2.5%, which would be
imposed by regulators at their discretion if it is determined
that a period of excessive credit growth is contributing to an
increase in systemic risk;
revise “Basel I” rules for calculating risk-weighted assets to
enhance risk sensitivity;
(cid:120)
(cid:120) modify the existing Basel II advanced approaches rules for
(cid:120)
calculating risk-weighted assets to implement Basel III; and
comply with the Dodd-Frank Act provision prohibiting the
reliance on external credit ratings.
The notices of proposed rulemaking did not implement the
capital surcharge proposals for G-SIBs or the proposed Basel III
liquidity standards. U.S. regulatory authorities have indicated
that these proposals will be addressed at a later date. The
ultimate impact of all of these proposals on our capital and
liquidity will depend on final rulemaking and regulatory
interpretation 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
109
Risk Factors (continued)
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. In December 2011, the
FRB 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 and early remediation requirements
that would impose capital distribution restrictions upon the
occurrence of capital, stress test, risk management, or liquidity
risk management triggers. Although the stress testing
requirements were finalized in October 2012, the remaining
requirements of the December 2011 FRB proposals have not
been finalized.
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 2012 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, the FRB recently
indicated that it intends to keep the target range for the federal
funds rate near zero until the unemployment rate falls to at least
6.5%. The FRB also may continue to 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.
110
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, the regulatory environment or external factors,
such as Super Storm Sandy, also can 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 for credit losses was $1.8 billion
and $3.4 billion less than net charge-offs in 2012 and 2011,
respectively, which had a positive effect on our earnings. Absent
significant deterioration in the economy, we expect future
allowance releases in 2013, although at more modest levels.
While we believe that our allowance for credit losses was
appropriate at December 31, 2012, 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 residential real estate 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, deterioration in real
estate values and underlying economic conditions in those
markets or elsewhere in California could result in materially
higher credit losses. In addition, deterioration in macro-
economic conditions generally across the country could result in
materially higher credit losses, including for our residential real
estate loan portfolio. We may experience higher delinquencies
and higher loss rates as our consumer real estate secured lines of
credit reach their contractual end of draw period and begin to
amortize.
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, 2012, 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, 2012, 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
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 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
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Risk Factors (continued)
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 rely on GSEs to purchase mortgage 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 forgo fee revenue and 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
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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 repurchase 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 continue to 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
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.
On February 9, 2012, a federal/state settlement was
announced among the DOJ, 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 did not participate in the
larger settlement, it settled separately with the five servicers
under a simplified agreement. Under the terms of the larger
settlement, which will remain in effect for three and a half years
(subject to a trailing review period) we have agreed to the
following programmatic commitments, consisting of three
components totaling approximately $5.3 billion:
(cid:120) Consumer Relief Program commitment of $3.4 billion
(cid:120) Refinance Program commitment of $900 million
(cid:120)
Foreclosure Assistance Program of $1 billion
Additionally and simultaneously, the OCC and FRB
announced the imposition of civil money penalties of $83 million
and $87 million, respectively, pursuant to the Consent Orders.
While still subject to FRB confirmation, we believe the civil
money obligations were satisfied through payments made under
the Foreclosure Assistance Program to the federal government
and participating states for their use to address the impact of
foreclosure challenges as they determine and which may include
direct payments to consumers.
As part of the settlement, 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. 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 could result in material
fines, penalties, equitable remedies, or other enforcement
actions.
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, Pledged Assets and Collateral)
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
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Risk Factors (continued)
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, legislative 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
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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;
degradation or loss of public internet domain; 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, including foreign state-sponsored 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.
To date we have not experienced any material losses relating
to cyber attacks or other information security breaches, but 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, and the current
global economic and political environment. For example, Wells
Fargo and reportedly other financial institutions have been the
target of various denial-of-service or other cyber attacks as part
of what appears to be a coordinated effort to disrupt the
operations of financial institutions and potentially test their
cybersecurity in advance of future and more advanced cyber
attacks. 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. The recent financial and credit crisis and resulting
regulatory reform highlighted both the importance and some of
the limitations of managing unanticipated risks, and our
regulators remain focused on ensuring that financial institutions
build and maintain robust risk management policies. 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
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.
Under the Iran Threat Reduction and Syria Human Rights
Act of 2012, we are required to make certain disclosures in our
periodic reports filed with the SEC relating to certain activities
that we or our worldwide affiliates knowingly engaged in
involving Iran during the quarterly period covered by the report.
If we or an affiliate were to engage in a reportable transaction, we
must also file a separate notice regarding the activity with the
SEC, which the SEC will make publicly available on its website.
The SEC will be required to forward the report to the President,
the Senate Committees on Foreign Relations and Banking,
Housing and Urban Affairs, and the House of Representatives
Committees on Foreign Affairs and Financial Services. The
President will then be required to initiate an investigation into
the reported activity and within 180 days make a determination
as to whether to impose sanctions on us. The scope of the
reporting requirement is broad and covers any domestic or
foreign entity or person that may be deemed to be an affiliate of
ours. The potential sanctions and reputational harm for engaging
in a reportable activity may be significant.
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 has
increased substantially because of the financial crisis and our
size and profile in the financial services industry. 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
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Risk Factors (continued)
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.
As a result of the financial crisis, Wells Fargo and other
financial institutions have been targeted from time to time by
protests and demonstrations, which 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 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, and possible public
backlash to bank fees, 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
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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
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
potentially resulting in our 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, and there is no assurance that
our models will capture or appropriately reflect all relevant
inputs required to accurately determine fair value. 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
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 re-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
117
Risk Factors (continued)
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. As a
result, our size 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 2013 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.
118
Controls and Procedures
Disclosure Controls and Procedures
The Company’s management evaluated the effectiveness, as of December 31, 2012, 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, 2012.
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:
(cid:120)
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.
(cid:120)
(cid:120)
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
2012 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, 2012,
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, 2012, 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.
119
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, 2012, 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, 2012, 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, 2012 and 2011, and the related consolidated statements of income,
comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and
our report dated February 27, 2013, expressed an unqualified opinion on those consolidated financial statements.
San Francisco, California
February 27, 2013
120
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,
2012
2011
2010
$
1,358
8,098
1,825
41
36,482
587
48,391
1,727
79
3,110
245
5,161
43,230
7,217
36,013
4,683
11,890
2,838
4,519
11,638
1,850
1,707
(128)
1,485
567
1,807
42,856
14,689
9,504
4,611
2,068
2,857
1,674
1,356
13,639
50,398
28,471
9,103
19,368
471
$
18,897
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
$
$
898
844
730
17,999
15,025
11,632
3.40
3.36
0.88
5,287.6
5,351.5
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) Total other-than-temporary impairment (OTTI) losses (gains) were $3 million, $349 million and $500 million for the year ended December 31, 2012, 2011 and 2010,
respectively. Of total OTTI, losses of $240 million, $423 million and $672 million were recognized in earnings, and gains of $(237) million, $(74) million and $(172) million
were recognized as non-credit-related OTTI in other comprehensive income for the year ended December 31, 2012, 2011 and 2010, respectively.
(2) Includes OTTI losses of $176 million, $288 million and $268 million for the year ended December 31, 2012, 2011 and 2010, respectively.
The accompanying notes are an integral part of these statements.
121
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Comprehensive Income
(in millions)
Wells Fargo net income
Other comprehensive income, before tax:
Foreign currency translation adjustments:
Net unrealized gains (losses) arising during the period
Reclassification of net gains to net income
Securities available for sale:
Net unrealized gains (losses) arising during the period
Reclassification of net (gains) losses to net income
Derivatives and hedging activities:
Net unrealized gains arising during the period
Reclassification of net gains on cash flow hedges to net income
Defined benefit plans adjustments:
Net actuarial gains (losses) arising during the period
Amortization of net actuarial loss and prior service cost to net income
Other comprehensive income (loss), before tax
Income tax (expense) benefit related to other comprehensive income
Other comprehensive income (loss), net of tax
Less: Other comprehensive income (loss) from noncontrolling interests
Wells Fargo other comprehensive income (loss), net of tax
Wells Fargo comprehensive income
Comprehensive income from noncontrolling interests
Total comprehensive income
The accompanying notes are an integral part of these statements.
Year ended December 31,
2012
2011
2010
$
18,897
15,869
12,362
(6)
(10)
5,143
(271)
52
(388)
(37)
-
(588)
(696)
190
(571)
(775)
(1,079)
144
99
83
-
2,624
77
750
(613)
20
104
3,889
(2,682)
3,045
(1,442)
1,139
(1,291)
2,447
(1,543)
1,754
4
(12)
25
2,443
(1,531)
1,729
21,340
14,338
14,091
475
330
326
$
21,815
14,668
14,417
122
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 $42,305 and $44,791 carried at fair value)
Loans held for sale (includes $6 and $1,176 carried at fair value)
Loans (includes $6,206 and $5,916 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 $1 and $0 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 5,481,811,474 shares and 5,358,522,061 shares
Additional paid-in capital
Retained earnings
Cumulative other comprehensive income
Treasury stock – 215,497,298 shares and 95,910,425 shares
Unearned ESOP shares
Total Wells Fargo stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
December 31,
2012
2011
$
21,860
137,313
57,482
19,440
44,367
77,814
235,199
222,613
47,149
110
48,357
1,338
799,574
(17,060)
769,631
(19,372)
782,514
750,259
11,538
1,160
9,428
25,637
93,578
12,603
1,408
9,531
25,115
101,022
$
1,422,968
1,313,867
$
288,207
714,628
244,003
676,067
1,002,835
920,070
57,175
76,668
49,091
77,665
127,379
125,354
1,264,057
1,172,180
12,883
11,431
9,136
59,802
77,679
5,650
(6,610)
(986)
8,931
55,957
64,385
3,207
(2,744)
(926)
157,554
140,241
1,357
1,446
158,911
141,687
$
1,422,968
1,313,867
(1) Our consolidated assets at December 31, 2012 and December 31, 2011, 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, $260 million and $321 million; Trading assets, $114 million and $293 million; Securities available for sale, $2.8 billion
and $3.3 billion; Mortgages held for sale, $469 million and $444 million; Net loans, $10.6 billion and $12.0 billion; Other assets, $457 million and $1.9 billion, and Total
assets, $14.6 billion and $18.2 billion, respectively.
(2) Our consolidated liabilities at December 31, 2012 and December 31, 2011, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells
Fargo: Short-term borrowings, $0 and $24 million; Accrued expenses and other liabilities, $134 million and $175 million; Long-term debt, $3.5 billion and $4.9 billion; and
Total liabilities, $3.6 billion and $5.1 billion, respectively.
The accompanying notes are an integral part of these statements.
123
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity
(in millions, except shares)
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
Net income
Other comprehensive income, net of tax
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
Balance January 1, 2011
Net income
Other comprehensive loss, net of tax
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
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
Balance December 31, 2011
The accompanying notes are an integral part of these statements.
(continued on following pages)
Preferred stock
Common stock
Shares
Amount
Shares
Amount
9,980,940 $
8,485
5,178,624,593 $
8,743
9,980,940
8,485
5,178,624,593
8,743
58,375,566
(3,010,451)
27
1,000,000
1,000
(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
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
10,450,690
$
11,431
5,262,611,636
$
8,931
124
Wells Fargo stockholders' equity
Cumulative
other
comprehensive
income
3,009
3,009
Treasury
stock
(2,450)
(2,450)
Unearned
ESOP
shares
(442)
(442)
Total
Wells Fargo
stockholders'
equity
111,786
111,786
183
Noncontrolling
interests
2,573
2,573
Additional
paid-in
capital
52,878
52,878
Retained
earnings
41,563
41,563
183
(28)
12,362
375
(376)
1,729
80
(63)
212
(545)
4
97
436
(48)
548
53,426
53,426
(37)
1,208
(150)
102
(80)
903
(2)
21
78
529
(41)
(1,049)
(737)
10,355
51,918
51,918
15,869
(2,558)
(844)
1,729
4,738
4,738
(1,531)
2,531
55,957
12,467
64,385
(1,531)
3,207
1,349
(91)
567
138
1,963
(487)
(487)
(2,266)
(1,080)
859
(221)
(663)
(663)
(1,302)
1,039
9
(2,257)
(2,744)
(263)
(926)
(28)
12,362
1,729
-
1,375
(91)
-
796
-
(545)
(1,045)
(737)
97
436
90
14,622
126,408
126,408
15,869
(1,531)
(37)
1,296
(2,416)
-
959
-
(2)
2,501
(2,537)
(844)
78
529
(32)
13,833
140,241
301
25
(1,418)
(1,092)
1,481
1,481
342
(12)
(365)
(35)
1,446
Total
equity
114,359
114,359
183
(28)
12,663
1,754
(1,418)
1,375
(91)
-
796
-
(545)
(1,045)
(737)
97
436
90
13,530
127,889
127,889
16,211
(1,543)
(402)
1,296
(2,416)
-
959
-
(2)
2,501
(2,537)
(844)
78
529
(32)
13,798
141,687
125
(continued from previous pages)
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity
(in millions, except shares)
Balance December 31, 2011
Cumulative effect of fair value election for certain
residential mortgage servicing rights
Balance January 1, 2012
Net income
Other comprehensive income, net of tax
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
Balance December 31, 2012
Preferred stock
Shares
10,450,690
Amount
$
11,431
Shares
5,262,611,636
Common stock
Amount
$
8,931
10,450,690
11,431
5,262,611,636
8,931
940,000
(887,825)
940
(888)
56,000
1,400
97,267,538
(119,586,873)
162
26,021,875
43
108,175
10,558,865
1,452
3,702,540
205
$
12,883
5,266,314,176
$
9,136
(1)
For the year ended December 31, 2012, includes $200 million related to a private forward repurchase transaction entered into in fourth quarter 2012 that is expected to
settle in first quarter 2013 for an estimated 6 million shares of common stock. See Note 1 for additional information.
The accompanying notes are an integral part of these statements.
126
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
55,957
64,385
3,207
(2,744)
(926)
140,241
1,446
141,687
3,207
(2,744)
(926)
140,243
1,446
141,689
2
2
55,957
2
64,387
18,897
(16)
2,326
(50)
88
(80)
845
(1)
(23)
55
230
560
(89)
(4,713)
(892)
2,443
(3,868)
(1,028)
968
2
3,845
59,802
13,292
77,679
2,443
5,650
(3,866)
(6,610)
(60)
(986)
18,897
2,443
(16)
2,488
(3,918)
-
888
-
(1)
1,377
(4,658)
(892)
230
560
(87)
17,311
471
4
(564)
(89)
19,368
2,447
(580)
2,488
(3,918)
-
888
-
(1)
1,377
(4,658)
(892)
230
560
(87)
17,222
157,554
1,357
158,911
127
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 (gains) losses
Stock-based compensation
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
Purchases (including participations) of loans
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 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:
Proceeds from issuance
Repurchased
Cash dividends paid
Common stock warrants repurchased
Excess tax benefits related to stock option payments
Net change in noncontrolling interests
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.
128
2012
Year ended December 31,
2010
2011
$
19,368
16,211
12,663
7,217
(2,307)
2,807
(3,661)
1,698
(226)
(483,835)
421,623
(15)
9,383
(7,975)
105,440
(1,297)
293
(84)
2,064
(11,953)
58,540
7,899
(295)
2,208
3,273
1,488
(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
1,232
(98)
(370,175)
355,325
(4,596)
17,828
(7,470)
12,356
4,287
1,051
(268)
(19,631)
(1,729)
18,772
(92,946)
36,270
(39,752)
5,210
59,712
(64,756)
23,062
52,618
(121,235)
8,668
47,919
(53,466)
(50,420)
(35,686)
15,869
6,811
(9,040)
25,080
(23,555)
(4,322)
9,729
116
(1,509)
(139,890)
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)
82,762
7,699
72,128
(6,231)
23,924
11,308
27,695
(28,093)
11,687
(50,555)
3,489
(63,317)
1,377
(892)
2,091
(3,918)
(4,565)
(1)
226
(611)
83,770
2,420
19,440
21,860
5,245
8,024
$
$
2,501
(844)
1,296
(2,416)
(2,537)
(2)
79
(331)
24,775
3,396
16,044
19,440
7,011
4,875
-
(737)
1,375
(91)
(1,045)
(545)
98
(592)
(26,133)
(11,036)
27,080
16,044
8,307
1,187
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 foreign 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 2012
In first quarter 2012, we adopted the following new accounting
guidance:
(cid:120) ASU 2011-05, Presentation of Comprehensive Income;
(cid:120) 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;
(cid:120) ASU 2011-04, Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP
and IFRSs; and
(cid:120) ASU 2011-03, Reconsideration of Effective Control for
Repurchase Agreements.
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 deferred
the requirement to present reclassification adjustments on the
statement of income. In January 2013, the FASB issued ASU
2013-02, Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income. This guidance
requires supplemental disclosures for significant amounts
reclassified out of accumulated other comprehensive income and
is effective for us in first quarter 2013 with prospective
application. We adopted the remaining provisions of ASU 2011-
05 in first quarter 2012 with retrospective application. This
Update did not affect our consolidated financial results as it
amends only the presentation of comprehensive income.
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. We adopted this guidance in
first quarter 2012 with prospective application, resulting in
expanded fair value disclosures. The measurement clarifications
of this Update did not 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. We adopted this guidance in first quarter 2012 with
prospective application to new transactions and existing
transactions modified on or after January 1, 2012. This Update
did not have a material effect on our consolidated financial
statements.
129
Note 1: Summary of Significant Accounting Policies (continued)
In third quarter 2012, we early adopted Accounting
Standards Update (ASU or Update) 2012-02, Testing Indefinite-
Lived Intangible Assets for Impairment.
ASU 2012-02 provides entities with the option to perform a
qualitative assessment of indefinite-lived intangible assets to test
for impairment. If, based on qualitative reviews, a company
concludes it is more likely than not that the fair value of an
indefinite-lived intangible asset is less than its carrying amount,
then the company must complete quantitative steps to
determine if the asset is impaired. 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:
(cid:120) Accounting Standards Update (ASU or Update) 2011-11,
Disclosures about Offsetting Assets and Liabilities; and
(cid:120) ASU 2013-01, Clarifying the Scope of Disclosures about
Offsetting Assets and Liabilities.
ASU 2011-11 expands the disclosure requirements for certain
financial instruments and derivatives that are subject to
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. In January 2013, the FASB
issued ASU 2013-01, which clarifies the scope of ASU 2011-11
by limiting the disclosures to derivatives, repurchase
agreements, and securities lending transactions to the extent
they are subject to an enforceable master netting or similar
arrangement. These changes are effective for us in first quarter
2013 with retrospective application. The Updates will not affect
our consolidated financial results since they amend only the
disclosure requirements for offsetting financial instruments.
Consolidation
Our consolidated financial statements include the accounts of
the Parent and our majority-owned subsidiaries and VIEs
(defined below) in which we are the primary beneficiary.
Significant intercompany accounts and transactions are
eliminated in consolidation. If we own at least 20% of an entity,
we generally account for the investment using the equity
method. If we own less than 20% of an entity, we generally carry
the investment at cost, except marketable equity securities,
which we carry at fair value with changes in fair value included
in 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
130
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
net 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 interest and
dividend income recorded in interest income and realized and
unrealized gains and losses recorded in noninterest income.
Periodic cash settlements on derivatives and other trading assets
are recorded in noninterest income.
Investments
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 income 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 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 other-than-temporary impairment (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 fair 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:
(cid:120)
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.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
NONMARKETABLE EQUITY INVESTMENTS Nonmarketable
equity investments include low income housing tax credit
investments, 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 investments 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
131
Note 1: Summary of Significant Accounting Policies (continued)
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.
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 and Loans 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.
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 MHFS are recorded in mortgage banking
noninterest income. Gains and losses on LHFS are recorded in
other noninterest income. Direct loan origination costs and fees
for MHFS and LHFS under fair value option are recognized in
income at origination. For MHFS and LHFS recorded at
LOCOM, loan costs and fees are deferred at origination and are
recognized in income at time of sale. Interest income on MHFS
and LHFS is calculated based upon the note rate of the loan and
is recorded to interest income.
Our lines of business are authorized to originate held-for-
investment loans that meet or exceed established loan product
profitability criteria, including minimum positive net interest
margin spreads in excess of funding costs. When a
determination is made at the time of commitment to originate
loans as held for investment, it is our intent to hold these loans
to maturity or for the “foreseeable future,” subject to periodic
review under our corporate asset/liability management process.
In determining the “foreseeable future” for these loans,
management considers (1) the current economic environment
and market conditions, (2) our business strategy and current
business plans, (3) the nature and type of the loan receivable,
including its expected life, and (4) our current financial
condition and liquidity demands. Consistent with our core
132
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
Loans are reported at their outstanding principal balances net of
any unearned income, cumulative charge-offs, unamortized
deferred fees and costs on originated loans and unamortized
premiums or discounts on purchased loans. PCI loans are
reported net of any remaining purchase accounting adjustments.
See the “Purchased Credit-Impaired Loans” section in this Note
for our accounting policy for PCI loans.
Unearned income, deferred fees and costs, and discounts and
premiums are amortized to interest income over the contractual
life of the loan using the interest method. Loan commitment fees
are generally deferred and amortized into noninterest income on
a straight-line basis over the commitment period.
Loans also include direct financing leases that are recorded at
the aggregate of minimum lease payments receivable plus the
estimated residual value of the leased property, less unearned
income. Leveraged leases, which are a form of direct financing
leases, are recorded net of related nonrecourse debt. Leasing
income is recognized as a constant percentage of outstanding
lease financing balances over the lease terms in interest income.
NONACCRUAL AND PAST DUE LOANS We generally place loans
on nonaccrual status when:
(cid:120)
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
or principal, unless both well-secured and in the process of
collection;
part of the principal balance has been charged off (including
loans discharged in bankruptcy);
effective first quarter 2012, for junior lien mortgages, we
have evidence that the related first lien mortgage may be
120 days past due or in the process of foreclosure regardless
of the junior lien delinquency status; or
effective third quarter 2012, performing consumer loans are
discharged in bankruptcy, regardless of their delinquency
status.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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. If the
ultimate collectability of the recorded loan balance is in doubt on
a nonaccrual loan, the cost recovery method is used and cash
collected is applied to first reduce the carrying value of the loan.
Otherwise, interest income may be recognized to the extent cash
is received. 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 re-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 generally 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.
Our loans are considered past due when contractually
required principal or interest payments have not been made on
the due dates.
LOAN CHARGE-OFF POLICIES For commercial loans, we
generally fully charge off or charge down to net realizable value
(fair value of collateral, less estimated costs to sell) for loans
secured by collateral when:
(cid:120) management judges the loan to be uncollectible;
(cid:120)
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.
(cid:120)
(cid:120)
(cid:120)
For consumer loans, we fully charge off or charge down to net
realizable value when deemed uncollectible due to bankruptcy or
other factors, or no later than reaching a defined number of days
past due, as follows:
(cid:120)
1-4 family first and junior lien mortgages – We generally
charge down to net realizable value when the loan is
180 days past due.
(cid:120) Auto loans – We generally fully charge off when the loan is
120 days past due.
(cid:120) Credit card loans – We generally fully charge off when the
loan is 180 days past due.
(cid:120) Unsecured loans (closed end) – We generally charge off
when the loan is 120 days past due.
(cid:120) Unsecured loans (open end) – We generally charge off when
the loan is 180 days past due.
(cid:120) Other secured loans – We generally fully or partially charge
down to net realizable value when the loan is 120 days past
due.
We implemented the guidance in the Office of the Comptroller
of the Currency (OCC) update to Bank Accounting Advisory
Series (OCC guidance) issued in third quarter 2012, which
requires consumer loans discharged in bankruptcy to be written
down to net realizable value and classified as nonaccrual
troubled debt restructurings (TDRs), regardless of their
delinquency status.
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.
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. 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,
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Note 1: Summary of Significant Accounting Policies (continued)
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 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,
consumer PCI loans have been aggregated into pools based on
common risk characteristics. Each pool is accounted for as a
single asset with a single composite interest rate and an
aggregate expectation of cash flows.
Accounting for PCI loans involves estimating fair value, at
acquisition, using the principal and interest cash flows expected
to be collected discounted at the prevailing market rate of
interest. The excess of cash flows expected to be collected over
the carrying value (estimated fair value at acquisition date) is
referred to as the accretable yield and is recognized in interest
income using an effective yield method over the remaining life of
the loan, or pool of loans, in situations where there is a
reasonable expectation about the timing and amount of cash
flows to be collected. The difference between contractually
required payments and the cash flows expected to be collected at
acquisition, considering the impact of prepayments, is referred
to as the nonaccretable difference.
Subsequent to acquisition, we regularly evaluate our
estimates of cash flows expected to be collected. If we have
probable decreases in cash flows expected to be collected (other
than due to decreases in interest rate indices and changes in
prepayment assumptions), we charge the provision for credit
losses, resulting in an increase to the allowance for loan losses. If
we have probable and significant increases in cash flows
expected to be collected, we first reverse any previously
established allowance for loan losses and then increase interest
income as a prospective yield adjustment over the remaining life
of the loan, or pool of loans. Estimates of cash flows are
impacted by changes in interest rate indices for variable rate
loans and prepayment assumptions, both of which are treated as
prospective yield adjustments included in interest income.
Resolutions of loans may include sales of loans to third
parties, receipt of payments in settlement with the borrower, or
foreclosure of the collateral. For individual PCI loans, gains or
losses on sales to third parties are included in noninterest
income, and gains or losses as a result of a settlement with the
borrower are included in interest income. Our policy is to
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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 (ACL) The allowance for
credit losses 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 appropriateness 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 our respective commercial and consumer
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 take into consideration
portfolios determined to be at elevated risk, such as junior lien
mortgages behind delinquent first lien mortgages and junior lien
lines of credit subject to near term significant payment increases.
We incorporate the default rates and high severity of loss for
these higher risk portfolios including 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 higher risk portfolios 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 risk
assessments for our commitments to regulatory and government
agencies regarding settlements of mortgage foreclosure-related
matters.
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 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 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 (which are influenced by
changes in mortgage interest rates and borrower behavior,
including estimates for borrower default), discount 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 validated by our
internal valuation model validation group and our valuation
estimates are periodically benchmarked to third party appraisals
on a quarterly 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 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
135
Note 1: Summary of Significant Accounting Policies (continued)
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 at a reporting unit level
on an annual basis or more frequently in certain circumstances.
We have determined that our reporting units are one level below
the operating segments. We have the option of performing a
qualitative assessment of goodwill. We may also elect to bypass
the qualitative test and proceed directly to a quantitative test.
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 a reporting unit’s fair value is not less than its
carrying amount, quantitative tests are not required. 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
136
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
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 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 liability at the time loans are sold
and continually update our liability estimate during their life.
Although activity can vary by investor, 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. This lag has
lengthened as some investor audit reviews, particularly by the
GSEs, have changed to reopen or expand reviews on previously
defaulted populations. Accordingly, the majority of repurchase
demands continue to be on loans that default in the first 24 to 36
months following origination of the mortgage loan.
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. Two principal assumptions in determining net
periodic pension cost are the discount rate and the expected long
term rate of return on plan assets.
A discount rate is used to estimate the present value of our
future pension benefit obligations. 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 325-350 bonds. The discount rate is determined
by matching this yield curve with the timing and amounts of the
expected benefit payments for our plans.
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 use of an expected long
term rate of return on plan assets may cause us to recognize
pension income returns that are greater or less than the actual
returns of plan assets in any given year. Differences between
expected and actual returns in each year, if any, are included in
our net actuarial gain or loss amount, which is recognized in
OCI. 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,
which at December 31, 2012, is 16 years. See Note 20 for
additional information on our pension accounting.
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 represents our
estimated 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. Tax benefits not
meeting our realization criteria represent unrecognized tax
benefits. 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 Long-Term Incentive
Compensation Plan provides for awards of incentive and
nonqualified stock options, stock appreciation rights, restricted
shares, RSRs, performance share awards and stock awards
without restrictions. 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.
Earnings Per Common Share
We compute earnings per common share by dividing net income
(after deducting dividends 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
137
Note 1: Summary of Significant Accounting Policies (continued)
equivalents (for example, stock options, restricted share rights,
convertible debentures and warrants) that are dilutive.
Fair Value of Financial Instruments
We use fair value measurements in our fair value disclosures and
to record certain assets and liabilities at fair value on a recurring
basis, such as trading assets, or on a nonrecurring basis such as
measuring impairment on assets carried at amortized cost.
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. These fair value
measurements are based on exit prices and determined by
maximizing the use of observable inputs. However, for certain
instruments we must utilize unobservable inputs in determining
fair value due to the lack of observable inputs in the market
which requires greater judgment in measuring fair value.
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 third-party 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.
Where markets are inactive and transactions are not orderly,
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. For items that
use price quotes in inactive markets, such as certain security
classes within securities available for sale, we analyze the degree
of market inactivity and distressed transactions to determine the
appropriate adjustment to the price quotes.
The methodology used to adjust the quotes involves
weighting the price quotes and results of internal pricing
138
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 are estimated
by type of underlying collateral, include credit loss assumptions,
estimated prepayment speeds and discount rates.
The more active and orderly markets for particular security
classes are determined to be, the more weighting is assigned to
price quotes. The less active and orderly markets are determined
to be, the less weighting is 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,
our determination of which securities markets are considered
active or inactive can change. If we determine a market to be
inactive, the degree to which price quotes require adjustment,
can also change. See Note 17 for further discussion of the
valuation methodologies applied to financial instruments to
determine fair value.
(cid:120)
(cid:120)
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:
(cid:120)
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 techniques that use
significant assumptions not observable in the market. These
unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar
techniques.
In the determination of the classification of financial
instruments in Level 2 or Level 3 of the fair value hierarchy, we
consider all available information, including observable market
data, indications of market liquidity and orderliness, and our
understanding of the valuation techniques and significant inputs
used. For securities in inactive markets, we use a predetermined
percentage to evaluate the impact of fair value adjustments
derived from weighting both external and internal indications of
value to determine if the instrument is classified as Level 2 or
Level 3. Based upon the specific facts and circumstances of each
instrument or instrument category, we make judgments
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.
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.
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 legally enforceable 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 derivatives subject to master
netting arrangements meet the applicable requirements,
including determining the legal enforceability of the
arrangement, it is our policy to present derivatives balances and
related cash collateral amounts net in the balance sheet.
Counterparty credit risk related to derivatives is considered in
determining fair value and our assessment of hedge
effectiveness.
Private Share Repurchases
During 2012 and 2011, we repurchased approximately 36 million
shares and 6 million shares, respectively, under repurchase
contracts. We entered into these transactions to complement our
open-market common stock repurchase strategies, to allow us to
manage our share repurchases in a manner consistent with our
capital plan submitted under the 2012 Comprehensive Capital
Analysis and Review (CCAR), and to provide an economic
benefit to the Company.
As of December 31, 2012, we had a forward repurchase
contract outstanding to repurchase an estimated 6 million
shares, which is expected to settle in first quarter 2013. In
connection with this contract, we paid $200 million to the
counterparty, which was recorded in permanent equity in the
quarter paid and was not subject to re-measurement. The
classification of the up-front payment as permanent equity
assured that we would have appropriate repurchase timing
139
Note 1: Summary of Significant Accounting Policies (continued)
consistent with our 2012 capital plan, which contemplated a
fixed dollar amount available per quarter for share repurchases
pursuant to Federal Reserve Board (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
has the right to accelerate settlement with delivery of shares
prior to the contractual settlement. There are 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.
(in millions)
Transfers from trading assets to securities available for sale
$
2012
-
921
85,108
4,988
223
7,584
143
9,016
-
(40)
(245)
-
-
Year ended December 31,
2011
47
2,822
61,599
4,089
224
6,305
129
9,315
-
7
(599)
-
-
2010
-
3,476
19,815
4,570
262
230
1,313
8,699
155
(7,590)
26,117
212
5,127
(293)
(628)
13,613
-
-
-
-
-
-
-
-
5,483
5,425
(32)
440
345
-
-
this commitment within two years of signing the agreement and
we anticipate that we will be able to meet our commitment
within the required timelines. This commitment did not result in
any charge as we believe that this commitment is covered
through the existing allowance for credit losses and the
nonaccretable difference relating to the purchased credit-
impaired loan portfolios.
Transfers from loans to securities available for sale
Trading assets retained from securitizations of MHFS
Capitalization of MSRs from sale of MHFS
Transfers from MHFS to foreclosed assets
Transfers from loans to MHFS
Transfers from loans to LHFS
Transfers from loans to foreclosed assets
Changes in consolidations (deconsolidations) of variable interest entities:
Trading assets
Securities available for sale
Loans
Other assets
Short-term borrowings
Long-term debt
Accrued expenses and other liabilities
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, 2012, and there have been no material events that
would require recognition in our 2012 consolidated financial
statements or disclosure in the Notes to the financial statements,
except for the announcement on January 7, 2013, that the
Company, along with nine other mortgage services, entered into
term sheets with the OCC and the FRB that provide the parties
will enter into amendments to the Consent Orders, which would
end our Independent Foreclosure Review (IFR) programs
created by Article VII of an April 2011 Interagency Consent
Order and replace it with an accelerated remediation process.
The amendments to the Consent Orders have not yet been
entered into with the OCC or FRB.
In aggregate, the servicers have agreed to make direct, cash
payments of $3.3 billion and to provide $5.2 billion in additional
assistance, such as loan modifications, to consumers. Our
portion of the cash settlement is $766 million, which is based on
the proportionate share of Wells Fargo-serviced loans in the
overall IFR population. We fully accrued the cash portion of the
settlement in 2012, along with other remediation-related costs.
We also committed to foreclosure prevention actions which
include first and second lien modifications and short
sales/deeds-in-lieu of foreclosure on $1.2 billion of loans. We
anticipate meeting this commitment primarily through first lien
modification and short sale activities. We are required to meet
140
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
(in millions)
2012
additional contingent consideration related to acquisitions,
which is considered to be a guarantee, see Note 14.
Business combinations completed in 2012, 2011, and 2010
are presented below. At December 31, 2012, we had no pending
business combinations.
Date
Assets
EverKey Global Partners Limited / EverKey Global Management LLC /
EverKey Global Partners (GP), LLC / EverKey Global Focus (GP), LLC – Bahamas/New York, New York
January 1
$
Burdale Financial Holdings Limited / Certain Assets of Burdale Capital Finance, Inc. – England/Stamford, Connecticut
February 1
Energy Lending Business of BNP Paribas, SA – Houston, Texas
Merlin Securities, LLC / Merlin Canada LTD. / Certain Assets and Liabilities
of Merlin Group Holdings, LLC – San Francisco, California/Toronto, Ontario
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)
(1) Consists of seven acquisitions of insurance brokerage businesses.
(2) Consists of five acquisitions of insurance brokerage businesses.
April 20
7
874
3,639
August 1
281
$
4,801
July 1
$
August 1
November 30
Various
$
April 30
$
Various
$
389
46
116
37
588
430
40
470
141
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 $9.1 billion in 2012 and $7.0 billion in 2011.
Federal law restricts the amount and the terms of both credit
and non-credit transactions between a bank and its nonbank
affiliates. They may not exceed 10% of the bank's capital and
surplus (which for this purpose represents Tier 1 and Tier 2
capital, as calculated under the risk-based capital (RBC)
guidelines, plus the balance of the allowance for credit losses
excluded from Tier 2 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 in this Report.
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 a state-chartered subsidiary bank that is subject
to state regulations that limit dividends. Under those provisions,
our national and state-chartered subsidiary banks could have
declared additional dividends of $1.7 billion at
December 31, 2012, 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, 2012, our nonbank
subsidiaries could have declared additional dividends of
$6.2 billion at December 31, 2012, without obtaining prior
approval.
The FRB published clarifying supervisory guidance in first
quarter 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. The FRB supplemented this guidance with
the Capital Plan Rule issued in fourth quarter 2011 (codified at
12 CFR 225.8 of Regulation Y) that establishes capital planning
and prior notice and approval requirements for capital
distributions including dividends by certain bank holding
companies. The effect of this guidance is to require the approval
of the FRB (or specifically under the Capital Plan Rule, a notice
of non-objection) for the Company to repurchase or redeem
common or perpetual preferred stock as well as to raise the per
share quarterly dividend from its current level of $0.25 per share
as declared by the Company’s Board of Directors on
January 22, 2013, payable on March 1, 2013.
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 short-term resale agreements
(generally less than one year) and other short-term investments.
The majority of interest-earning deposits at December 31, 2012,
were held at the Federal Reserve.
(in millions)
Federal funds sold and securities
December 31,
2012
2011
purchased under resale agreements
$
33,884
Interest-earning deposits
Other short-term investments
102,408
1,021
24,255
18,917
1,195
Total
$
137,313
44,367
We have classified in loans securities purchased under long-
term resale agreements (generally one year or more), which
totaled $9.5 billion and $8.7 billion at December 31, 2012 and
2011, respectively. For additional information on the collateral
we receive from other entities under resale agreements and
securities borrowings, see the “Pledged Assets and Collateral”
section of Note 14.
142
Note 5: Securities Available for Sale
The following table provides the amortized cost and fair value for
the major categories of securities available for sale carried at fair
value. The net unrealized gains (losses) are reported on an
after-tax basis as a component of cumulative OCI. There were no
securities classified as held to maturity as of the periods
presented.
(in millions)
December 31, 2012
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
$
7,099
47
-
7,146
37,120
2,000
(444)
38,676
Mortgage-backed securities:
Federal agencies
Residential
Commercial
92,855
14,178
18,438
4,434
1,802
1,798
(4)
(49)
97,285
15,931
(268)
19,968
Total mortgage-backed securities
125,471
8,034
(321)
133,184
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, 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 (1)
Other (2)
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total (3)
20,120
12,726
18,410
1,282
557
553
(69)
(95)
(76)
21,333
13,188
18,887
220,946
12,473
(1,005)
232,414
1,935
402
2,337
281
216
497
(40)
(9)
2,176
609
(49)
2,785
$
223,283
12,970
(1,054)
235,199
$
6,920
32,307
59
1,169
(11)
(883)
6,968
32,593
92,279
16,997
17,829
4,485
1,253
1,249
(10)
(414)
(928)
96,754
17,836
18,150
127,105
6,987
(1,352)
132,740
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)
(63)
2,527
890
3,417
$
215,571
10,211
(3,169)
222,613
(1) Includes collateralized loan obligations with a cost basis and fair value of $12.2 billion and $12.5 billion, respectively, at December 31, 2012, and $8.1 billion for both cost
basis and fair value, at December 31, 2011.
(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 $5.9 billion each at
December 31, 2012, and $6.7 billion each at December 31, 2011. Also included in the "Other" category are asset-backed securities collateralized by home equity loans with
a cost basis and fair value of $695 million and $918 million, respectively, at December 31, 2012, and $846 million and $932 million, respectively, at December 31, 2011.
The remaining balances primarily include asset-backed securities collateralized by credit cards and student loans.
(3) At December 31, 2012 and 2011, 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.
143
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, 2012
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
(55)
2,709
(389)
4,662
(444)
7,371
Mortgage-backed securities:
Federal agencies
Residential
Commercial
(4)
(4)
(6)
2,247
261
491
-
(45)
(262)
-
1,564
2,564
(4)
(49)
(268)
2,247
1,825
3,055
Total mortgage-backed securities
(14)
2,999
(307)
4,128
(321)
7,127
Corporate debt securities
Collateralized debt obligations
Other
(14)
(2)
(11)
1,217
1,485
2,153
(55)
(93)
(65)
305
798
1,010
(69)
(95)
(76)
1,522
2,283
3,163
Total debt securities
(96)
10,563
(909)
10,903
(1,005)
21,466
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total
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
(3)
(9)
(12)
116
48
164
(37)
-
(37)
538
-
538
(40)
(9)
(49)
654
48
702
$
(108)
10,727
(946)
11,441
(1,054)
22,168
$
(11)
(229)
5,473
8,501
-
-
(11)
5,473
(654)
4,348
(883)
12,849
(7)
(80)
(157)
2,392
3,780
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)
(55)
8,107
4,268
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
(13)
(9)
(22)
316
61
377
(41)
-
(41)
530
-
530
(54)
(9)
(63)
846
61
907
Total
$
(916)
39,083
(2,253)
14,530
(3,169)
53,613
144
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 – “Investments” 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 the
relationship between municipal and term funding credit curves
rather than by changes to the credit quality of the underlying
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/or 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 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.
145
Note 5: Securities Available for Sale (continued)
The following table shows the gross unrealized losses and fair
value of debt and perpetual preferred securities available for sale
by those rated investment grade and those rated less than
investment grade, according to their lowest credit rating by
Standard & Poor’s Rating Services (S&P) or Moody’s Investors
Service (Moody’s). Credit ratings express opinions about the
credit quality of a security. Securities rated investment grade,
that is those rated BBB- or higher by S&P or Baa3 or higher by
Moody’s, are generally considered by the rating agencies and
market participants to be low credit risk. Conversely, securities
rated below investment grade, labeled as “speculative grade” by
the rating agencies, are considered to be distinctively higher
credit risk than investment grade securities. We have also
included securities not rated by S&P or Moody’s in the table
below based on the internal credit grade of the securities (used
for credit risk management purposes) equivalent to the credit
rating assigned by major credit agencies. The unrealized losses
and fair value of unrated securities categorized as investment
grade based on internal credit grades were $19 million and
$2.0 billion, respectively, at December 31, 2012, and
$207 million and $6.2 billion, respectively, at
December 31, 2011. 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
Fair
value
$
-
-
(378)
6,839
-
(66)
-
532
(4)
(3)
2,247
78
-
-
(46)
1,747
(31)
2,110
(237)
945
(38)
(19)
(49)
(49)
4,435
1,112
2,065
3,034
(283)
2,692
(50)
(46)
(27)
410
218
129
(533)
(40)
17,485
654
(472)
-
3,981
-
$
(573)
18,139
(472)
3,981
$
(11)
5,473
(781)
12,093
(10)
(39)
(429)
3,019
2,503
6,273
(478)
11,795
(165)
(185)
(186)
7,156
4,597
3,458
-
(102)
-
(375)
(499)
(874)
(121)
(164)
(39)
(1,806)
(53)
44,572
833
(1,300)
(1)
-
756
-
4,717
874
5,591
1,118
284
385
8,134
13
$
(1,859)
45,405
(1,301)
8,147
(in millions)
December 31, 2012
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, 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
146
Contractual Maturities
The following table shows the remaining contractual maturities
and contractual yields (taxable-equivalent basis) 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 maturity
(in millions)
amount
yield
Amount Yield
Amount Yield
Amount
Yield
Amount Yield
December 31, 2012
Securities of U.S. Treasury
and federal agencies
$
7,146
1.59 % $
376 0.43 % $
661 1.24 % $
6,109 1.70 % $
-
- %
Securities of U.S. states and
political subdivisions
38,676
5.29
1,861 2.61
11,620 2.18
3,380 5.51
21,815 7.15
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed
97,285
15,931
19,968
3.82
4.38
5.33
1 5.40
106 4.87
1,144 3.41
96,034 3.83
-
-
-
-
-
-
78 3.69
569 2.06
15,362 4.47
101 2.84
19,789 5.35
securities
133,184
4.12
1 5.40
184 4.37
1,814 2.95
131,185 4.13
Corporate debt securities
21,333
4.26
1,037 4.29
12,792 3.19
6,099 6.14
1,405 5.88
Collateralized debt
obligations
Other
Total debt securities
13,188
18,887
1.35
1.85
44 0.96
1,246 0.71
7,376 1.01
4,522 2.08
1,715 1.14
9,589 1.75
3,274 2.11
4,309 2.14
at fair value
$ 232,414
3.91 % $ 5,034 2.28 % $ 36,092 2.37 % $ 28,052 3.07 % $ 163,236 4.44 %
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
32,593
4.94
520 3.02
11,679 2.90
2,692
5.31
17,702 6.28
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed
96,754
17,836
18,150
4.39
4.51
5.40
1 6.47
442 4.02
1,399
3.07
94,912 4.42
-
-
-
-
-
-
-
-
640
1.88
17,196 4.61
87
3.33
18,063 5.41
securities
132,740
4.55
1 6.47
442 4.02
2,126
2.72
130,171 4.58
Corporate debt securities
Collateralized debt obligations
Other
18,404
8,599
19,892
4.64
1.10
1.89
815 5.57
11,022 3.40
4,691
6.67
1,876 6.38
-
-
540 1.61
6,813
1.00
1,246 1.42
506 2.29
12,963 1.75
3,149
2.04
3,274 2.29
Total debt securities
at fair value
$
219,196
4.12 % $
1,899 3.85 % $
43,305 2.36 % $ 19,665
3.31 % $ 154,327 4.72 %
147
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
investments (see Note 7 – Other Assets).
(in millions)
Gross realized gains
Gross realized losses
OTTI write-downs
Year ended December 31,
2012
2011
2010
$
600
1,305
(73)
(70)
645
(32)
(256)
(541)
(692)
Net realized gains (losses) from
securities available for sale
271
694
(79)
Net realized gains from private
equity investments
1,086
842
534
Net realized gains from debt
securities and equity
investments
$
1,357
1,536
455
Other-Than-Temporary Impairment
The following table shows the detail of total OTTI write-downs
included in earnings for debt securities, marketable securities
and nonmarketable equity investments.
(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 investments
Year ended December 31,
2012
2011
2010
$
16
2
16
-
84
86
11
1
42
-
252
101
3
1
64
267
175
120
10
15
69
240
423
672
12
4
16
256
160
96
22
118
15
5
20
541
692
170
248
Total OTTI write-downs included in earnings
$
416
711
940
(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.
148
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
Changes to OCI for increase (decrease) in non-credit-related OTTI (2):
U.S. states and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Corporate debt securities
Collateralized debt obligations
Other debt securities
Total changes to OCI for non-credit-related OTTI
Total OTTI losses recorded on debt securities
Year ended December 31,
2012
2011
2010
237
3
240
1
(178)
(88)
1
(1)
28
(237)
3
422
1
423
(1)
(171)
105
2
4
(13)
(74)
349
400
272
672
(4)
(326)
138
(1)
54
(33)
(172)
500
$
$
(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 where credit-related OTTI write-downs have occurred. Increases represent initial or subsequent non-
credit-related OTTI on debt securities. Decreases represent partial to full reversal of impairment due to recoveries in the fair value of securities due to factors other than
credit.
The following table presents a rollforward of the credit loss
component recognized in earnings for debt securities we still
own (referred to as “credit-impaired” debt securities). The credit
loss component of the amortized cost represents the difference
between the present value of expected future cash flows
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 were recognized in earnings and related to
securities that we do not intend to sell were:
(in millions)
Year ended December 31,
2012
2011
2010
Credit loss component, beginning of year
$
1,272
1,043
1,187
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
55
182
237
87
335
422
(194)
(160)
-
-
(26)
(2)
-
(31)
122
278
400
(263)
(242)
(2)
(37)
(220)
(193)
(544)
$
1,289
1,272
1,043
(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.
149
Note 5: Securities Available for Sale (continued)
To determine credit impairment losses for asset-backed
securities (e.g., residential MBS, commercial 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 loss rate (1):
Range (2)
Credit impairment loss rate distribution (3):
0 - 10% range
10 - 20% range
20 - 30% range
Greater than 30%
Weighted average loss rate (4)
Current subordination levels (5):
Range (2)
Weighted average (4)
Prepayment speed (annual CPR (6)):
Range (2)
Weighted average (4)
Year ended December 31,
2012
2011
2010
$
$
-
84
84
5
247
252
5
170
175
1-44 %
0-48
1-43
77
11
4
8
8
0-57
2
5-29
15
42
18
28
12
12
0-25
4
3-19
11
52
29
17
2
9
0-25
7
2-27
14
(1) Represents future expected credit losses on each pool of loans underlying respective securities expressed as a percentage of the total current outstanding loan balance of the
pool for each respective security.
(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 77% of credit
impairment losses recognized in earnings for the year ended December 31, 2012, 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 provided by tranches subordinate to our security holdings (subordination), expressed as a percentage of total current underlying
loan balance.
(6) Constant prepayment rate.
Total credit impairment losses on commercial MBS that we
do not intend to sell were $86 million, $101 million, and
$120 million for the years ended December 31, 2012, 2011 and
2010, respectively. Significant inputs considered in determining
the credit impairment losses for commercial MBS are the
expected remaining life of loan loss rates and current
subordination levels. Prepayment activity on commercial MBS
does not significantly impact the determination of their credit
impairment because, unlike residential MBS, commercial MBS
experience significantly lower prepayments due to certain
contractual restrictions, impacting the borrower’s ability to
prepay the mortgage. The expected remaining life of loan loss
rates for commercial MBS with credit impairment losses ranged
from 3% to 18%, 4% to 18%, and 2% to 15%, while the current
subordination level ranges were 0% to 13%, 3% to 15%, and 3%
to 13% for the years ended December 31, 2012, 2011 and 2010,
respectively.
150
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 $7.4 billion and $9.3 billion at
December 31, 2012 and December 31, 2011, 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
2012
2011
2010
2009
2008
December 31,
$
187,759
167,216
151,284
158,352
202,469
106,340
105,975
99,435
97,527
94,923
16,904
19,382
25,333
36,978
42,861
12,424
13,117
13,094
14,210
15,829
37,771
39,760
32,912
29,398
33,882
361,198
345,450
322,058
336,465
389,964
249,900
228,894
230,235
229,536
247,894
75,465
85,991
96,149
103,708
110,164
24,640
22,836
22,260
24,003
23,555
88,371
86,460
86,565
89,058
93,253
438,376
424,181
435,209
446,305
474,866
$
799,574
769,631
757,267
782,770
864,830
(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
Loan concentrations may exist when there are amounts loaned
to borrowers engaged in similar activities or similar types of
loans extended to a diverse group of borrowers that would cause
them to be similarly impacted by economic or other conditions.
At December 31, 2012 and 2011, 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 both December 31, 2012
and 2011. For the years ended 2012 and 2011, 2% and 3% of the
amounts were PCI loans, respectively. 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 18% of
total loans at December 31, 2012, and 21% at December 31, 2011.
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. We acquired an option
payment loan portfolio (Pick-a-Pay) from Wachovia at
December 31, 2008. A majority of the portfolio was identified as
PCI loans. Since the acquisition, we have reduced our exposure
to the option payment portion of the portfolio through our
modification efforts and loss mitigation actions. At
December 31, 2012, approximately 4 percent of total loans
remained with the payment option feature compared with 10
percent at December 31, 2008.
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. At December 31, 2012, our lines of credit
portfolio had an outstanding balance of $84.6 billion, of which
$2.1 billion (2%) is in its amortization period, another
$8.2 billion, or 10%, of our total outstanding balance, will reach
their end of draw period during 2013 through 2014,
$29.4 billion, or 35%, during 2015 through 2017, and
$44.9 billion, or 53%, will convert in subsequent years. This
portfolio had unfunded credit commitments of $77.8 billion at
December 31, 2012. The lines that enter their amortization
period may experience higher delinquencies and higher loss
rates than the ones in their draw period. At December 31, 2012,
$223 million, or 11%, of outstanding lines of credit that are in
their amortization period were 30 or more days past due,
151
Note 6: Loans and Allowance for Credit Losses (continued)
compared with $1.9 billion, or 2%, for lines in their draw period.
In anticipation of our customer’s reaching their contractual end
of draw period, we have created a process to help borrowers
effectively make the transition from interest-only to fully-
amortizing payments.
Loan Purchases, Sales, and Transfers
The following table summarizes the proceeds paid or received for
purchases and sales of loans and transfers from loans held for
investment to mortgages/loans held for sale at lower of cost or
market. This loan activity primarily includes loans added in
business combinations and asset acquisitions, as well as
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.
(in millions)
Purchases (1)
Sales
Transfers to MHFS/LHFS (1)
Year ended December 31,
2012
2011
Commercial Consumer
Total
Commercial
Consumer
Total
$
12,280
167
12,447
7,078
284
7,362
(5,840)
(840)
(6,680)
(4,705)
(1,018)
(5,723)
(84)
(21)
(105)
(164)
(75)
(239)
(1) The “Purchases” and “Transfers to MHFS/LHFS" categories exclude activity in government insured/guaranteed loans. As servicer, we are able to buy delinquent
insured/guaranteed loans out of the Government National Mortgage Association (GNMA) pools. These loans have different risk characteristics from the rest of our consumer
portfolio, whereby this activity does not impact the allowance for loan losses in the same manner because the loans are predominantly insured by the Federal Housing
Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). On a net basis, such purchases net of transfers to MHFS were $9.8 billion and $10.4 billion
for the year ended December 31, 2012 and 2011, respectively.
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:
December 31,
2012
2011
Commercial and industrial
$
215,626
201,061
Real estate mortgage
Real estate construction
Foreign
6,165
9,109
8,423
5,419
7,347
6,083
Total commercial
239,323
219,910
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family
junior lien mortgage
Credit card
42,657
37,185
50,934
70,960
55,207
65,111
Other revolving credit and installment
19,791
17,617
Total consumer
Total unfunded
184,342
175,120
credit commitments
$
423,665
395,030
Commitments to Lend
A commitment to lend is a legally binding agreement to lend
funds to a customer, usually at a stated interest rate, if funded,
and for specific purposes and time periods. We generally require
a fee to extend such commitments. 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. We may reduce or cancel consumer commitments,
including home equity lines and credit card lines, in accordance
with the contracts and applicable law.
When we make commitments, we are exposed to credit risk.
The maximum credit risk for these commitments will generally
be lower than the contractual amount because a significant
portion of these commitments are expected to expire without
being used by the customer. In addition, we manage the
potential risk in commitments to lend by limiting the total
amount of arrangements, both by individual customer and in
total, by monitoring the size and maturity structure of these
commitment portfolios and by applying the same credit
standards as for all of our credit activities. In some cases, we
participate a portion of our commitment to others in an
arrangement that reduces our contractual commitment amount.
We also originate multipurpose lending commitments under
which borrowers have the option to draw on the facility in one of
several forms, including a standby letter of credit. See Note 14
for information on standby letters of credit.
For certain loans and commitments to lend, we may require
collateral or a guarantee, based on our assessment of a
customer’s credit risk. We may require various types of
collateral, including commercial and consumer real estate, autos,
other short-term liquid assets such as accounts receivable or
inventory and long-lived asset, such as equipment and other
business assets. Collateral requirements for each customer may
vary according to the specific credit underwriting, including
152
Allowance for Credit Losses
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 (2)
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
Net loan charge-offs (3)
Year ended December 31,
2012
2011
2010
2009
2008
$
19,668
7,217
(315)
23,463
7,899
25,031
15,753
21,711
21,668
5,518
15,979
(332)
(266)
-
-
(1,306)
(1,598)
(2,775)
(3,365)
(1,653)
(382)
(191)
(24)
(111)
(636)
(351)
(38)
(173)
(1,151)
(1,189)
(670)
(1,063)
(120)
(198)
(229)
(237)
(29)
(178)
(65)
(245)
(2,014)
(2,796)
(5,433)
(5,564)
(2,170)
(3,013)
(3,437)
(1,101)
(1,408)
(3,883)
(4,900)
(3,318)
(540)
(3,763)
(1,449)
(4,934)
(2,396)
(4,812)
(2,708)
(2,204)
(1,563)
(1,724)
(2,437)
(3,423)
(2,300)
(8,959)
(10,819) (14,667)
(14,261)
(6,607)
(10,973)
(13,615) (20,100)
(19,825)
(8,777)
461
163
124
19
32
799
157
259
185
539
419
143
146
24
45
427
68
110
20
53
254
114
33
16
20
40
5
3
13
49
777
678
363
184
405
218
251
665
522
211
218
718
185
174
180
755
37
89
147
481
754
938
1,140
1,539
1,669
1,294
1,939
2,316
2,347
1,657
(9,034)
(11,299) (17,753)
(18,168)
(7,839)
Allowances related to business combinations/other (4)
(59)
(63)
698
(180)
8,053
Balance, end of year
Components:
$
17,477
19,668
23,463
25,031
21,711
Allowance for loan losses
Allowance for unfunded credit commitments
$
17,060
417
19,372
296
23,022
441
24,516
515
21,013
698
Allowance for credit losses (5)
$
17,477
19,668
23,463
25,031
21,711
Net loan charge-offs as a percentage of average total loans (3)
Allowance for loan losses as a percentage of total loans (5)
Allowance for credit losses as a percentage of total loans (5)
1.17 %
2.13
2.19
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) 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 the allowance as interest income.
(2) The year ended December 31, 2012, includes $888 million resulting from the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in
bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status.
(3) For PCI loans, charge-offs are only recorded to the extent that losses exceed the purchase accounting estimates.
(4) Includes $693 million for the year ended December 31, 2010, related to the adoption of consolidation accounting guidance on January 1, 2010.
(5) The allowance for credit losses includes $117 million, $231 million, $298 million and $333 million at December 31, 2012, 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.
153
Note 6: Loans and Allowance for Credit Losses (continued)
The following table summarizes the activity in the allowance for credit losses by our commercial and consumer portfolio segments.
(in millions)
Balance, beginning of period
Provision for credit losses
Interest income on certain impaired loans
Commercial Consumer
Total
Commercial
Consumer
2012
2011
Total
$
6,358
13,310
19,668
8,169
15,294
23,463
666
(95)
6,551
(220)
7,217
(315)
365
(161)
7,534
(171)
7,899
(332)
Year ended December 31,
Loan charge-offs
Loan recoveries
(2,014)
(8,959)
(10,973)
(2,796)
(10,819)
(13,615)
799
1,140
1,939
777
1,539
2,316
Net loan charge-offs
(1,215)
(7,819)
(9,034)
(2,019)
(9,280)
(11,299)
Allowance related to business combinations/other
-
(59)
(59)
4
(67)
(63)
Balance, end of period
$
5,714
11,763
17,477
6,358
13,310
19,668
The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
(in millions)
December 31, 2012
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
December 31, 2011
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
Allowance for credit losses
Recorded investment in loans
Commercial
Consumer
Total
Commercial
Consumer
Total
$
3,951
1,675
88
7,524
11,475
349,035
389,559 738,594
4,210
5,885
29
117
8,186
3,977
21,826
30,012
26,991
30,968
$
5,714
11,763
17,477
361,198
438,376 799,574
$
4,060
2,133
165
8,699
4,545
12,759
6,678
328,117
10,566
376,785
17,444
704,902
28,010
66
231
6,767
29,952
36,719
$
6,358
13,310
19,668
345,450
424,181
769,631
(1) Represents loans collectively evaluated for impairment in accordance with Accounting Standards Codification (ASC) 450-20, Loss Contingencies (formerly FAS 5), and
pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired 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
appropriateness 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, 2012 information, with the exception of updated
Fair Isaac Corporation (FICO) scores 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, 2012.
COMMERCIAL CREDIT QUALITY INDICATORS In addition to
monitoring commercial loan concentration risk, we manage a
consistent process for assessing commercial loan credit quality.
Generally, 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. Of the $21.0 billion in
criticized commercial real estate (CRE) loans, $4.3 billion has
been placed on nonaccrual status and written down to net
realizable collateral value. CRE loans have a high level of
monitoring in place to manage these assets and mitigate loss
exposure.
154
(in millions)
December 31, 2012
By risk category:
Pass
Criticized
Commercial
Real
Real
and
estate
industrial mortgage
estate
construction
Lease
financing
Foreign
Total
$
169,293
87,183
12,224
11,787
35,380
315,867
18,207
17,187
3,803
637
1,520
41,354
Total commercial loans (excluding PCI)
187,500
104,370
16,027
12,424
36,900
357,221
Total commercial PCI loans (carrying value)
259
1,970
877
-
871
3,977
Total commercial loans
$
187,759
106,340
16,904
12,424
37,771
361,198
December 31, 2011
By risk category:
Pass
Criticized
$
144,980
80,215
10,865
12,455
36,567
285,082
21,837
22,490
6,772
662
1,840
53,601
Total commercial loans (excluding PCI)
166,817
102,705
17,637
13,117
38,407
338,683
Total commercial PCI loans (carrying value)
Total commercial loans
399
3,270
1,745
-
1,353
6,767
$
167,216
105,975
19,382
13,117
39,760
345,450
The following table provides past due information for
commercial loans, which we monitor as part of our credit risk
management practices.
(in millions)
December 31, 2012
By delinquency status:
Commercial
Real
Real
and
estate
industrial mortgage
estate
construction
Lease
financing
Foreign
Total
Current-29 DPD and still accruing
$
185,614
100,317
14,861
12,344
36,837
349,973
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
417
47
503
228
136
27
1,422
3,322
1,003
53
-
27
12
1
50
1,121
303
5,824
Total commercial loans (excluding PCI)
187,500
104,370
16,027
12,424
36,900
357,221
Total commercial PCI loans (carrying value)
259
1,970
877
-
871
3,977
Total commercial loans
$
187,759
106,340
16,904
12,424
37,771
361,198
December 31, 2011
By delinquency status:
Current-29 DPD and still accruing
$
163,583
97,410
15,471
12,934
38,122
327,520
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
939
153
954
256
187
89
2,142
4,085
1,890
130
-
53
232
6
47
2,442
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
CONSUMER CREDIT QUALITY INDICATORS We have various
classes of consumer loans that present 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 appropriateness of the allowance for credit
losses for the consumer portfolio segment.
Many of our loss estimation techniques used for the
allowance for credit losses rely on delinquency-based models;
therefore, delinquency is an important indicator of credit quality
and the establishment of our allowance for credit losses.
155
Note 6: Loans and Allowance for Credit Losses (continued)
The following table provides the outstanding balances of our consumer portfolio by delinquency status.
(in millions)
December 31, 2012
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
junior lien
first
Other
revolving
credit and
Credit
mortgage mortgage
card installment
Total
$
179,870
73,256
23,976
74,519
351,621
3,295
1,528
853
1,141
6,655
29,719
577
339
265
358
518
-
211
143
122
187
966
272
130
33
5,049
2,282
1,370
1,719
1
-
5
12,446
7,179
42,165
223,061
75,313
24,640
88,371
411,385
26,839
152
-
-
26,991
Total consumer loans
$
249,900
75,465
24,640
88,371
438,376
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)
$
156,985
4,075
83,033
786
22,125
211
69,712
963
331,855
6,035
2,012
1,152
1,704
6,665
26,555
501
382
537
546
-
154
135
211
-
275
127
33
4
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
(1) Represents loans whose repayments are predominantly 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). Loans insured/guaranteed by the FHA/VA and 90+ DPD
totaled $20.2 billion at December 31, 2012, compared with $18.5 billion at December 31, 2011. Student loans 90+ DPD totaled $1.1 billion at December 31, 2012,
compared with $1.3 billion at December 31, 2011.
Of the $10.3 billion of loans not government
insured/guaranteed that are 90 days or more past due at
December 31, 2012, $1.1 billion was accruing, compared with
$11.5 billion past due and $1.5 billion accruing at
December 31, 2011.
Real estate 1-4 family first mortgage loans 180 days or more
past due totaled $6.7 billion, or 3.0% of total first mortgages
(excluding PCI), at December 31, 2012, compared with
$6.7 billion, or 3.3%, at December 31, 2011.
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. The
majority of our portfolio is underwritten with a FICO score of
680 and above. FICO is not available for certain loan types and
may not be obtained if we deem it unnecessary due to strong
collateral and other borrower attributes, primarily securities-
based margin loans of $5.4 billion at December 31, 2012, and
$5.0 billion at December 31, 2011.
156
(in millions)
December 31, 2012
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)
Real estate Real estate
1-4 family 1-4 family
junior lien
first
Other
revolving
credit and
Credit
mortgage mortgage
card installment
Total
$
17,662
10,208
15,764
6,122
3,660
6,574
2,314
1,961
9,091
35,189
6,403
22,232
3,772
10,153
36,263
24,725
11,361
4,990
11,640
52,716
31,502
15,992
5,114
10,729
63,337
63,946
21,874
4,109
12,371
102,300
26,044
3,491
8,526
1,204
-
29,719
-
-
2,223
6,355
43,148
157
-
-
3,780
5,403
8,632
5,403
12,446
42,165
223,061
75,313
24,640
88,371
411,385
26,839
152
-
-
26,991
Total consumer loans
$
249,900
75,465
24,640
88,371
438,376
December 31, 2011
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)
$
21,604
10,978
15,563
7,428
4,086
7,187
2,323
1,787
3,383
8,921
40,276
6,222
23,073
9,350
35,483
23,622
12,497
4,697
10,465
51,281
27,417
17,574
4,760
9,936
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
11,271
-
26,555
-
-
-
-
4,990
4,990
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
(1) Represents loans whose repayments are predominantly 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.
LTV refers to the ratio comparing the loan’s unpaid principal
The following table shows the most updated LTV and CLTV
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, generally with an original value of $1 million or
more, as the AVM values have proven less accurate for these
properties.
distribution of the real estate 1-4 family first and junior lien
mortgage loan portfolios. In recent years, the residential real
estate markets experienced significant declines in property
values and several markets, particularly California and Florida
have experienced more significant declines 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.
157
Note 6: Loans and Allowance for Credit Losses (continued)
(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, 2012
December 31, 2011
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
$
56,247
12,170
68,417
46,476
12,694
59,170
69,759
15,168
84,927
46,831
15,722
62,553
34,830
18,038
52,868
36,764
20,290
57,054
17,004
13,576
30,580
21,116
15,829
36,945
13,529
14,610
28,139
18,608
18,626
37,234
1,973
1,751
3,724
2,798
2,624
5,422
Government insured/guaranteed loans (2)
29,719
-
29,719
26,555
-
26,555
Total consumer loans (excluding PCI)
223,061
75,313
298,374
199,148
85,785
284,933
Total consumer PCI loans (carrying value)
26,839
152
26,991
29,746
206
29,952
Total consumer loans
$
249,900
75,465
325,365
228,894
85,991
314,885
(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.
(2) Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
NONACCRUAL LOANS The following table provides loans on
nonaccrual status. PCI loans are excluded from this table due to
the existence of the accretable yield.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial (1)
Consumer:
December 31,
2012
2011
$
1,422
2,142
3,322
1,003
4,085
1,890
27
50
53
47
5,824
8,217
Real estate 1-4 family first mortgage (2)
11,455
10,913
Real estate 1-4 family junior lien mortgage (3)
Other revolving credit and installment
Total consumer (4)
Total nonaccrual loans
(excluding PCI)
2,922
285
1,975
199
14,662
13,087
$
20,486
21,304
(1) Includes LHFS of $16 million and $25 million at December 31, 2012 and 2011,
respectively.
(2) Includes MHFS of $336 million and $301 million at December 31, 2012 and
2011, respectively.
(3) Includes $960 million at December 31, 2012, resulting from the Interagency
Guidance issued in 2012, which requires performing junior liens to be classified
as nonaccrual if the related first mortgage is nonaccruing.
(4) Includes $1.8 billion at December 31, 2012, consisting of $1.4 billion of first
mortgages, $205 million of junior liens and $140 million of auto and other loans,
resulting from the OCC guidance issued in third quarter 2012, which requires
performing consumer loans discharged in bankruptcy to be placed on nonaccrual
status and written down to net realizable collateral value, regardless of their
delinquency status.
158
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 $6.0 billion at December 31, 2012, and
$8.7 billion at December 31, 2011, are not included in these past
due and still accruing loans 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 predominantly insured by the FHA or
guaranteed by the VA for mortgages and the U.S. Department of
Education for student loans under the FFELP were $21.8 billion
at December 31, 2012, up from $20.5 billion at
December 31, 2011.
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)
December 31,
2012
2011
Loan 90 days or more past due and still accruing:
Total (excluding PCI):
$ 23,245 22,569
Less: FHA insured/guaranteed by the VA (1)(2)
Less: Student loans guaranteed
under the FFELP (3)
Total, not government
insured/guaranteed
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 (2)
Real estate 1-4 family junior lien mortgage (2)(4)
Credit card
Other revolving credit and installment
Total consumer
Total, not government
insured/guaranteed
20,745 19,240
1,065
1,281
$
1,435
2,048
$
47
228
27
1
153
256
89
6
303
504
564
133
310
125
781
279
346
138
1,132
1,544
$
1,435
2,048
(1) Represents loans whose repayments are predominantly insured by the FHA or
guaranteed by the VA.
(2) Includes mortgage loans held for sale 90 days or more past due and still
accruing.
(3) Represents loans whose repayments are predominantly guaranteed by agencies
on behalf of the U.S. Department of Education under the FFELP.
(4) The balance at December 31, 2012, includes the impact from the transfer of
certain 1-4 family junior lien mortgages to nonaccrual loans in accordance with
the Interagency Guidance issued on January 31, 2012.
159
Note 6: Loans and Allowance for Credit Losses (continued)
IMPAIRED LOANS The table below summarizes key information
for impaired loans. Our impaired loans predominantly 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 generally have estimated losses
which are included in the allowance for credit losses. Impaired
loans exclude PCI loans. 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 $705 million at December 31, 2012,
and $651 million at December 31, 2011.
(in millions)
December 31, 2012
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial (1)
Consumer:
Recorded investment
Impaired loans
Unpaid
with related
Related
principal
Impaired
allowance for
allowance for
balance
loans
credit losses
credit losses
$
3,331
5,766
1,975
54
109
2,086
4,673
1,345
39
43
2,086
4,537
1,345
39
43
353
1,025
276
11
9
11,235
8,186
8,050
1,674
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
21,293
18,472
2,855
2,483
531
341
531
340
15,224
2,070
531
340
25,020
21,826
18,165
Total impaired loans (excluding PCI)
$
36,255
30,012
26,215
3,074
859
244
33
4,210
5,884
501
1,133
470
21
8
$
7,191
7,490
4,733
127
185
3,072
5,114
2,281
68
31
3,018
4,637
2,281
68
31
19,726
10,566
10,035
2,133
16,494
14,486
2,232
2,079
593
287
593
286
19,606
17,444
13,909
2,079
593
274
16,855
26,890
3,380
784
339
42
4,545
6,678
December 31, 2011
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial (1)
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
(1) The unpaid principal balance for commercial loans at December 31, 2011, includes $2.5 billion of commercial and industrial, $1.1 billion of real estate mortgage, $1.8 billion
of real estate construction and $157 million of lease financing and foreign loans that have been fully charged off and therefore have no recorded investment. The unpaid
principal balance for loans with no recorded investment has been excluded from the amounts disclosed at December 31, 2012.
160
Commitments to lend additional funds on loans whose terms
have been modified in a TDR amounted to $421 million at
December 31, 2012, and $3.8 billion at December 31, 2011.
The following tables provide the average recorded investment
in impaired loans and the amount of interest income recognized
on impaired loans by portfolio segment and class.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
2012
2011
2010
Average Recognized
interest
recorded
Average
recorded
Recognized
interest
Average
recorded
Recognized
interest
investment
income
investment
income
investment
income
Year ended December 31,
$
2,281
4,821
1,818
57
36
111
119
61
1
1
3,282
5,308
2,481
80
29
105
80
70
-
-
4,098
4,598
3,203
166
47
64
41
28
-
-
Total commercial
9,013
293
11,180
255
12,112
133
Consumer:
Real estate 1-4 family first mortgage
15,750
803
13,592
700
9,221
494
Real estate 1-4 family
junior lien mortgage
Credit card
Other revolving credit and installment
2,193
572
324
80
63
44
1,962
594
270
76
21
27
1,443
360
132
Total consumer
18,839
990
16,418
824
11,156
Total impaired loans (excluding PCI)
$
27,852
1,283 $
27,598
1,079 $
23,268
55
13
3
565
698
(in millions)
Average recorded investment in impaired loans
Interest income:
Cash basis of accounting
Other (1)
Total interest income
Year ended December 31,
2012
2011
2010
27,852
27,598
23,268
316
967
180
899
1,283
1,079
250
448
698
$
$
$
(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.
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.
We may require some borrowers experiencing financial
difficulty to make trial payments generally for a period of three
to four months, according to the 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. 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, however, the exact concession type and
resulting financial effect are usually not finalized and do not take
effect until the loan is permanently modified. 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, 2012, the loans in trial modification period
were $402 million under HAMP, $45 million under 2MP and
$258 million under proprietary programs, compared with
$421 million, $46 million and $184 million at
December 31, 2011, respectively. Trial modifications with a
recorded investment of $429 million at December 31, 2012, and
$310 million at December 31, 2011, were accruing loans and
$276 million and $341 million, respectively, 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.
161
Note 6: Loans and Allowance for Credit Losses (continued)
The following table summarizes our TDR modifications for
the periods presented by primary modification type and includes
the financial effects of these 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 (5)
Year ended December 31, 2012
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 (6)
Total consumer
Total
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 (6)
Total consumer
Total
$
$
$
11
47
12
-
-
70
1,371
79
-
5
-
1,455
1,525
166
113
29
-
-
308
1,629
98
-
74
-
1,801
2,109
35
219
19
-
-
273
1,302
244
241
55
-
1,842
2,115
64
146
114
-
-
324
1,908
559
336
119
-
2,922
3,246
1,370
1,907
531
4
19
3,831
5,822
756
-
287
666
1,416
2,173
562
4
19
4,174
8,495
1,079
241
347
666
7,531
10,828
11,362
15,002
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
40
12
10
-
-
62
547
512
-
55
-
1,114
1,176
84
24
26
-
-
1.60 % $
1.57
1.69
-
-
1.58
3.00
3.70
10.85
6.82
-
3.78
3.59 % $
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 % $
38
226
19
-
-
283
2,379
313
241
58
-
2,991
3,274
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. Year ended December 31, 2012, includes $5.2 billion of consumer loans, consisting of $4.5 billion of first mortgages, $506 million of junior liens and $140 million of
auto and other loans, resulting from the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be classified as TDRs, as well
as written down to net realizable collateral value.
(4) Charge-offs include write-downs of the investment in the loan in the period it is contractually modified. The amount of charge-off will differ from the modification terms if the
loan has been charged down prior to the modification based on our policies. In addition, there may be cases where we have a charge-off/down with no legal principal
modification. Modifications resulted in legally forgiving principal (actual, contingent or deferred) of $495 million and $577 million for years ended December 31, 2012 and
2011, respectively. Year ended December 31, 2012, includes $888 million in charge-offs on consumer loans resulting from the OCC guidance discussed above.
(5) Reflects the effect of reduced interest rates to loans with principal or interest rate reduction primary modification type.
(6) 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. Trial modifications for the period are
presented net of any trial modifications that successfully complete the program requirements. Such successful modifications are included as an addition to the appropriate
loan category in the period they successfully complete the program requirements.
162
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.
(in millions)
Commercial:
Recorded
investment of defaults
Year ended December 31,
2012
2011
Commercial and industrial
$
Real estate mortgage
Real estate construction
Lease financing
Foreign
379
579
261
1
-
216
331
69
1
1
Total commercial
1,220
618
Consumer:
Real estate 1-4 family first mortgage
567
1,110
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total
55
94
56
137
156
113
772
1,516
$
1,992
2,134
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. Real
estate 1-4 family first mortgage PCI loans are predominantly
Pick-a-Pay loans.
(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)
2012
2011
2010
2009
2008
December 31,
$
259
399
718
1,970
3,270
2,855
877
871
1,745
1,353
2,949
1,413
1,911
4,137
5,207
1,733
4,580
5,803
6,462
1,859
3,977
6,767
7,935
12,988
18,704
26,839
29,746
33,245
38,386
39,214
152
206
-
-
250
-
331
-
728
151
26,991
29,952
33,495
38,717
40,093
30,968
36,719
41,430
51,705
58,797
45,174
55,312
64,331
83,615
98,182
$
$
163
Note 6: Loans and Allowance for Credit Losses (continued)
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:
(cid:120)
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.
(cid:120)
(cid:120)
During 2012, our expectation of cash flows was favorably
impacted by lower expected defaults and losses as a result of
observed strengthening in housing prices and the impact of our
modification efforts. These factors favorably impacted
probability of default and loss severity, reducing our expected
loss on PCI loans, primarily Pick-a-Pay, and increasing the
estimated weighted-average remaining life of the PCI portfolios
and resulting expected interest to be collected. Accordingly, we
increased accretable yield for $1.1 billion of transfers out of
nonaccretable difference for the increase in principal expected to
be collected, and by $3.6 billion for the increase in interest
income 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,
2012
2011
2010
2009
$
15,961
3
(2,152)
(5)
1,141
3,600
16,714
128
(2,206)
(189)
373
1,141
14,559
-
(2,392)
(43)
3,399
1,191
10,447
-
(2,601)
(5)
441
6,277
$
18,548
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 the impact of modifications, changes in prepayment assumptions and changes in interest rates on variable
rate PCI loans.
164
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 though 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
Balance, December 31, 2011
Provision for losses due to credit deterioration
Charge-offs
Balance, December 31, 2012
COMMERCIAL PCI CREDIT QUALITY INDICATORS The following
table provides a breakdown of commercial PCI loans by risk category.
Commercial Pick-a-Pay
consumer
Total
Other
$
-
850
(520)
330
712
(776)
266
106
(207)
165
25
(102)
$
88
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3
-
3
59
(30)
32
54
(20)
66
7
-
853
(520)
333
771
(806)
298
160
(227)
231
32
(44)
(146)
29
117
(in millions)
December 31, 2012
By risk category:
Pass
Criticized
Total commercial PCI loans
December 31, 2011
By risk category:
Pass
Criticized
Total commercial PCI loans
Commercial
and
Real
estate
Real
estate
industrial
mortgage
construction
Foreign
Total
$
$
$
$
95
164
341
1,629
259
1,970
207
670
877
255
616
898
3,079
871
3,977
191
208
399
640
2,630
3,270
321
1,424
-
1,353
1,152
5,615
1,745
1,353
6,767
165
Note 6: Loans and Allowance for Credit Losses (continued)
The following table provides past due information for commercial PCI loans.
(in millions)
December 31, 2012
By delinquency status:
Commercial
and
Real
estate
Real
estate
industrial
mortgage
construction
Foreign
Total
Current-29 DPD and still accruing
$
235
1,804
30-89 DPD and still accruing
90+ DPD and still accruing
1
23
26
140
Total commercial PCI loans
$
259
1,970
699
51
127
877
704
-
167
871
3,442
78
457
3,977
December 31, 2011
By delinquency status:
Current-29 DPD and still accruing
30-89 DPD and still accruing
90+ DPD and still accruing
Total commercial PCI loans
$
$
359
22
18
399
2,867
1,206
1,178
5,610
178
225
72
467
-
175
272
885
3,270
1,745
1,353
6,767
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, 2012
December 31, 2011
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
$
22,304
198
22,502
25,693
268
25,961
2,587
1,361
650
804
11
7
6
7
2,598
1,368
656
811
5,356
116
5,472
3,272
1,433
791
1,169
5,921
20
9
8
10
3,292
1,442
799
1,179
150
6,071
Total consumer PCI loans (adjusted unpaid principal balance) $
33,062
345
33,407
38,279
465
38,744
Total consumer PCI loans (carrying value)
$
26,839
152
26,991
29,746
206
29,952
166
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, 2012
December 31, 2011
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
$
13,163
144
13,307
17,169
210
17,379
6,673
6,602
3,635
1,757
874
202
156
68
73
39
11
6
1
3
6,741
6,675
3,674
1,768
880
203
159
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
Total consumer PCI loans (adjusted unpaid principal balance) $
33,062
345
33,407
38,279
465
38,744
Total consumer PCI loans (carrying value)
$
26,839
152
26,991
29,746
206
29,952
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, 2012
December 31, 2011
Real estate Real estate
1-4 family 1-4 family
first
junior lien
mortgage mortgage
Real estate Real estate
1-4 family 1-4 family
first
junior lien
mortgage mortgage
by LTV
by CLTV
Total
by LTV
by CLTV
Total
$
1,374
4,119
9,576
8,084
9,889
20
21
30
61
93
1,395
4,149
9,637
8,177
1,243
3,806
9,341
9,471
25
49
63
79
1,268
3,855
9,404
9,550
138
10,027
14,318
246
14,564
2
22
100
3
103
Total consumer PCI loans (adjusted unpaid principal balance) $
33,062
345
33,407
38,279
465
38,744
Total consumer PCI loans (carrying value)
$
26,839
152
26,991
29,746
206
29,952
(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.
167
Note 7: Premises, Equipment, Lease Commitments and Other Assets
Operating lease rental expense (predominantly for premises),
net of rental income, was $1.1 billion, $1.2 billion and
$1.3 billion in 2012, 2011 and 2010, respectively.
The components of other assets were:
December 31,
2012
2011
$
1,832
1,825
7,670
7,194
7,441
7,195
1,839
1,725
Total premises and equipment
18,657
18,333
Cost method:
(in millions)
122
147
Nonmarketable equity investments:
9,229
8,802
Federal bank stock
Private equity investments
$
(in millions)
Land
Buildings
Furniture and equipment
Leasehold improvements
Premises and equipment leased
under capital leases
Less: Accumulated depreciation
and amortization
Net book value,
December 31,
2012
2011
2,572
4,227
3,444
4,617
6,799
8,061
4,767
6,156
4,077
4,670
Total cost method
Equity method and other:
LIHTC investments (1)
Private equity and other
Total equity method and other
10,923
8,747
Total nonmarketable
equity investments (2)
17,722
16,808
Corporate/bank-owned life insurance
Accounts receivable
Interest receivable
Core deposit intangibles
Customer relationship and
18,649
20,146
25,828
25,939
5,006
5,915
5,296
7,311
other amortized intangibles
1,352
1,639
Foreclosed assets:
GNMA (3)
Other
Operating lease assets
Due from customers on acceptances
Other
1,509
2,514
2,001
282
1,319
3,342
1,825
225
12,800
17,172
Total other assets
$
93,578
101,022
(1) Represents low income housing tax credit investments.
(2) Proceeds from sales of nonmarketable equity investments totaled $2.3 billion
and $2.4 billion and purchases totaled $2.6 billion and $2.7 billion for 2012 and
2011, respectively.
(3) These are foreclosed real estate securing GNMA loans. 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.
Income related to nonmarketable equity investments was:
(in millions)
2012
2011
2010
Year ended December 31,
premises and equipment
$
9,428
9,531
Depreciation and amortization expense for premises and
equipment was $1.3 billion, $1.4 billion and $1.5 billion in 2012,
2011 and 2010, respectively.
Dispositions of premises and equipment, included in
noninterest expense, resulted in a net gain of $7 million in 2012,
and net losses of $17 million and $115 million in 2011 and 2010,
respectively.
We have obligations under a number of noncancelable
operating leases for premises and equipment. The leases
predominantly expire over the next 15 years, with the longest
expiring in 2105, 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, 2012.
Operating
leases
Capital
leases
$
1,311
1,184
970
808
657
2,594
3
3
3
3
2
15
29
(8)
(9)
(in millions)
Year ended December 31,
2013
2014
2015
2016
2017
Thereafter
Executory costs
Amounts representing interest
Present value of net minimum
lease payments
168
Total minimum lease payments
$
7,524
$
Net realized gains from private
equity investments
$
12
All other
Total
$
1,086
(185)
$
901
842
(298)
544
534
(188)
346
Note 8: Securitizations and Variable Interest Entities
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. Generally, SPEs are
formed in connection with securitization transactions. In a
securitization transaction, assets from our balance sheet are
transferred to an SPE, which then issues to investors various
forms of interests in those assets and may also enter into
derivative transactions. In a securitization transaction, we
typically receive cash and/or other interests in an SPE as
proceeds for the assets we transfer. Also, in certain transactions,
we may retain the right to service the transferred receivables and
to repurchase those receivables from the SPE if the outstanding
balance of the receivables falls to a level where the cost exceeds
the benefits of servicing such receivables. 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:
(cid:135)
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.
(cid:135)
(cid:135)
(cid:135)
(cid:135)
(cid:135)
(cid:135)
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 those for which we account for the transfers of
financial assets 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.
169
Note 8: Securitizations and Variable Interest Entities (continued)
The classifications of assets and liabilities in our balance sheet associated with our transactions with VIEs follow:
(in millions)
December 31, 2012
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, 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
VIEs that we
do not
consolidate
Transfers that
we account
VIEs
that we
consolidate
for as secured
borrowings
$
-
1,902
19,900
-
9,841
11,114
4,993
260
114
2,772
469
10,553
-
457
30
218
14,848
-
7,088
-
161
Total
290
2,234
37,520
469
27,482
11,114
5,611
47,750
14,625
22,345
84,720
-
3,441
2,059 (2)
901 (2)
13,228
20
-
3,483 (2)
6,520
15,287
4,362
10,003
3,441
6,443
19,768
29,652
-
48
-
48
$
44,309
8,134
2,577
55,020
$
-
3,723
21,708
-
11,404
12,080
4,494
321
293
3,332
444
11,967
-
1,858
11
30
11,671
-
7,181
-
137
332
4,046
36,711
444
30,552
12,080
6,489
53,409
18,215
19,030
90,654
-
3,350
-
3,350
3,450 (2)
10,682
1,138 (2)
121
4,932 (2)
6,686
14,132
4,609
11,618
9,520
17,489
30,359
-
61
-
61
$
50,059
8,634
1,541
60,234
(1) Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and
GNMA.
(2) Includes the following VIE liabilities at December 31, 2012, and December 31, 2011, respectively, with recourse to the general credit of Wells Fargo: Short-term borrowings,
$2.1 billion and $3.4 billion; Accrued expenses and other liabilities, $767 million and $963 million; and Long-term debt, $29 million and $30 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
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
170
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.
(in millions)
December 31, 2012
Residential mortgage loan
securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
Residential mortgage loan
securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
(continued on following page)
Total
Debt and
VIE
equity
Servicing
Other
commitments
and
assets
interests (1)
assets Derivatives
guarantees
Net
assets
Carrying value - asset (liability)
$
1,268,494
49,794
168,126
6,940
8,155
10,404
20,098
6,641
4,771
10,401
3,620
2,188
7,081
13
7,962
7,155
5,180
1,439
49
977
10,336
284
466
-
-
-
-
-
-
28
-
-
404
471
-
(104)
-
1
-
14
(1,690)
12,266
(53)
-
144
-
-
(1,657)
-
-
1
2,419
7,951
628
7,962
7,051
3,523
1,440
49
1,020
$
1,553,824
35,664
11,114
786
(3,255)
44,309
Maximum exposure to loss
$
3,620
2,188
7,081
13
7,962
7,155
5,180
1,439
49
977
10,336
284
466
-
-
-
-
-
-
-
-
446
471
-
104
-
1
-
28
318
5,061
19,017
353
-
2,825
7,993
144
-
1,967
247
261
27
119
628
7,962
9,226
5,427
1,701
76
1,442
$
35,664
11,114
1,340
8,179
56,297
171
Note 8: Securitizations and Variable Interest Entities (continued)
(continued from previous page)
(in millions)
December 31, 2011
Residential mortgage loan securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
Residential mortgage loan securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
Total
VIE
Debt and
equity
Servicing
Other
commitments
and
Net
assets interests (1)
assets Derivatives
guarantees
assets
$ 1,135,629
4,682
11,070
61,461
179,007
11,240
9,757
9,606
19,257
12,191
6,318
2,460
7,063
1,107
9,511
6,942
4,119
2,019
-
353
623
-
-
-
-
-
-
Carrying value - asset (liability)
-
1
349
193
-
(130)
-
40
-
(975)
14,777
(48)
-
2,766
8,035
-
-
-
(1,439)
-
-
1,300
9,511
6,812
2,680
2,059
-
18,717
1,896
34
190
(1)
2,119
$ 1,463,183
39,799
12,080
643
(2,463)
50,059
Maximum exposure to loss
$
4,682
11,070
2,460
7,063
1,107
9,511
6,942
4,119
2,019
-
353
623
-
-
-
-
-
-
-
1
538
874
-
130
-
41
-
1,896
34
903
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
$
39,799
12,080
2,487
6,170
60,536
(1) Includes total equity interests of $5.8 billion and $4.5 billion at December 31, 2012 and 2011, respectively. The December 31, 2011 equity interests balance has been
revised to include tax credit structures, which are all equity interests. 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 83% and 88% were rated as investment grade by the primary rating agencies at December 31, 2012 and 2011,
respectively. These senior loans are accounted for at amortized cost 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.
172
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. Because of
the power of the GSEs over the VIEs that hold the assets from
these conforming residential mortgage loan securitizations, we
do not consolidate them.
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
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 a VIE purchases a pool of assets consisting
of asset-backed securities and issues multiple tranches of equity
or notes to investors. In some CDOs, 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 CDOs, including ones established
prior to 2008. Such involvement may include acting as liquidity
provider, derivative counterparty, secondary market maker or
investor. For certain CDOs, 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 them in combination with the variable
interests we hold. Subsequently, we monitor our ongoing
involvement to determine if the nature of our involvement has
changed. We are not the primary beneficiary of these CDOs 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.
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
173
Note 8: Securitizations and Variable Interest Entities (continued)
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
them and the variable interests we hold. In most cases, we are
not the primary beneficiary 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 CLOs. Such involvement may include
acting as underwriter, derivative counterparty, secondary market
maker or investor. For certain CLOs, we may also act as the
servicer, for which we receive fees in connection with that role.
We also earn fees for arranging these CLOs 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 them.
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 them 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 them.
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.
OTHER TRANSACTIONS WITH VIEs In 2008, legacy Wachovia
reached an agreement to purchase auction rate securities (ARS)
at par that were sold to third-party investors by certain of its
174
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, 2012, we held in our securities available-for-sale
portfolio $357 million of ARS issued by VIEs redeemed pursuant
to this agreement, compared with $643 million at
December 31, 2011.
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, 2012, we held in our securities available-for-sale
portfolio $329 million of ARS issued by VIEs redeemed pursuant
to this agreement, compared with $624 million at
December 31, 2011.
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 $4.9 billion at December
31, 2012, and $7.6 billion at December 31, 2011 and $2.5 billion
of preferred stock at both December 31, 2012, and 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 2012, we redeemed $2.7 billion of trust preferred
securities that will no longer count as Tier 1 capital under the
Dodd-Frank Act and the Basel Committee recommendations
known as the Basel III standards.
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. We had the following cash flows with our securitization
trusts that were involved in transfers accounted for as sales.
(in millions)
2012
Other
Year ended December 31,
2011
Other
2010
Other
Mortgage
financial
Mortgage
financial
Mortgage
financial
loans
assets
loans
assets
loans
assets
Sales proceeds from securitizations (1)
$
535,372
Servicing fees
Other interests held
Purchases of delinquent assets
Net servicing advances
4,433
1,767
62
226
-
10
135
-
-
337,357
4,401
1,779
9
29
-
11
263
-
-
374,488
4,316
1,786
25
49
-
34
442
-
-
(1) Represents cash flow data for all loans securitized in the period presented.
In 2012, 2011, and 2010, we recognized net gains of
$518 million, $112 million and $27 million, respectively, from
transfers accounted for as sales of financial assets in
securitizations. These net gains primarily relate to commercial
mortgage securitizations and residential mortgage
securitizations where the loans were not already carried at fair
value.
Sales with continuing involvement during 2012, 2011 and
2010 predominantly related to conforming residential mortgage
securitizations. During 2012, 2011 and 2010 we transferred
$517.3 billion, $329.1 billion and $379.0 billion respectively, in
fair value of conforming residential mortgages to unconsolidated
VIEs and recorded the transfers as sales. Substantially all of
these transfers did not result in a gain or loss because the loans
are already carried at fair value. In connection with all of these
transfers, in 2012 we recorded a $4.9 billion servicing asset,
measured at fair value using a Level 3 measurement technique,
and a $274 million liability for probable repurchase losses. In
2011, we recorded a $4.0 billion servicing asset and a
$101 million liability. 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 $144 million repurchase
liability in 2010.
We used the following key weighted-average assumptions to
measure mortgage servicing assets at the date of securitization:
Residential mortgage
servicing rights
2012
2011
2010
Year ended December 31,
Prepayment speed (1)
13.4 %
12.8
13.5
Discount rate
7.3
Cost to service ($ per loan) (2) $
151
7.7
146
5.4
151
(1) The prepayment speed assumption for residential mortgage servicing rights
includes a blend of prepayment speeds and default rates. Prepayment speed
assumptions are influenced by mortgage interest rate inputs as well as our
estimation of drivers of borrower behavior.
(2) Includes costs to service and unreimbursed foreclosure costs.
During 2012, 2011 and 2010, we transferred $3.4 billion,
$3.0 billion and $336 million, respectively, in fair value of
commercial mortgages to unconsolidated VIEs and recorded the
transfers as sales. These transfers resulted in a gain of
$178 million in 2012, $48 million in 2011 and $23 million in
2010 because the loans were carried at LOCOM. In connection
with these transfers, in 2012 and 2011 we recorded a servicing
asset of $13 million and $20 million, respectively, initially
measured at fair value using a Level 3 measurement technique.
175
Note 8: Securitizations and Variable Interest Entities (continued)
The following table provides key economic assumptions and
the sensitivity of the current fair value of residential mortgage
servicing rights and other retained interests to immediate
adverse changes in those assumptions. “Other interests held”
relate predominantly to residential and commercial mortgage
loan securitizations. Residential mortgage-backed securities
retained in securitizations issued through GSEs, such as FNMA,
FHLMC and GNMA, are excluded from the table because these
securities have a remote risk of credit loss due to the GSE
guarantee. These securities also have economic characteristics
similar to GSE mortgage-backed securities that we purchase,
which are not included in the table. Subordinated interests
include only those bonds whose credit rating was below AAA by
a major rating agency at issuance. Senior interests include only
those bonds whose credit rating was AAA by a major rating
agency at issuance. The information presented excludes trading
positions held in inventory.
Residential
mortgage
Interest-
Consumer
Commercial (2)
Other interests held
($ in millions, except cost to service amounts)
servicing
rights (1)
Fair value of interests held at December 31, 2012 $
Expected weighted-average life (in years)
11,538
4.8
Key economic assumptions:
only
strips
187
4.1
Subordinated
Senior
Subordinated
bonds
bonds
bonds
249
4.7
Senior
bonds
982
5.3
40
5.9
Prepayment speed assumption (3)
15.7 %
10.6
6.8
Decrease in fair value from:
10% adverse change
25% adverse change
$
869
2,038
5
12
-
-
Discount rate assumption
Decrease in fair value from:
100 basis point increase
200 basis point increase
Cost to service assumption ($ per loan)
Decrease in fair value from:
10% adverse change
25% adverse change
Credit loss assumption
Decrease in fair value from:
10% higher losses
25% higher losses
7.4 %
16.9
8.9
4
8
2
4
$
562
1,073
219
615
1,537
$
0.4 %
-
-
45
6.1
3.5
2.2
12
21
43
84
10.0
12
19
240
5.3
-
-
-
852
4.4
Fair value of interests held at December 31, 2011
$
12,918
Expected weighted-average life (in years)
5.1
230
4.6
$
$
Key economic assumptions:
Prepayment speed assumption (3)
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
Cost to service assumption ($ per loan)
Decrease in fair value from:
10% adverse change
25% adverse change
Credit loss assumption
Decrease in fair value from:
10% higher losses
25% higher losses
14.8 %
10.7
6.9
13.9
895
2,105
6
15
-
1
2
4
7.1 %
15.6
11.9
7.1
3.8
2.4
6
12
2
4
12
24
9
18
31
59
566
1,081
218
582
1,457
0.5 %
4.5
10.7
$
-
-
1
2
8
18
-
-
-
(1) December 31, 2011, has been revised to report only the sensitivities for residential mortgage servicing rights. See narrative following this table for a discussion of
commercial mortgage servicing rights.
(2) “Other interests held” has been expanded to include retained interests from commercial securitizations. Prepayment speed assumptions do not significantly impact the value
of commercial mortgage securitization bonds as the underlying commercial mortgage loans experience significantly lower prepayments due to certain contractual
restrictions, impacting the borrower’s ability to prepay the mortgage.
(3) The prepayment speed assumption for residential mortgage servicing rights includes a blend of prepayment speeds and default rates. Prepayment speed assumptions are
influenced by mortgage interest rate inputs as well as our estimation of drivers of borrower behavior.
176
-
-
-
-
-
-
-
-
-
-
-
321
5.6
In addition to residential mortgage servicing rights (MSRs)
included in the previous table, we have a small portfolio of
commercial MSRs with a fair value of $1.4 billion at
December 31, 2012, and December 31, 2011. The nature of our
commercial MSRs, which are carried at LOCOM, is different
from our residential MSRs. Prepayment activity on serviced
loans does not significantly impact the value of commercial
MSRs because, unlike residential mortgages, commercial
mortgages experience significantly lower prepayments due to
certain contractual restrictions, impacting the borrower’s ability
to prepay the mortgage. Additionally, for our commercial MSR
portfolio, we are typically master/primary servicer, but not the
special servicer, who is separately responsible for the servicing
and workout of delinquent and foreclosed loans. It is the special
servicer, similar to our role as servicer of residential mortgage
loans, who is affected by higher servicing and foreclosure costs
due to an increase in delinquent and foreclosed loans.
Accordingly, prepayment speeds and costs to service are not key
assumptions for commercial MSRs as they do not significantly
impact the valuation. The primary economic driver impacting
the fair value of our commercial MSRs is forward interest rates,
which are derived from market observable yield curves used to
price capital markets instruments. Market interest rates most
significantly affect interest earned on custodial deposit balances.
The sensitivity of the current fair value to an immediate adverse
25% change in the assumption about interest earned on deposit
balances at December 31, 2012, and 2011, results in a decrease in
fair value of $139 million and $219 million, respectively. See
Note 9 for further information on our commercial MSRs.
The sensitivities in the preceding paragraph and table are
hypothetical and caution should be exercised when relying on
this data. Changes in value based on variations in assumptions
generally cannot be extrapolated because the relationship of the
change in the assumption to the change in value may not be
linear. Also, the effect of a variation in a particular assumption
on the value of the other interests held is calculated
independently without changing any other assumptions. In
reality, changes in one factor may result in changes in others (for
example, changes in prepayment speed estimates could result in
changes in the credit losses), which might magnify or counteract
the sensitivities.
The following table presents information about the principal
balances of off-balance sheet securitized loans, including
residential mortgages sold to FNMA, FHLMC, 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.
(in millions)
Commercial:
Real estate mortgage
Total commercial
Consumer:
Total loans
Delinquent loans
Year ended
December 31,
December 31,
December 31,
2012
2011
2012
2011
2012
2011
Net charge-offs
$
128,564
137,121
12,216
11,142
128,564
137,121
12,216
11,142
541
541
569
569
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Other revolving credit and installment
1,283,504 1,171,666
2
1
21,574
-
24,235
-
1,170
-
1,506
16
2,034
2,271
110
131
-
-
Total consumer
1,285,539 1,173,939
21,684
24,366
1,170
1,522
Total off-balance sheet securitized loans (1)
$
1,414,103 1,311,060
33,900
35,508
1,711
2,091
(1) At December 31, 2012 and 2011, the table includes total loans of $1.3 trillion and $1.2 trillion, respectively, and delinquent loans of $17.4 billion and $19.7 billion,
respectively for FNMA, FHLMC and GNMA. 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.
177
Note 8: Securitizations and Variable Interest Entities (continued)
Transactions with Consolidated VIEs and Secured
Borrowings
The following table presents a summary of transfers of financial
assets accounted for as secured borrowings and involvements
with consolidated VIEs. “Consolidated assets” are presented
using GAAP measurement methods, which may include fair
value, credit impairment or other adjustments, and therefore in
some instances will differ from “Total VIE assets.” 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, 2012
Secured borrowings:
Total
VIE
assets
Consolidated
assets
Third
party
liabilities
Noncontrolling
interests
Net
assets
Carrying value
Municipal tender option bond securitizations
$
16,782
15,130
(13,248)
Commercial real estate loans
Residential mortgage securitizations
975
5,757
975
6,240
(696)
(5,824)
Total secured borrowings
23,514
22,345
(19,768)
Consolidated VIEs:
Nonconforming residential
mortgage loan securitizations
Multi-seller commercial paper conduit
Auto loan securitizations
Structured asset finance
Investment funds
Other
8,633
2,059
-
71
1,837
3,454
7,707
2,036
-
71
1,837
2,974
(2,933)
(2,053)
-
(17)
(2)
(1,438)
Total consolidated VIEs
16,054
14,625
(6,443)
Total secured borrowings and consolidated VIEs
$
39,568
36,970
(26,211)
December 31, 2011
Secured borrowings:
Municipal tender option bond securitizations
$
14,168
11,748
(10,689)
Commercial real estate loans
Residential mortgage securitizations
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
2,860
163
124
2,012
3,432
10,244
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)
Total secured borrowings and consolidated VIEs
$
41,007
37,245
(27,009)
-
-
-
-
-
-
-
-
-
(48)
(48)
(48)
-
-
-
-
-
-
-
-
-
(61)
(61)
(61)
1,882
279
416
2,577
4,774
(17)
-
54
1,835
1,488
8,134
10,711
1,059
127
355
1,541
5,730
(75)
20
108
1,990
861
8,634
10,175
In addition to the transactions included in the previous table,
at both December 31, 2012, and 2011, we had approximately
$6.0 billion of private placement debt financing issued through a
consolidated VIE. The issuance is classified as long-term debt in
our consolidated financial statements. At December 31, 2012,
and 2011, we pledged approximately $6.4 billion and $6.2 billion
in loans (principal and interest eligible to be capitalized),
$179 million and $316 million in securities available for sale, and
$138 million and $154 million in cash and cash equivalents to
collateralize the VIE’s borrowings, respectively. These 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
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
178
of commercial paper issued by the conduit and is described
further below.
MUNICIPAL TENDER OPTION BOND SECURITIZATIONS As part
of our normal portfolio investment activities, we consolidate
municipal bond trusts that hold highly rated, long-term, fixed-
rate municipal bonds, the majority of which are rated AA or
better. Our residual interests in these trusts generally allow us to
capture the economics of owning the securities outright, and
constructively make decisions that significantly impact the
economic performance of the municipal bond vehicle, primarily
by directing the sale of the municipal bonds owned by the
vehicle. In addition, the residual interest owners have the right
to receive benefits and bear losses that are proportional to
owning the underlying municipal bonds in the trusts. The trusts
obtain financing by issuing floating-rate trust certificates that
reprice on a weekly or other basis to third-party investors. Under
certain conditions, if we elect to terminate the trusts and
withdraw the underlying assets, the third party investors are
entitled to a small portion of any unrealized gain on the
underlying assets. We may serve as remarketing agent and/or
liquidity provider for the trusts. The floating-rate investors have
the right to tender the certificates at specified dates, often with
as little as seven days’ notice. Should we be unable to remarket
the tendered certificates, we are generally obligated to purchase
them at par under standby liquidity facilities unless the bond’s
credit rating has declined below investment grade or there has
been an event of default or bankruptcy of the issuer and insurer.
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.
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. 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. We
consolidate these VIEs because we have discretion over the
management of the assets and are the sole investor in these
funds.
179
Note 9: Mortgage Banking Activities
Mortgage banking activities, included in the Community
Banking and Wholesale Banking operating segments, consist of
residential and commercial mortgage originations, sale activity
and servicing.
(in millions)
Fair value, beginning of year
Adjustments from adoption of consolidation accounting guidance
Servicing from securitizations or asset transfers (1)
Sales
Net additions
Changes in fair value:
Due to changes in valuation model inputs or assumptions:
Mortgage interest rates (2)
Servicing and foreclosure costs (3)
Discount rates (4)
Prepayment estimates and other (5)
Net changes in valuation model inputs or assumptions
Other changes in fair value (6)
Total changes in fair value
Fair value, end of year
We apply the amortization method to all commercial MSRs
and apply the fair value method to only residential MSRs. The
changes in MSRs measured using the fair value method were:
Year ended December 31,
2012
2011
2010
$
12,603
14,467
16,004
-
-
(118)
5,182
3,957
4,092
(293)
-
-
4,889
3,957
3,974
(2,092)
(3,749)
(1,944)
(677)
(397)
273
(694)
(150)
913
(1,095)
(387)
469
(2,893)
(3,680)
(2,957)
(3,061)
(2,141)
(2,554)
(5,954)
(5,821)
(5,511)
$
11,538
12,603
14,467
(1) The year ended December 31, 2012, includes $315 million residential MSRs transferred from amortized MSRs that we elected to carry at fair value effective January 1, 2012.
(2) Primarily represents prepayment speed changes due to changes in mortgage interest rates, but also includes other valuation changes due to changes in mortgage interest
rates (such as changes in estimated interest earned on custodial deposit balances).
(3) Includes costs to service and unreimbursed foreclosure costs.
(4) Reflects discount rate assumption change, excluding portion attributable to changes in mortgage interest rates; the year ended December 31, 2012, change predominantly
reflects increased capital return requirements from market participants.
(5) Represents changes driven by other valuation model inputs or assumptions including prepayment speed estimation changes and other assumption updates. Prepayment
speed estimation changes are influenced by observed changes in borrower behavior that occur independent of interest rate changes.
(6) 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
Servicing from securitizations or asset transfers (1)
Amortization (2)
Balance, end of year (2)
Valuation allowance:
Balance, beginning of year
Reversal of provision (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,
2012
2011
2010
$
1,445
1,422
1,119
-
177
(229)
(233)
-
155
132
(264)
(5)
58
478
(228)
1,160
1,445
1,422
(37)
37
-
(3)
(34)
(37)
-
(3)
(3)
$
1,160
1,408
1,419
$
1,756
1,400
1,812
1,756
1,261
1,812
(1) The year ended December 31, 2012, is net of $350 million ($313 million after valuation allowance) of residential MSRs that we elected to carry at fair value effective
January 1, 2012. A cumulative adjustment of $2 million to fair value was recorded in retained earnings at January 1, 2012.
(2) Includes $350 million and $400 million in residential amortized MSRs at December 31, 2011 and 2010, respectively. For the years ended December 31, 2011 and 2010, the
residential MSR amortization was $(50) million and $(5) million, respectively.
(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. For the year ended December 31, 2012, valuation allowance of $37 million for
residential MSRs was reversed upon election to carry at fair value.
(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. The December 31, 2012, balance is all commercial amortized MSRs.
180
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,
2012
2011
$
1,498
1,456
368
7
358
8
1,873
1,822
408
106
13
527
398
106
14
518
$
$
2,400
2,340
1,906
0.67 %
1,854
0.76
Year ended December 31,
2012
2011
2010
$
4,626
4,611
4,566
257
342
298
354
360
434
(1,234)
(1,119)
(763)
3,991
4,144
4,597
(2,893)
(3,680)
(2,957)
(3,061)
(2,141)
(2,554)
(5,954)
(233)
(5,821)
(264)
(5,511)
(228)
-
3,574
(34)
5,241
(3)
4,485
1,378
3,266
3,340
10,260
4,566
6,397
11,638
7,832
9,737
681
1,561
1,528
$
$
(1) Primarily associated with foreclosure expenses and certain interest costs.
(2) Refer to the changes in fair value of MSRs table in this Note for more detail.
(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.
181
Note 9: Mortgage Banking Activities (continued)
The table below summarizes the changes in our liability for
mortgage loan repurchase losses. This liability is in “Accrued
expenses and other liabilities” in our consolidated financial
statements and the provision for repurchase losses reduces net
gains on mortgage loan origination/sales activities. 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, the
Federal Housing Finance Agency (FHFA), and other significant
investors to monitor their repurchase demand practices and
issues as part of our process to update our repurchase liability
estimate as new information becomes available. 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 is 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 $2.4 billion at
December 31, 2012, and was determined based upon modifying
the assumptions (particularly to assume significant changes in
investor repurchase demand practices) 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,
2012
2011
2010
Balance, beginning of year
$
1,326
1,289
1,033
Provision for repurchase losses:
Loan sales
Change in estimate (1)
Total additions
Losses
275
1,665
101
1,184
144
1,474
1,940
1,285
1,618
(1,060) (1,248) (1,362)
Balance, end of year
$
2,206
1,326
1,289
(1) Results from such factors as changes in investor demand and mortgage insurer
practices, credit deterioration and changes in the financial stability of
correspondent lenders.
182
Note 10: Intangible Assets
The gross carrying value of intangible assets and accumulated amortization was:
(in millions)
Amortized intangible assets (1):
MSRs (2)
Core deposit intangibles
Customer relationship and other intangibles
December 31, 2012
December 31, 2011
Gross
Net
carrying Accumulated carrying
Gross
carrying
Accumulated
Net
carrying
value amortization
value
value
amortization
value
$
2,317
(1,157)
1,160
12,836
3,147
(6,921)
5,915
(1,795)
1,352
2,383
15,079
3,158
(975)
(7,768)
1,408
7,311
(1,519)
1,639
Total amortized intangible assets
$
18,300
(9,873)
8,427
20,620
(10,262)
10,358
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.
$
11,538
25,637
14
12,603
25,115
14
We based our projections of amortization expense shown
below on existing asset balances at December 31, 2012. Future
amortization expense may vary from these projections.
The following table provides the current year and estimated
future amortization expense for amortized intangible assets.
(in millions)
Year ended December 31, 2012 (actual)
Estimate for year ended December 31,
2013
2014
2015
2016
2017
Customer
Core
relationship
Amortized
deposit
and other
MSRs
intangibles
intangibles
Total
$
$
233
1,396
286
1,915
235
204
178
145
101
1,241
1,113
1,022
919
851
267
251
227
212
195
1,743
1,568
1,427
1,276
1,147
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.
(in millions)
December 31, 2010
Reduction in goodwill related to divested businesses
Goodwill from business combinations
December 31, 2011
Goodwill from business combinations
December 31, 2012
Community
Wholesale Brokerage and
Consolidated
Banking
Banking
Retirement
Company
Wealth,
$
17,922
6,475
-
2
(9)
354
17,924
6,820
(2)
524
$
17,922
7,344
373
(2)
-
371
-
371
24,770
(11)
356
25,115
522
25,637
183
Note 11: Deposits
Time certificates of deposit (CDs) and other time deposits issued
by domestic and foreign offices totaled $90.1 billion and
$99.6 billion at December 31, 2012 and 2011, respectively.
Substantially all of these deposits were interest bearing. The
contractual maturities of these deposits follow.
Of these deposits, the amount of domestic time deposits with
a denomination of $100,000 or more was $23.7 billion and
$25.1 billion at December 31, 2012 and 2011, respectively. The
contractual maturities of these deposits follow.
(in millions)
December 31, 2012
(in millions)
2013
2014
2015
2016
2017
Thereafter
Total
December 31, 2012
Three months or less
$
56,921
After three months through six months
After six months through twelve months
After twelve months
Total
$
3,460
3,840
5,582
10,821
$
23,703
11,119
9,078
6,418
2,612
3,959
$
90,107
Time CDs and other time deposits issued by foreign offices
with a denomination of $100,000 or more were $11.7 billion and
$13.6 billion at December 31, 2012 and 2011, respectively.
Demand deposit overdrafts of $806 million and $649 million
were included as loan balances at December 31, 2012 and 2011,
respectively.
Note 12: Short-Term Borrowings
The table below shows selected information for short-term
borrowings, which generally mature in less than 30 days. We
pledge certain financial instruments that we own to collateralize
repurchase agreements and other securities financings. For
additional information, see the “Pledged Assets and Collateral”
section of Note 14.
(in millions)
As of December 31,
Commercial paper and other short-term borrowings
Federal funds purchased and securities sold
2012
2011
2010
Amount
Rate
Amount
Rate
Amount
Rate
$
22,202
0.18 % $
18,053
0.19 % $
17,454
0.26 %
under agreements to repurchase
34,973
0.17
31,038
0.05
37,947
0.15
Total
Year ended December 31,
Average daily balance
$
57,175
0.17 $
49,091
0.10 $
55,401
0.19
Commercial paper and other short-term borrowings
$
19,104
0.28 $
17,393
0.33 $
16,330
0.31
Federal funds purchased and securities sold
under agreements to repurchase
32,092
0.12
34,388
0.11
30,494
0.18
Total
$
51,196
0.18 $
51,781
0.18 $
46,824
0.22
Maximum month-end balance
Commercial paper and other short-term borrowings (1)
Federal funds purchased and securities sold
$
22,202
N/A $
18,234
N/A $
17,646
N/A
under agreements to repurchase (2)
36,327
N/A
37,509
N/A
37,947
N/A
N/A- Not Applicable
(1) Highest month-end balance in each of the last three years was December 2012, April 2011 and March 2010.
(2) Highest month-end balance in each of the last three years was June 2012, March 2011 and December 2010.
184
Note 13: Long-Term Debt
We issue long-term debt denominated in multiple currencies,
predominantly in U.S. dollars. Our issuances have both fixed and
floating interest rates. As a part of our overall interest rate risk
management strategy, we often use derivatives to manage our
exposure to interest rate risk. We also use derivatives to manage
our exposure to foreign currency risk. As a result, the long-term
debt presented below is primarily 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 carrying
values, reflecting unamortized debt discounts and premiums,
and purchase accounting adjustments for debt assumed in the
Wachovia acquisition, where applicable. The interest rates
displayed represent the range of contractual rates in effect at
December 31, 2012. These interest rates do not include the
effects of any associated derivatives designated in a hedge
accounting relationship.
(in millions)
Wells Fargo & Company (Parent only)
Senior
Fixed-rate notes
Floating-rate notes
Structured notes (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
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
Floating-rate extendible notes (4)
Fixed-rate advances - Federal Home Loan Bank (FHLB)
Floating-rate advances - FHLB
Structured notes (2)
Capital leases (Note 7)
Total senior debt - Bank
Subordinated
Fixed-rate notes
Floating-rate notes
Total subordinated debt - Bank
Junior subordinated
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,
2012
2011
2013-2035
2013-2048
2013-2052
1.25-6.75% $
0.059-3.480
44,623
10,996
3,633
38,002 (1)
17,872 (1)
1,359
59,252
57,233
2013-2035
2015-2016
4.375-7.574%
11,340
0.653-0.710
1,165
12,041
1,141
2029-2068
2027
5.625-7.950%
0.840-1.340
2013
2017-2040
2014
2013-2031
2013
2013-2025
2013-2023
6.00%
0.06-0.53
0.359-0.380
3.83 - 8.17
0.403-0.411
12,505
13,182
4,221
255
4,476
6,951
247
7,198
76,233
77,613
1,331
170
4,450
216
2,002
163
12
8,344
1,326
72
-
500
2,101
238
116
4,353
2013-2038
2014-2017
4.75-7.74%
14,153
0.520-3.652
1,617
15,882
1,976
2027
0.88-0.99%
2013-2052
2020-2052
2013-2062
0.00-7.00%
0.339-31.835
15,770
17,858
294
294
1,542
1,826
286
286
2,103
2,748
0.00-12.50
16,976
14,854
44,752
42,202
185
Note 13: Long-Term Debt (continued)
(continued from previous page)
December 31,
2012
2011
(in millions)
Other consolidated subsidiaries
Senior
Fixed-rate notes
FixFloat notes
Maturity
date(s)
Stated
interest rate(s)
2013-2019
2.774-4.38%
5,968
2020
6.795% through 2015, varies
20
Total senior debt - Other consolidated subsidiaries
5,988
5,154
20
5,174
Junior subordinated
Floating-rate 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
2027
0.813%
155
155
2015-2023
2015
2013-2018
5.16-6.34%
1.606
3.50-6.00
155
105
10
136
155
81
-
129
Total long-term debt - Other consolidated subsidiaries
Total long-term debt
6,394
5,539
$
127,379
125,354
(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 that matured on
June 15, 2012. These notes were guaranteed under the Federal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program (TLGP) and were backed by
the full faith and credit of the United States.
(2) A significant portion 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. In addition, a
major portion consists of zero coupon callable notes where interest is paid as part of the final redemption amount.
(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.
(4) Represents floating-rate extendible notes where holders of the notes may elect to extend the contractual maturity of all or a portion of the principal amount on a periodic
basis. The maturity of the notes may not be extended beyond 2018.
The aggregate carrying value of long-term debt that matures
(based on contractual payment dates) as of December 31, 2012,
in each of the following five years and thereafter, is presented in
the following table.
(in millions)
2013
2014
2015
2016
2017
Thereafter
Total
Parent
Company
$
10,192
15,961
7,821
15,579
8,582
12,763
13,510
17,864
9,283
13,454
26,845
51,758
$
76,233
127,379
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, 2012, we were in compliance with all the
covenants.
186
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 related non-investment grade amounts.
2012
December 31,
2011
Maximum exposure to loss
Maximum exposure to loss
Carrying
investment
Carrying
Non-
Non-
investment
(in millions)
value
Total
grade
value
Total
grade (1)
Standby letters of credit (2)
$
42
39,759
11,331
85
41,171
13,250
Securities lending and other indemnifications
Liquidity agreements (3)
Written put options (3)(4)
Loans and MHFS sold with recourse
Residual value guarantees
Contingent consideration
Other guarantees
Total guarantees
-
-
1,427
99
-
35
3
2,541
3
11,874
5,873
-
129
1,421
118
3
3,953
3,905
-
129
4
-
-
1,469
102
8
31
6
669
2
8,224
5,784
197
98
552
62
2
2,466
3,850
-
97
4
$
1,606
61,600
19,443
1,701
56,697
19,731
(1) Amounts have been revised from what was previously reported to reflect better alignment of our internal rating process to external noninvestment grade ratings.
(2) Total maximum exposure to loss includes direct pay letters of credit (DPLCs) of $18.5 billion and $19.7 billion at December 31, 2012 and 2011, respectively. We issue DPLCs
to provide credit enhancements for certain bond issuances. Beneficiaries (bond trustees) may draw upon these instruments to make scheduled principal and interest
payments, redeem all outstanding bonds because a default event has occurred, or for other reasons as permitted by the agreement. We also originate multipurpose lending
commitments under which borrowers have the option to draw on the facility in one of several forms, including as a standby letter of credit. Total maximum exposure to loss
includes the portion of these facilities for which we have issued standby letters of credit under the commitments.
(3) Certain of these agreements included in this table are related to off-balance sheet entities and, accordingly, are also disclosed in Note 8.
(4) 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. Maximum exposure to loss estimates in the table above
do not reflect economic hedges or collateral we could use to
offset or recover losses we may incur under our guarantee
agreements. 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. Standby letters of
credit include direct pay letters of credit we issue to provide
credit enhancements for certain bond issuances. The terms of
our standby letters of credit are predominantly five years or less.
SECURITIES LENDING AND OTHER INDEMNIFICATIONS As a
securities lending agent, we lend debt and equity securities from
participating institutional clients’ portfolios to third-party
borrowers. These arrangements are for an indefinite period of
time whereby we indemnify our clients against default by the
borrower in returning these lent securities. This indemnity is
supported by collateral received from the borrowers and is
generally in the form of cash or highly liquid securities that are
marked to market daily. Substantially all of these securities are
returned to our clients within one year from trade date. There
was $443 million at December 31, 2012, and $687 million at
December 31, 2011, in collateral supporting loaned securities
with values of $436 million and $669 million, respectively.
Commencing third quarter 2012, we began using certain
third party clearing agents to clear and settle transactions on
187
Note 14: Guarantees, Pledged Assets and Collateral (continued)
behalf of some of our institutional brokerage customers. We
indemnify the clearing agents against loss that could occur for
non-performance by our customers on transactions that are not
sufficiently collateralized. These arrangements are for an
indefinite period. Transactions subject to the indemnifications
may include customer obligations related to the settlement of
margin accounts and short positions, such as written call options
and securities borrowing transactions. Outstanding customer
obligations and related collateral were $579 million and $3.1
billion, respectively, as of December 31, 2012. Our estimate of
maximum exposure to loss, which requires judgment regarding
the range and likelihood of future events, was $2.1 billion as of
December 31, 2012.
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 expect to repurchase pursuant to various
representations and warranties. See Note 9 for additional
information on the liability for mortgage loan repurchase losses.
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. The
terms of our written put options are largely five years or less. See
Note 8 for additional information regarding transactions with
VIEs and Note 16 for additional information regarding written
derivative contracts.
188
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. Our recourse arrangements remain in
effect as long as the loans are outstanding, which predominantly
have remaining terms in excess of five years. During 2012, we
repurchased $26 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
corporate assets. 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. In November 2012,
the purchase options on the leasing transactions related to these
residual value guarantees were exercised; therefore we no longer
have any exposure related to these guarantees.
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.
OTHER GUARANTEES We are members of exchanges and
clearing houses that we use to clear our trades and those of our
customers. It is common that all members in these organizations
are required to collectively guarantee the performance of other
members. Our obligations under the guarantees are based on
either a fixed amount or a multiple of the collateral we are
required to maintain with these organizations. We have not
recorded a liability for these arrangements as of the dates
presented in the previous table because we believe the likelihood
of loss is remote.
We also have contingent performance arrangements related
to various customer relationships and lease transactions. We are
required to pay the counterparties to these agreements if third
parties default on certain obligations.
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, 2012, and 2011, 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)
December 31,
2012
2011
Securities available for sale
Loans
$
96,018
360,171
80,540
317,742
Total
$
456,189
398,282
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
$27.4 billion at December 31, 2012, and $20.8 billion at
December 31, 2011, under agreements that permit the secured
parties to sell or repledge the collateral. Pledged collateral where
the secured party cannot sell or repledge was $677 million and
$2.8 billion at the same period ends, respectively.
We receive collateral from other entities under short-term
(generally less than one year) and long-term resale agreements
and securities borrowings. At December 31, 2012 and 2011, we
have received $46.6 billion and $31.1 billion, respectively, in
collateral that we have the right to sell or repledge, of which
$15.5 billion and $13.3 billion, respectively, are for long-term
resale agreements. These amounts include securities we have
sold or repledged to others with a fair value of $29.7 billion at
December 31, 2012, and $16.7 billion at December 31, 2011.
189
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.
FHA INSURANCE LITIGATION On October 9, 2012, the United
States filed a complaint, captioned United States of America v.
Wells Fargo Bank, N.A., in the U.S. District Court for the
Southern District of New York. The complaint makes claims with
respect to Wells Fargo’s Federal Housing Administration (FHA)
lending program for the period 2001 to 2010. The complaint
alleges, among other allegations, that Wells Fargo improperly
certified certain FHA mortgage loans for United States
Department of Housing and Urban Development (HUD)
insurance that did not qualify for the program, and therefore
Wells Fargo should not have received insurance proceeds from
HUD when some of the loans later defaulted. The complaint
further alleges Wells Fargo knew some of the mortgages did not
qualify for insurance and did not disclose the deficiencies to
HUD before making insurance claims. On December 1, 2012,
Wells Fargo filed a motion in the U.S. District Court for the
District of Columbia seeking to enforce a release of Wells Fargo
given by the United States, which was denied on
February 12, 2013. On December 14, 2012, the United States
filed an amended complaint. On January 16, 2013, Wells Fargo
filed a motion in the Southern District of New York to dismiss
the amended complaint.
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 U.S. 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
190
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. On July 13, 2012, Visa, MasterCard and
the financial institution defendants, including Wells Fargo,
signed a memorandum of understanding with plaintiff
merchants to resolve the consolidated class actions and reached
a separate settlement in principle of the consolidated individual
actions. The proposed settlement payments by all defendants in
the consolidated class and individual actions total approximately
$6.6 billion. The class settlement also provides for the
distribution to class merchants of 10 basis points of default
interchange across all credit rate categories for a period of eight
consecutive months. The Court has granted preliminary
approval of the settlements. The settlements are subject to
further review and approval by the Court.
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
U.S. 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. A previously disclosed potential settlement of the case was
not consummated and the case is in discovery.
MARYLAND MORTGAGE LENDING LITIGATION On December
26, 2007, a class action complaint captioned Denise Minter, et
al., v. Wells Fargo Bank, N.A., et al., was filed in the U.S.
District Court for the District of Maryland. The complaint alleges
that Wells Fargo and others violated provisions of the Real
Estate Settlement Procedures Act and other laws by conducting
mortgage lending business improperly through a general
partnership, Prosperity Mortgage Company. The complaint
asserts that Prosperity Mortgage Company was not a legitimate
affiliated business and instead operated to conceal Wells Fargo
Bank, N.A.’s role in the loans at issue. A plaintiff class of
borrowers who received a mortgage loan from Prosperity that
was funded by Prosperity’s line of credit with Wells Fargo Bank,
N.A. from 1993 to May 31, 2012 has been certified. The Court has
scheduled a trial in this case for May 6, 2013. A second, related
case is also pending in the same Court. On July 8, 2008, a class
action complaint captioned Stacey and Bradley Petry, et al., v.
Wells Fargo Bank, N.A., et al., was filed. The complaint alleges
that Wells Fargo and others violated the Maryland Finder’s Fee
Act in the closing of mortgage loans in Maryland. The Court
certified a plaintiff class of borrowers whose loans are secured by
Maryland real property, which loans showed Prosperity
Mortgage Company as the lender receiving a fee for services, and
were funded through a Wells Fargo line of credit to Prosperity
from 1993 to May 31, 2012. The Court has scheduled a trial in
this case for March 18, 2013.
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) and the Federal Home Loan
Mortgage Corporation (Freddie Mac).
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
ParibasSecurities 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. 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.
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 were brought in state and federal courts. All eight cases
have been dismissed or otherwise resolved.
MORTGAGE RELATED REGULATORY INVESTIGATIONS
Government agencies and authorities continue investigations or
examinations of certain mortgage related practices of Wells
Fargo. Wells Fargo, for itself and for predecessor institutions,
has responded, and continues to respond, to requests from
government agencies seeking information regarding the
origination, underwriting and securitization of residential
mortgages, including sub-prime mortgages. On
February 24, 2012, Wells Fargo received a Wells Notice from
SEC Staff relating to Wells Fargo’s disclosures in mortgage-
backed securities offering documents. On November 20, 2012,
the SEC Staff advised Wells Fargo it did not intend to take action
on the subject matter of the Wells Notice.
IN RE MUNICIPAL DERIVATIVES ANTITRUST LITIGATION
Wachovia Bank, along with several other banks and financial
services companies, was named as a defendant beginning in
April 2008 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 alleged anticompetitive activity of the defendants.
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 received final
approval on December 14, 2012. A number of municipalities
have opted out of the settlement, but the remaining potential
claims are not material.
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
191
Note 15: Legal Actions (continued)
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 appealed the decision to
the U.S. Court of Appeals for the Eleventh Circuit. On October
26, 2012, the Eleventh Circuit affirmed the District Court’s
denial of the motion.
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. On December 26, 2012, the Ninth Circuit reversed the
order requiring Wells Fargo to change its order of posting and
vacated the portion of the order granting remediation of
approximately $203 million on the grounds of federal pre-
emption. The Ninth Circuit affirmed the District Court’s finding
that Wells Fargo violated a California state law prohibition on
fraudulent representations and remanded the case to the District
Court for further proceedings.
SECURITIES LENDING LITIGATION Wells Fargo Bank, N.A. is
involved in several separate pending actions brought by
securities lending customers of Wells Fargo and Wachovia Bank
in various courts. In general, each of the cases alleges that Wells
Fargo violated fiduciary and contractual duties by investing
collateral for loaned securities in investments that suffered
losses. In addition, on March 27, 2012, a class of Wells Fargo
securities lending customers was certified in a case captioned
City of Farmington Hills Employees Retirement System v. Wells
Fargo Bank, N.A., which is pending in the U.S. District Court for
the District of Minnesota. Wells Fargo sought interlocutory
review of the class certification in the U.S. Court of Appeals for
the Eighth Circuit. The Eighth Circuit declined such review on
May 7, 2012.
OUTLOOK When establishing a liability for contingent litigation
losses, the Company determines a range of potential losses for
each matter that is both probable and estimable, and records the
amount it considers to be the best estimate within the range. The
high end of the range of reasonably possible potential litigation
losses in excess of the Company’s liability for probable and
estimable losses was $1.0 billion as of December 31, 2012. 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.
192
Note 16: Derivatives
We primarily use derivatives to manage exposure to market risk,
interest rate risk, credit risk and foreign currency risk, and to
assist customers with their risk management objectives. We
designate derivatives either as hedging instruments in a
qualifying hedge accounting relationship (fair value or cash flow
hedge) or as free-standing derivatives. Free-standing derivatives
include economic hedges that do not qualify for hedge
accounting and derivatives held for customer accommodation or
other trading purposes.
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 free-standing derivatives
(economic hedges) 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 reflected in other comprehensive income and not in
earnings.
We also offer various derivatives, including interest rate,
commodity, equity, credit and foreign exchange contracts, to our
customers as part of our trading businesses but usually offset our
exposure from such contracts by entering into other financial
contracts. These derivative transactions are conducted in an
effort to help customers manage their market price risks. The
customer accommodations and any offsetting derivative
contracts are treated as free-standing derivatives. To a much
lesser extent, we take positions executed for our own account
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 our derivatives. Derivative
transactions can be 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. Derivatives designated as
qualifying hedge contracts and free-standing derivatives
(economic hedges) are recorded on the balance sheet at fair
value 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,
other assets or other liabilities.
193
Note 16: Derivatives (continued)
2012
Fair value
Notional or
December 31,
2011
Fair value
Asset
Liability
contractual
Asset
Liability
Notional or
contractual
(in millions)
amount
derivatives derivatives
amount derivatives derivatives
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
$
92,004
27,382
7,284
1,808
2,696
274
87,537
22,269
8,423
1,523
2,769
572
9,092
2,970
9,946
3,341
334,555
450
694
377,497
2,318
2,011
75
3,074
16
2,296
-
3
-
-
50
64
-
78
-
5,833
125
2,367
-
250
3
-
-
3
-
117
453
886
2,571
2,131
2,774,783
63,617
65,305
2,425,144
81,336
83,834
90,732
71,958
166,061
26,455
29,021
3,456
3,783
3,713
315
1,495
3,590
4,114
3,241
2,623
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
Subtotal
76,379
79,202
96,179
99,986
Total derivatives not designated as hedging instruments
76,832
80,088
98,750
102,117
Total derivatives before netting
85,924
83,058
108,696
105,458
Netting (3)
Total
(62,108)
(71,116)
(81,143)
(89,990)
$
23,816
11,942
27,553
15,468
(1) Notional amounts presented exclude $4.7 billion at December 31, 2012, and $15.5 billion at December 31, 2011, 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, loans 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 $5.0 billion and $14.5 billion, respectively, at December 31, 2012, and $6.6 billion and $15.4 billion,
respectively, at December 31, 2011.
194
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, cross-
currency swaps, cross-currency 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.
Interest rate
Foreign exchange Total net
contracts hedging:
contracts hedging:
gains
Securities Mortgages
Securities
available
held Long-term
available
Long-term
(losses)
on fair
value
(in millions)
for sale
for sale
debt
for sale
debt
hedges
Year ended December 31, 2012
Gains (losses) recorded in net interest income
$
(457)
(4)
1,685
(5)
248
1,467
Gains (losses) recorded in noninterest income
Recognized on derivatives
Recognized on hedged item
(22)
17
(15)
(179)
6
233
Recognized on fair value hedges (ineffective portion) (1) $
(5)
(9)
54
39
(3)
36
567
390
(610)
(357)
(43)
33
Year ended December 31, 2011
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)
1,232
(21)
2,796
17
(2,616)
Recognized on fair value hedges (ineffective portion) (1)
$
(66)
(4)
180
168
(186)
(18)
512
2,157
(445)
(1,998)
67
159
(1) Included $(9) million and $53 million, respectively, for year ended December 31, 2012 and 2011, of gains (losses) on forward derivatives hedging foreign currency securities
available for sale and long-term debt, representing the portion of derivative gains (losses) excluded from the assessment of hedge effectiveness (time value).
195
Note 16: Derivatives (continued)
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
$350 million (pre tax) of deferred net gains on derivatives in OCI
at December 31, 2012, 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 5 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 (pre tax) recognized in OCI on derivatives
Gains (pre tax) reclassified from cumulative OCI into net income (1)
Losses (pre tax) recognized in noninterest income on derivatives (2)
(1) Amounts were recorded in net interest income and noninterest expense.
(2) None of the change in value of the derivatives was excluded from the assessment of hedge effectiveness.
Year ended
December 31,
2012
2011
52
388
(1)
190
571
(5)
$
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 certain residential MHFS, certain loans held
for investment, residential MSRs measured at fair value,
derivative loan commitments and other interests held. The
resulting gain or loss on these economic hedges is reflected in
mortgage banking noninterest income and other noninterest
income. 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.
The derivatives used to hedge 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 $3.6 billion in 2012
and $5.2 billion in 2011, which are included in mortgage banking
noninterest income. The aggregate fair value of these derivatives
was a net asset of $87 million at December 31, 2012, and a net
asset of $1.4 billion at December 31, 2011. The change in fair
value of these derivatives for each period end is due to changes
in the underlying market indices and interest rates as well as the
purchase and sale of derivative financial instruments throughout
the period as part of our dynamic MSR risk management
process.
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
196
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 $497 million at
December 31, 2012, and a net asset of $478 million at
December 31, 2011, 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
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)
Equity contracts (2)
Foreign exchange 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,
2012
2011
$
(1,882)
2
4
(53)
(15)
246
(157)
(5)
70
(18)
(1,944)
136
7,222
3,594
589
(14)
(234)
501
(54)
-
298
124
769
698
(200)
(5)
8,010
5,278
$
6,066
5,414
(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.
the special purpose vehicle for which we have provided liquidity
to obtain funding.
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
197
Note 16: Derivatives (continued)
The following table provides details of sold and purchased credit derivatives.
(in millions)
December 31, 2012
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-
backed securities index
Asset-backed securities index
Other
Notional amount
Protection
sold -
non-
Protection
purchased
Net
with protection
Other
Fair value
Protection investment
identical
sold protection
Range of
liability
sold (A)
grade underlyings (B)
(A) - (B) purchased maturities
$
240
15,845
1,787
2,433
8,448
2,039
9,636
948
6,209
1,485
7,701 2013-2021
393 2016-2056
4
3,520
348
3,444
76
616 2013-2017
531
1,249
64
861
64
790
6
459
58
524 2049-2052
92 2037-2046
3,344
3,344
106
3,238
4,655 2013-2056
57
4
Total credit derivatives
$
2,623
26,455
15,104
14,930
11,525
13,981
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
Other
$
1,002
3,308
24,634
14,043
13,329
11,305
9,404
2012-2021
4,691
4,300
2,194
2,497
1,335
2016-2056
68
713
76
11
3,006
1,357
83
843
458
83
2,341
665
912
2012-2017
19
8
1,338
1,403
2049-2052
75
116
2037-2046
4,632
4,090
481
4,151
4,673
2012-2056
Total credit derivatives
$
5,178
38,403
23,817
18,372
20,031
17,843
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.
198
Credit-Risk Contingent Features
Certain of our derivative contracts contain provisions whereby if
the credit rating of our debt were to be downgraded by certain
major credit rating agencies, 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
$16.2 billion at December 31, 2012, and $17.1 billion at
December 31, 2011, respectively, for which we posted
$14.3 billion and$15.0 billion, respectively, in collateral in the
normal course of business. If the credit rating of our debt had
been downgraded below investment grade, which is the credit-
risk-related contingent feature that if triggered requires the
maximum amount of collateral to be posted, on
December 31, 2012, or December 31, 2011, we would have been
required to post additional collateral of $1.9 billion or
$2.1 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 legally enforceable 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, including determining the legal enforceability of
the arrangement, it is our policy to present derivatives balances
and related cash collateral amounts net in the balance sheet.
Counterparty credit risk related to derivatives is considered in
determining fair value and our assessment of hedge
effectiveness.
199
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 (excluding derivatives), securities
available for sale, derivatives, substantially all residential MHFS,
certain commercial LHFS, certain loans held for investment, fair
value MSRs and securities sold but not yet purchased (short sale
liabilities) are recorded at fair value on a recurring basis.
Additionally, from time to time, we may be required to record at
fair value other assets on a nonrecurring basis, such as certain
residential and commercial MHFS, certain LHFS, loans held for
investment and certain other assets. These nonrecurring fair
value adjustments typically involve application of lower-of-cost-
or-market accounting or write-downs of individual assets.
Following are descriptions of the valuation methodologies
used for assets and liabilities recorded at fair value on a
recurring or nonrecurring basis and for estimating fair value for
financial instruments not recorded at fair value.
Assets
SHORT-TERM FINANCIAL ASSETS Short-term financial assets
include cash and due from banks, federal funds sold and
securities purchased under resale agreements and due from
customers on acceptances. These assets are carried at historical
cost. The carrying amount is a reasonable estimate of fair value
because of the relatively short time between the origination of
the instrument and its expected realization.
TRADING ASSETS (EXCLUDING DERIVATIVES) AND
SECURITIES AVAILABLE FOR SALE Trading assets and
securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon various
sources of market pricing. We use quoted prices in active
markets, where available and classify such instruments 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 third-party pricing
services or brokers (collectively, vendors) or combination
thereof, and accordingly, we classify these instruments as Level 2
or 3.
Trading securities are mostly valued using internal trader
prices that are subject to price verification procedures performed
by separate internal personnel. The majority of fair values
derived using internal valuation techniques are verified against
multiple pricing sources, including prices obtained from third-
party vendors. Vendors compile prices from various sources and
often apply matrix pricing for similar securities when no price is
observable. We review pricing methodologies provided by the
vendors in order to determine if observable market information
is being used, versus unobservable inputs. When evaluating the
appropriateness of an internal trader price compared with
vendor prices, considerations include the range and quality of
vendor prices. Vendor prices are used to ensure the
reasonableness of a trader price; however valuing financial
200
instruments involves judgments acquired from knowledge of a
particular market. If a trader asserts that a vendor price is not
reflective of market value, justification for using the trader price,
including recent sales activity where possible, must be provided
to and approved by the appropriate levels of management.
Similarly, while securities available for sale traded in
secondary markets are typically valued using unadjusted vendor
prices or vendor prices adjusted by weighting them with internal
discounted cash flow techniques, these prices are reviewed and,
if deemed inappropriate by a trader who has the most knowledge
of a particular market, can be adjusted. Securities measured with
these internal valuation techniques are generally classified as
Level 2 of the hierarchy and often involve using quoted market
prices for similar securities, pricing models, discounted cash
flow analyses using significant inputs observable in the market
where available or combination of multiple valuation techniques.
Examples include certain residential and commercial MBS,
municipal bonds, U.S. government and agency MBS, and
corporate debt securities.
Security fair value measurements using significant inputs
that are unobservable in the market due to limited activity or a
less liquid market are classified as Level 3 in the fair value
hierarchy. Such measurements include securities valued using
internal models or 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. We value
CDOs 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, we use management's
best estimate.
MORTGAGES HELD FOR SALE (MHFS) We carry substantially all
of our residential MHFS portfolio at fair value. Fair value is
based on 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 loans
with similar characteristics. As such, we classify those loans
subjected to nonrecurring fair value adjustments as Level 2.
LOANS For information on how we report 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
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 are appropriate for loans
with similar characteristics and remaining maturity.
For real estate 1-4 family first and junior lien mortgages, we
calculate fair value 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 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 are carried at lower of cost or market value, and therefore
can be subject to fair value measurements on a nonrecurring
basis. Changes in the fair value of MSRs occur primarily due to
the collection/realization of expected cash flows, as well as
changes in valuation inputs and assumptions. For other interests
held in securitizations (such as interest-only strips) we use a
valuation model that calculates the present value of estimated
future cash flows. The model incorporates our own estimates of
assumptions market participants use in determining the fair
value, including estimates of prepayment speeds, discount rates,
defaults and contractual fee income. Interest-only strips are
recorded as trading assets. Our valuation approach is validated
by our internal valuation model validation group. Fair value
measurements of our MSRs and interest-only strips use
significant unobservable inputs and, accordingly, we classify
them as Level 3.
FORECLOSED ASSETS Foreclosed assets are carried at net
realizable value, which represents fair value less costs to sell.
Fair value is generally based upon independent market prices or
appraised values of the collateral and, accordingly, we classify
foreclosed assets as Level 2.
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),
201
Note 17: Fair Values of Assets and Liabilities (continued)
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 predominantly
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.
Level 3 Asset and Liability Valuation Processes
We generally determine fair value of our Level 3 assets and
liabilities by using internally developed models and, to a lesser
extent, prices obtained from third-party pricing services or
brokers (collectively, vendors). Our valuation processes vary
depending on which approach is utilized.
202
INTERNAL MODEL VALUATIONS Our internally developed
models primarily consist of discounted cash flow techniques. Use
of such techniques requires determining relevant inputs, some of
which are unobservable. Unobservable inputs are generally
derived from historic performance of similar assets or
determined from previous market trades in similar instruments.
These unobservable inputs usually consist of discount rates,
default rates, loss severity upon default, volatilities, correlations
and prepayment rates, which are inherent within our Level 3
instruments. Such inputs can be correlated to similar portfolios
with known historic experience or recent trades where particular
unobservable inputs may be implied; but due to the nature of
various inputs being reflected within a particular trade, the value
of each input is considered unobservable. We attempt to
correlate each unobservable input to historic experience and
other third party data where available.
Internal valuation models are subject to review prescribed
within our model risk management policies and procedures
which includes model validation. The purpose of model
validation includes ensuring the model is appropriate for its
intended use and the appropriate controls exist to help mitigate
risk of invalid valuations. Model validation assesses the
adequacy and appropriateness of the model, including reviewing
its key components such as inputs, processing components, logic
or theory, output results and supporting model documentation.
Validation also includes ensuring significant unobservable
model inputs are appropriate given observable market
transactions or other market data within the same or similar
asset classes. This ensures modeled approaches are appropriate
given similar product valuation techniques and are in line with
their intended purpose.
We have ongoing monitoring procedures in place for our
Level 3 assets and liabilities that use such internal valuation
models. These procedures, which are designed to provide
reasonable assurance that models continue to perform as
expected after approved, include:
(cid:135)
ongoing analysis and benchmarking to market transactions
and other independent market data (including pricing
vendors, if available);
back-testing of modeled fair values to actual realized
transactions; and
review of modeled valuation results against expectations,
including review of significant or unusual value fluctuations.
(cid:135)
(cid:135)
We update model inputs and methodologies periodically to
reflect these monitoring procedures. Additionally, procedures
and controls are in place to ensure existing models are subject to
periodic reviews, and we perform full model revalidations as
necessary.
All internal valuation models are subject to ongoing review
by business-unit-level management. More complex models are
subject to additional oversight by a corporate-level risk
management department. Corporate oversight responsibilities
include evaluating adequacy of business unit risk management
programs, maintaining company-wide model validation policies
and standards and reporting the results of these activities to
management and our Enterprise Risk Management Committee
(ERMC). The ERMC, which consists of senior executive
management and reports on top risks to the Company’s Board of
Directors, monitors all company-wide risks, including credit
risk, market risk, and reputational risk.
VENDOR-DEVELOPED VALUATIONS In certain limited
circumstances we obtain pricing from third party vendors for the
value of our Level 3 assets or liabilities. We have processes in
place to approve such vendors to ensure information obtained
and valuation techniques used are appropriate. Once these
vendors are approved to provide pricing information, we
monitor and review the results to ensure the fair values are
reasonable and in line with market experience in similar asset
classes. While the input amounts used by the pricing vendor in
determining fair value are not provided, and therefore
unavailable for our review, we do perform one or more of the
following procedures to validate the prices received:
(cid:135)
(cid:135)
comparison to other pricing vendors (if available);
variance analysis of prices;
(cid:135)
(cid:135)
(cid:135)
corroboration of pricing by reference to other independent
market data such as market transactions 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.
Fair Value Measurements from Brokers or Third
Party Pricing Services
For certain assets and liabilities, we obtain fair value
measurements from brokers or 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 brokers or 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)
December 31, 2012
Trading assets (excluding derivatives)
$
Securities available for sale:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities
Other debt securities
Total debt securities
Total marketable equity securities
Total securities available for sale
Derivatives (trading and other assets)
Loans held for sale
Derivatives (liabilities)
Other liabilities
December 31, 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
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
$
Brokers
Third party pricing services
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
406
-
-
138
8
-
-
4
1,516
12,465
1,654
3
12,469
-
1,314
1,016
915
6,231
-
-
-
35,036
121,703
28,314
915
29
191,284
774
-
-
-
292
149
441
-
1,657
12,469
944
192,058
441
8
-
26
121
-
-
-
-
-
-
-
-
602
-
634
104
446
7
1,086
1,564
-
16
2,342
1,091
-
-
43
8,163
868
5,748
-
-
-
21,014
118,107
26,222
3,449
8,206
868
171,091
-
-
33
665
3,449
8,206
901
171,756
17
-
11
22
44
-
43
-
-
-
-
6
834
1
850
249
-
-
-
-
-
-
-
186
145
331
3
334
-
-
-
-
203
Note 17: Fair Values of Assets and Liabilities (continued)
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis
The following two tables present the balances of assets and
liabilities measured at fair value on a recurring basis.
Total trading assets (excluding derivatives)
10,735
27,370
1,063
(in millions)
December 31, 2012
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(2)
Other trading assets
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized debt obligations (4)
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 (5)
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 (7)
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
Total derivative liabilities (7)
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
$
$
Total liabilities recorded at fair value
$
Level 1
Level 2
Level 3
Netting
Total
$
5,104
-
-
-
-
-
3,481
8,585
2,150
3,774
1,587
-
6,664
13,380
722
356
26,483
887
-
46
742
52
6
138
3
987
76
915
-
-
-
-
-
125
-
-
-
-
-
-
6,231
35,045
-
3,631 (3)
97,285
15,837
19,765
132,887
20,934
-
7
867
7,828
8,702
930
-
94
203
297
274
13,188 (3)
5,921 (3)
51
3,283 (3)
9,255
-
1,040
204,729
26,645
629
554
1,183
2,223
-
-
-
-
16
-
432
19
-
-
-
467
136
753
55
808
205,537
39,055
6
185
-
70,277
3,386
2,747
5,481
1,160
-
-
83,051
123
794 (3)
-
794
27,439
3,250
-
6,021
11,538
1,058
70
604
24
650
-
-
2,406
162
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
8,878
1,633
742
6,716
13,386
860
3,840
36,055
3,113
39,168
7,146
38,676
97,285
15,931
19,968
133,184
21,333
13,188
5,928
918
11,111
17,957
930
232,414
2,176
609
2,785
235,199
42,305
6
6,206
11,538
71,351
3,456
3,783
5,524
1,810
-
(62,108) (6)
(62,108)
(62,108)
-
13,561
355,327
51,879
(62,108)
(52)
-
(199)
(23)
-
-
-
(274)
(4,225)
-
-
(1,233)
-
(5,458)
-
(5,732)
(68,244)
(3,541)
(3,239)
(3,553)
(1,152)
-
-
(79,729)
(875)
(9)
(3,941)
(35)
(47)
(4,907)
(34)
(84,670)
(399)
(49)
(726)
(3)
(1,800)
(78)
-
(3,055)
-
-
-
-
-
-
-
-
-
-
-
-
71,116 (6)
71,116
-
-
-
-
-
-
(49)
(3,104)
-
71,116
23,816
421
358,659
(68,695)
(3,590)
(4,164)
(3,579)
(2,952)
(78)
71,116
(11,942)
(5,100)
(9)
(3,941)
(1,268)
(47)
(10,365)
(83)
(22,390)
(1) Includes collateralized loan obligations of $721 million that are classified as trading assets.
(2) Net gains from trading activities recognized in the income statement include $305 million in net unrealized gains on trading securities held at December 31, 2012.
(3) Balances consist of securities that are predominantly investment grade based on ratings received from the ratings agencies or internal credit grades categorized as
investment grade if external ratings are not available. The securities are classified as Level 3 due to limited market activity.
(4) Includes collateralized loan obligations of $12.5 billion that are classified as securities available for sale.
(5) Perpetual preferred securities include ARS and corporate preferred securities. See Note 8 for additional information.
(6) 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.
(7) Derivative assets and derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets and trading
liabilities, respectively.
(continued on following page)
204
(continued from previous page)
(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(2)
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 (4)
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 (5)
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 (7)
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
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 (3)
-
61
232
293
295
8,599 (3)
6,641 (3)
282
2,863 (3)
9,786
-
1,186
187,521
30,489
552
814
1,366
2,552
-
-
-
-
-
-
471
35
-
-
-
506
88
631
53
684
188,205
41,381
1,176
5,893
-
91,022
4,351
2,737
4,873
2,219
-
-
105,202
135
1,344 (3)
23
1,367
31,856
3,410
-
23
12,603
1,055
-
560
16
1,357
-
-
2,988
244
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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) (6)
(81,143)
(81,143)
-
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 (6)
89,990
Total derivative liabilities (7)
(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)
-
(4,764)
-
(919)
(2)
(4,112)
(298)
(737)
(6,068)
(98)
-
-
-
-
-
-
(44)
-
-
-
-
-
-
-
Total liabilities recorded at fair value
$
(5,028)
(106,784)
(4,620)
89,990
(4,739)
(2)
(4,112)
(1,242)
(737)
(10,832)
(142)
(26,442)
(1) Includes collateralized loan obligations of $583 million that are classified as trading assets.
(2) Net gains from trading activities recognized in the income statement include $133 million in net unrealized gains on trading securities we held at December 31, 2011.
(3) Balances consist of securities that are predominantly investment grade based on ratings received from the ratings agencies or internal credit grades categorized as
investment grade if external ratings are not available. The securities are classified as Level 3 due to limited market activity.
(4) Includes collateralized loan obligations of $8.1 billion that are classified as securities available for sale.
(5) Perpetual preferred securities include ARS and corporate preferred securities. See Note 8 for additional information.
(6) 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.
(7) Derivative assets and derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets and trading
liabilities, respectively.
205
Note 17: Fair Values of Assets and Liabilities (continued)
Changes in Fair Value Levels
We monitor the availability of observable market data to assess
the appropriate classification of financial instruments within the
fair value hierarchy and transfer between Level 1, Level 2, and
Level 3 accordingly. Observable market data includes but is not
limited to quoted prices and market transactions. Changes in
economic conditions or market liquidity generally will drive
changes in availability of observable market data. Changes in
availability of observable market data, which also may result in
changing the valuation technique used, are generally the cause of
transfers between Level 1, Level 2, and Level 3.
All current period transfers into and out of Level 1, Level 2,
and Level 3 are provided within the below table. The amounts
reported as transfers represent the fair value as of the beginning
of the quarter in which the transfer occurred.
Transfers Between Fair Value Levels
Level 1
Level 2
Level 3 (1)
(in millions)
In
Out
In
Out
In
Out
Total
Year ended December 31, 2012
Trading securities
Securities available for sale (2)
Mortgages held for sale
Loans (3)
Net derivative assets and liabilities
Short sale liabilities
Total transfers
$
23
8
-
-
-
-
$
31
-
-
-
-
-
-
-
16
9,832
298
41
51
-
(37)
(68)
(488)
(5,851)
8
-
14
60
488
5,851
(8)
-
(16)
(9,832)
(298)
(41)
(51)
-
10,238
(6,436)
6,405
(10,238)
-
-
-
-
-
-
-
(1) All transfers in and out of Level 3 are disclosed within the recurring level 3 rollforward table in this Note.
(2) Includes $9.4 billion of securities of U.S. states and political subdivisions that we transferred from Level 3 to Level 2 as a result of increased observable market data in the
valuation of such instruments. This transfer was done in conjunction with a change in our valuation technique from an internal model based upon unobservable inputs to
third party vendor pricing based upon market observable data.
(3) Consists of reverse mortgage loans securitized with GNMA which were accounted for as secured borrowing transactions. We transferred the loans from Level 2 to Level 3 in
third quarter 2012 due to decreased market activity and visibility to significant trades of the same or similar products. As a result, we changed our valuation technique from
an internal model based on market observable data to an internal discounted cash flow model based on unobservable inputs.
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:
(cid:120) 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.
(cid:120) 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.
206
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2012, are
summarized as follows:
(in millions)
Year ended December 31, 2012
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 period
Net
income
$
53
1,582
97
108
190
4
2,034
115
3
(191)
-
8
48
-
(132)
(39)
(excluding derivatives)
2,149
(171)
Total net gains
(losses) included in
Purchases,
sales,
issuances
Other
compre-
hensive settlements,
net (1)
income
and Transfers
into
Level 3
Net unrealized
gains (losses)
included in
income related
to assets and
liabilities held
at period end (2)
Transfers
out of
Level 3
Balance,
end of
period
-
-
-
-
-
-
-
-
-
(10)
(649)
(45)
(110)
(98)
(1)
(913)
-
-
-
-
-
14
-
14
-
-
-
-
-
(16)
-
(16)
-
46
742
52
6
138
3
987
76
-
(47)
(3)
2
23
-
(25)
(19)
(913)
14
(16)
1,063
(44)(3)
Total debt securities
30,489
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
1,344
23
(9,832)
26,645
(64)(4)
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
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
11,516
10
160
1,347
-
(9,402)
3,631
61
232
293
295
8,599
6,641
282
2,863
9,786
12
(56)
(44)
20
135
3
15
(29)
(11)
110
91
2
16
57
73
19
514
3
14
148
165
931
(30)
(16)
50
(30)
20
(20)
3,940
(726)
(3)
329
(400)
4,887
(611)
(9)
1,367
93
(46)
(620)
203
885
29
-
29
1
-
-
29
1
30
60
-
-
-
(74)
-
(74)
(41)
-
-
(286)
(29)
(315)
94
203
297
274
13,188
5,921
51
3,283
9,255
-
-
-
794
-
794
31,856
3,410
23
12,603
609
-
(75)
(7)
(1,998)
(117)
(42)
43
(5,954)
7,397
78
(11)
23
38
40
-
-
-
-
-
-
-
-
(1)
(1)
-
-
-
4,267
(308)
145
4,889
(7,349)
(50)
18
5
810
-
(6,566)
(61)
-
38
60
(9,832)
27,439
488
5,851
-
(298)
(41)
-
-
(8)
-
-
-
-
(8)
-
-
-
2
1
(54)
-
-
-
(51)
-
-
-
3,250
6,021
11,538
659
21
(122)
21
(1,150)
(78)
(649)
162
-
(49)
Total derivative contracts
(1,588)
7,565
Other assets
Short sale liabilities
Other liabilities (excluding derivatives)
244
-
(44)
(21)
-
(43)
(1) See next page for detail.
(2) 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.
(3) Included in trading activities and other noninterest income in the income statement.
(4) Included in debt securities available for sale in the income statement.
(5) Included in equity investments in the income statement.
(6) Included in mortgage banking and other noninterest income in the income statement.
(7) Included in mortgage banking, trading activities and other noninterest income in the income statement.
(continued on following page)
-
(1)
(56)
(57)
-
-
-
(1)
(6)
(7)
-
-
- (5)
(64)
(30)(6)
43 (6)
(2,893)(6)
562
40
(16)
30
41
-
657 (7)
(8)(3)
- (3)
- (6)
207
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, 2012.
Purchases
Sales
Issuances
Settlements
Net
$
85
829
192
49
116
1
1,272
-
(95)
(1,478)
(237)
(159)
(169)
(2)
(2,140)
-
1,272
(2,140)
1,847
86
39
125
26
5,608
3,004
-
2,074
5,078
12,684
-
-
-
12,684
441
2
-
11
-
386
2
(6)
-
393
19
9
(3)
(37)
(34)
-
(34)
(37)
(185)
-
(2)
(159)
(161)
(454)
-
(8)
(8)
(462)
-
-
(293)
-
(2)
(375)
(3)
3
-
(377)
(8)
(9)
11
-
-
-
-
-
-
-
-
-
-
-
-
-
(45)
-
(45)
-
(10)
(649)
(45)
(110)
(98)
(1)
(913)
-
(45)
(913)
1,011
(1,474)
1,347
-
-
-
-
-
666
-
1,401
2,067
3,078
-
-
-
3,078
-
257
5,182
-
-
1
-
-
-
1
-
-
(216)
(2)
(69)
(71)
(9)
(1,483)
(4,396)
(1)
(2,987)
(7,384)
(10,421)
(611)
(1)
50
(30)
20
(20)
3,940
(726)
(3)
329
(400)
4,887
(611)
(9)
(612)
(620)
(11,033)
(749)
(114)
-
(7,360)
(48)
6
6
813
-
(6,583)
(72)
-
246
4,267
(308)
145
4,889
(7,349)
(50)
18
5
810
-
(6,566)
(61)
-
38
(in millions)
Year ended December 31, 2012
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
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)
208
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2011, are
summarized as follows:
Total net gains
(losses) included in
Purchases,
sales,
Balance,
beginning
of period
Net
income
Other
compre-
hensive
income
issuances
and
settlements,
net (1)
Transfers
into
Level 3
Transfers
out of
Level 3
Balance,
end of
period
Net unrealized
gains (losses)
included in
income related
to assets and
liabilities held
at period end (2)
(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
$
5
1,915
166
117
366
34
2,603
136
3
(24)
1
6
75
(3)
58
(21)
Total trading assets
(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
20
217
237
433
4,778
6,133
112
3,150
9,395
85
10
(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)
(2)
53
1,582
97
108
190
4
2,034
115
-
1
(80)
(4)
(2)
72
(13)
14
(539)
83
(171)
2,149
1 (3)
6,923
-
(33)
11,516
(6)
2
(4)
(185)
3,725
531
40
181
752
(85)
(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)
-
Total debt securities
19,492
408
(236)
11,126
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)
2,434
32
160
-
(7)
1
(1,243)
(10)
2,466
160
(6)
(1,253)
21,958
3,305
309
14,467
77
(1)
(225)
9
(1,017)
(35)
(1,192)
314
-
(344)
568
(242)
44
13
(5,821)
4,051
2
126
(8)
(856)
(82)
3,233
12
-
(8)
-
-
-
-
-
-
-
-
-
-
-
-
-
9,873
(104)
(299)
3,957
(3,414)
(9)
28
(6)
(123)
-
(3,524)
(82)
-
308
(801)
30,489
(90)(4)
(2)
-
1,344
23
(53)
-
(2)
1,367
(53)(5)
(803)
(327)
-
-
(104)
11
2
(3)
(2)
-
31,856
3,410
23
12,603
609
-
(75)
(7)
(1,998)
(117)
(96)
(1,588)
-
-
-
244
-
(44)
(143)
43 (6)
- (6)
(3,680)(6)
309
1
55
(19)
50
-
396 (7)
3 (3)
- (3)
- (6)
(1) See next page for detail.
(2) 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.
(3) Included in trading activities and other noninterest income in the income statement.
(4) Included in debt securities available for sale in the income statement.
(5) Included in equity investments in the income statement.
(6) Included in mortgage banking and other noninterest income in the income statement.
(7) Included in mortgage banking, trading activities and other noninterest income in the income statement.
(continued on following page)
209
121
2
123
41
8
-
221
107
328
-
500
2
-
2
502
492
-
-
(1)
(3)
(6)
1
-
-
(9)
-
-
-
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)
-
9,873
(104)
(299)
3,957
(3,414)
(9)
28
(6)
(123)
-
(3,390)
(3,524)
(91)
1
317
(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)
210
The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended
December 31, 2010.
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
501
259
-
(2,403)
48
903
256
113
1,057
(1,276)
(2,175)
(3,451)
(155)
(212)
-
(1,767)
(1,150)
(1,452)
1,426
(2,917)
12
-
-
20
217
237
433
4,778
6,133
112
3,150
9,395
85
2,393
100
(26)
(15)
6
(21)
80
14
94
(26)
(54)
2,434
32
(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)
3,305
309
14,467
77
(1)
(225)
9
(1,017)
(35)
(1,192)
-
-
54
-
-
-
54
(989)
314
159
-
-
-
6
-
165
4
(37)
94
-
(1,038)
65
665
-
(344)
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)
(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.
The following table provides quantitative information about
the valuation techniques and significant unobservable inputs
used in the valuation of substantially all of our Level 3 assets and
liabilities measured at fair value on a recurring basis for which
we use an internal model.
The significant unobservable inputs for Level 3 assets and
liabilities that are valued using fair values obtained from third
party vendors are not included in the table as the specific inputs
applied are not provided by the vendor (see discussion regarding
vendor-developed valuations within the “Level 3 Asset and
211
Note 17: Fair Values of Assets and Liabilities (continued)
Liabilities Valuation Processes” section previously within this
Note). In addition, the table excludes the valuation techniques
and significant unobservable inputs for certain classes of Level 3
assets and liabilities measured using an internal model that we
consider, both individually and in the aggregate, insignificant
relative to our overall Level 3 assets and liabilities. We made this
determination based upon an evaluation of each class which
considered the magnitude of the positions, nature of the
unobservable inputs and potential for significant changes in fair
value due to changes in those inputs.
Fair Value
Level 3
Valuation Technique(s)
Unobservable Input
Inputs
Average (1)
Significant
Range of
Weighted
($ in millions, except cost to service amounts)
December 31, 2012
Trading and available for sale securities:
Securities of U.S. states and
political subdivisions:
Government, healthcare and
other revenue bonds
$
3,081
Discounted cash flow
Discount rate
0.5 -
4.8 %
1.8
Auction rate securities
596
Discounted cash flow
Discount rate
2.0 - 12.9
Collateralized debt obligations (2)
Asset-backed securities:
Auto loans and leases
Other asset-backed securities:
Dealer floor plan
Diversified payment rights (3)
Other commercial and consumer
Marketable equity securities: perpetual
1,423
12,507
Market comparable pricing
Comparability adjustment (22.5) - 24.7 %
Weighted average life
3.0 -
7.5 yrs
Vendor priced
5,921
Discounted cash flow
Default rate
2.1 -
9.7
Discount rate
0.6 -
1.6
Loss severity
50.0 - 66.6
Prepayment rate
0.6 -
0.9
1,030
639
1,665 (4)
Discounted cash flow
Discounted cash flow
Discounted cash flow
87
Vendor priced
Discount rate
Discount rate
Discount rate
0.5 -
1.0 -
0.6 -
2.2
2.9
6.8
Weighted average life
1.0 -
7.5 yrs
preferred
794 (5)
Discounted cash flow
Discount rate
4.3 -
9.3
%
Weighted average life
1.0 -
7.0 yrs
Mortgages held for sale (residential)
3,250
Discounted cash flow
Default rate
0.6 - 14.8 %
Loans
6,021 (6)
Discounted cash flow
Discount rate
2.4 -
2.8
Discount rate
3.4 -
7.5
Loss severity
1.3 - 35.3
Prepayment rate
1.0 - 11.0
Mortgage servicing rights (residential)
11,538
Discounted cash flow
Net derivative assets and (liabilities):
Interest rate contracts
162
Discounted cash flow
Prepayment rate
1.6 - 44.4
Utilization rate
0.0 -
2.0
Cost to service per loan (7)
Discount rate
$ 90 -
6.7 - 10.9 %
854
Prepayment rate (8)
7.3 - 23.7
Default rate
Loss severity
0.0 - 20.0
45.8 - 83.2
Prepayment rate
7.4 - 15.6
Interest rate contracts: derivative loan
commitments
Equity contracts
Credit contracts
Insignificant Level 3 assets,
net of liabilities
497
(122)
(1,157)
8
835 (9)
Total level 3 assets, net of liabilities
$
48,775 (10)
Discounted cash flow
Fall-out factor
1.0 - 99.0
Option model
Correlation factor (43.6) - 94.5 %
Initial-value servicing (13.7) - 137.2 bps
Volatility factor
3.0 - 68.9
Market comparable pricing
Comparability adjustment (34.4) - 30.5
Option model
Credit spread
0.1 - 14.0
Loss severity
16.5 - 87.5
4.4
3.4
3.5
3.2
1.0
51.8
0.7
1.9
1.8
2.7
2.9
6.3
5.3
5.5
5.4
26.4
6.2
2.6
11.6
0.8
219
7.4
15.7
5.4
51.6
14.9
22.9
85.6
50.3
26.5
0.1
2.0
52.3
(1) Weighted averages are calculated using outstanding unpaid principal balance for cash instruments such as loans and securities, and notional amounts for derivative
instruments.
(2) Includes $13.3 billion of collateralized loan obligations.
(3) Securities backed by specified sources of current and future receivables generated from foreign originators.
(4) Consists primarily of investments in asset-backed securities that are revolving in nature, in which the timing of advances and repayments of principal are uncertain.
(5) Consists of auction rate preferred equity securities with no maturity date that are callable by the issuer.
(6) Consists predominantly of reverse mortgage loans securitized with GNMA which were accounted for as secured borrowing transactions.
(7) The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $90 - $437.
(8) Includes a blend of prepayment speeds and expected defaults. Prepayment speeds are influenced by mortgage interest rates as well as our estimation of drivers of borrower
behavior.
(9) Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The
amount includes corporate debt securities, mortgage-backed securities, asset-backed securities backed by home equity loans, other marketable equity securities, other
assets, other liabilities and certain net derivative assets and liabilities, such as commodity contracts, foreign exchange contracts and other derivative contracts.
(10) Consists of total Level 3 assets of $51.9 billion and total Level 3 liabilities of $3.1 billion, before netting of derivative balances.
212
The valuation techniques used for our Level 3 assets and
liabilities, as presented in the previous table, are described as
follows:
(cid:120) Discounted cash flow - Discounted cash flow valuation
techniques generally consist of developing an estimate of
future cash flows that are expected to occur over the life of
an instrument and then discounting those cash flows at a
rate of return that results in the fair value amount.
(cid:120) Option model - Option model valuation techniques are
generally used for instruments in which the holder has a
contingent right or obligation based on the occurrence of a
future event, such as the price of a referenced asset going
above or below a predetermined strike price. Option models
estimate the likelihood of the specified event occurring by
incorporating assumptions such as volatility estimates, price
of the underlying instrument and expected rate of return.
(cid:120) Market comparable pricing - Market comparable pricing
valuation techniques are used to determine the fair value of
certain instruments by incorporating known inputs such as
recent transaction prices, pending transactions, or prices of
other similar investments which require significant
adjustment to reflect differences in instrument
characteristics.
(cid:120) Vendor-priced – Prices obtained from third party pricing
vendors or brokers that are used to record the fair value of
the asset or liability, of which the related valuation
technique and significant unobservable inputs are not
provided.
Significant unobservable inputs presented in the previous
table are those we consider significant to the fair value of the
Level 3 asset or liability. We consider unobservable inputs to be
significant, if by their exclusion, the fair value of the Level 3 asset
or liability would be impacted by a predetermined percentage
change or based on qualitative factors such as nature of the
instrument, type of valuation technique used, and the
significance of the unobservable inputs relative to other inputs
used within the valuation. Following is a description of the
significant unobservable inputs provided in the table.
(cid:120) Comparability adjustment – is an adjustment made to
observed market data such as a transaction price in order to
reflect dissimilarities in underlying collateral, issuer, rating,
or other factors used within a market valuation approach,
expressed as a percentage of an observed price.
(cid:120) Correlation factor - is the likelihood of one instrument
changing in price relative to another based on an
established relationship expressed as a percentage of
relative change in price over a period over time.
(cid:120) Cost to service - is the expected cost per loan of servicing a
portfolio of loans which includes estimates for
unreimbursed expenses (including delinquency and
foreclosure costs) that may occur as a result of servicing
such loan portfolios.
(cid:120) Credit spread – is the portion of the interest rate in excess of
a benchmark interest rate, such as LIBOR or U.S. Treasury
rates, that when applied to an investment captures changes
in the obligor’s creditworthiness.
(cid:120) Default rate – is an estimate of the likelihood of not
collecting contractual amounts owed expressed as a
constant default rate (CDR).
(cid:120)
(cid:120) Discount rate – is a rate of return used to present value the
future expected cash flow to arrive at the fair value of an
instrument. The discount rate consists of a benchmark rate
component and a risk premium component. The benchmark
rate component, for example, LIBOR or U.S. Treasury rates,
is generally observable within the market and is necessary to
appropriately reflect the time value of money. The risk
premium component reflects the amount of compensation
market participants require due to the uncertainty inherent
in the instruments’ cash flows resulting from risks such as
credit and liquidity.
Fall-out factor - is the expected percentage of loans
associated with our interest rate lock commitment portfolio
that are likely of not funding.
Initial-value servicing - is the estimated value of the
underlying loan, including the value attributable to the
embedded servicing right, expressed in basis points of
outstanding unpaid principal balance.
Loss severity – is the percentage of contractual cash flows
lost in the event of a default.
Prepayment rate – is the estimated rate at which forecasted
prepayments of principal of the related loan or debt
instrument are expected to occur, expressed as a constant
prepayment rate (CPR).
Utilization rate – is the estimated rate in which incremental
portions of existing reverse mortgage credit lines are
expected to be drawn by borrowers, expressed as an
annualized rate.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120) Volatility factor – is the extent of change in price an item is
estimated to fluctuate over a specified period of time
expressed as a percentage of relative change in price over a
period over time.
(cid:120) Weighted average life – is the weighted average number of
years an investment is expected to remain outstanding,
based on its expected cash flows reflecting the estimated
date the issuer will call or extend the maturity of the
instrument or otherwise reflecting an estimate of the timing
of an instrument’s cash flows whose timing is not
contractually fixed.
Significant Recurring Level 3 Fair Value Asset and
Liability Input Sensitivity
We generally use discounted cash flow or similar internal
modeling techniques to determine the fair value of our Level 3
assets and liabilities. Use of these techniques requires
determination of relevant inputs and assumptions, some of
which represent significant unobservable inputs as indicated in
the preceding table. Accordingly, changes in these unobservable
inputs may have a significant impact on fair value.
Certain of these unobservable inputs will (in isolation) have a
directionally consistent impact on the fair value of the
instrument for a given change in that input. Alternatively, the
fair value of the instrument may move in an opposite direction
for a given change in another input. Where multiple inputs are
used within the valuation technique of an asset or liability, a
213
Note 17: Fair Values of Assets and Liabilities (continued)
change in one input in a certain direction may be offset by an
opposite change in another input having a potentially muted
impact to the overall fair value of that particular instrument.
Additionally, a change in one unobservable input may result in a
change to another unobservable input (that is, changes in certain
inputs are interrelated to one another), which may counteract or
magnify the fair value impact.
SECURITIES, LOANS and MORTGAGES HELD FOR SALE The fair
values of predominantly all Level 3 trading securities, mortgages
held for sale, loans and securities available for sale have
consistent inputs, valuation techniques and correlation to
changes in underlying inputs. The internal models used to
determine fair value for these Level 3 instruments use certain
significant unobservable inputs within a discounted cash flow or
market comparable pricing valuation technique. Such inputs
include discount rate, prepayment rate, default rate, loss
severity, utilization rate and weighted average life.
These Level 3 assets would decrease (increase) in value based
upon an increase (decrease) in discount rate, default rate, loss
severity, or weighted average life inputs. Conversely, the fair
value of these Level 3 assets would generally increase (decrease)
in value if the prepayment rate input were to increase (decrease)
or if the utilization rate input were to increase (decrease).
Generally, a change in the assumption used for default rate is
accompanied by a directionally similar change in the risk
premium component of the discount rate (specifically, the
portion related to credit risk) and a directionally opposite change
in the assumption used for prepayment rates. Unobservable
inputs for loss severity, utilization rate and weighted average life
do not increase or decrease based on movements in the other
significant unobservable inputs for these Level 3 assets.
DERIVATIVE INSTRUMENTS Level 3 derivative instruments are
valued using market comparable pricing, option pricing and
discounted cash flow valuation techniques. We utilize certain
unobservable inputs within these techniques to determine the
fair value of the Level 3 derivative instruments. The significant
unobservable inputs consist of credit spread, a comparability
adjustment, prepayment rate, default rate, loss severity, initial
value servicing, fall-out factor, volatility factor, and correlation
factor.
Level 3 derivative assets (liabilities) would decrease
(increase) in value upon an increase (decrease) in default rate,
fall-out factor, credit spread or loss severity inputs. Conversely,
Level 3 derivative assets (liabilities) would increase (decrease) in
value upon an increase (decrease) in prepayment rate, initial-
value servicing or volatility factor inputs. The correlation factor
and comparability adjustment inputs may have a positive or
negative impact on the fair value of these derivative instruments
depending on the change in value of the item the correlation
factor and comparability adjustment is referencing. The
correlation factor and comparability adjustment is considered
independent from movements in other significant unobservable
inputs for derivative instruments.
Generally, for derivative instruments for which we are subject
to changes in the value of the underlying referenced instrument,
change in the assumption used for default rate is accompanied
by directionally similar change in the risk premium component
of the discount rate (specifically, the portion related to credit
risk) and a directionally opposite change in the assumption used
for prepayment rates. Unobservable inputs for loss severity, fall-
out factor, initial-value servicing, and volatility do not increase
or decrease based on movements in other significant
unobservable inputs for these Level 3 instruments.
MORTGAGE SERVICING RIGHTS We use a discounted cash flow
valuation technique to determine the fair value of Level 3
mortgage servicing rights. These models utilize certain
significant unobservable inputs including prepayment rate,
discount rate and costs to service. An increase in any of these
unobservable inputs will reduce the fair value of the mortgage
servicing rights and alternatively, a decrease in any one of these
inputs would result in the mortgage servicing rights increasing in
value. Generally, a change in the assumption used for the default
rate is accompanied by a directionally similar change in the
assumption used for cost to service and a directionally opposite
change in the assumption used for prepayment. The sensitivity
of our residential MSRs is discussed further in Note 8.
214
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 2012 and 2011 that were still held in the balance sheet at each
respective period end, the following table provides the fair value
hierarchy and the fair value of the related individual assets or
portfolios at period end.
(in millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
December 31, 2012
December 31, 2011
Mortgages held for sale (LOCOM) (1)
$
Loans held for sale
Loans:
Commercial
Consumer (2)
Total loans (3)
Mortgage servicing rights (amortized)
Other assets (4)
-
-
-
-
-
-
-
1,509
1,045
2,554
4
1,507
5,889
7,396
-
-
4
4
1,507
5,893
4
7,400
-
-
-
989
144
1,133
-
-
-
-
-
-
-
1,019
1,166
2,185
86
-
86
1,501
4,163
5,664
-
537
13
1,514
4
4,167
17
5,681
293
67
293
604
(1) Predominantly real estate 1-4 family first mortgage loans.
(2) The December 31, 2012, amount includes fair value of $2.0 billion for consumer loans that were written down in accordance with OCC guidance issued in third quarter 2012.
(3) Represents carrying value of loans for which adjustments are based on the appraised value of the collateral.
(4) 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.
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
recognized in the periods presented.
(in millions)
Mortgages held for sale (LOCOM)
$
Loans held for sale
Loans:
Commercial
Consumer (1)
Total loans
Mortgage servicing rights (amortized)
Other assets (2)
Year ended December 31,
2012
2011
37
1
29
22
(795)
(4,989)
(1,043)
(4,905)
(5,784)
(5,948)
-
(316)
(34)
(256)
Total
$
(6,062)
(6,187)
(1) Represents write-downs of loans based on the appraised value of the collateral.
The year ended December 31, 2012, includes $888 million resulting from
consumer loans written down in accordance with OCC guidance issued in third
quarter 2012.
(2) Includes the losses on foreclosed real estate and other collateral owned that
were measured at fair value subsequent to their initial classification as
foreclosed assets.
215
Note 17: Fair Values of Assets and Liabilities (continued)
The table below provides quantitative information about the
valuation techniques and significant unobservable inputs used in
the valuation of substantially all of our Level 3 assets and
liabilities measured at fair value on a nonrecurring basis for
which we use an internal model.
We have excluded from the table classes of Level 3 assets and
liabilities measured using an internal model that we consider,
both individually and in the aggregate, insignificant relative to
our overall Level 3 nonrecurring measurements. We made this
determination based upon an evaluation of each class which
considered the magnitude of the positions, nature of the
unobservable inputs and potential for significant changes in fair
value due to changes in those inputs.
($ in millions)
December 31, 2012
Residential mortgages held for sale
Fair Value
Level 3
Significant
Valuation Technique(s) (1) Unobservable Inputs (1)
Range
Weighted
of inputs Average (2)
(LOCOM)
$
1,045 (3)
Discounted cash flow
Default rate (4)
Discount rate
Loss severity
Prepayment rate (5)
2.9 -
21.2 %
4.1 -
11.9
2.0 -
45.0
1.0 - 100.0
7.9 %
10.9
6.0
66.7
Insignificant level 3 assets
Total
148
1,193
(1) Refer to the narrative following the recurring quantitative Level 3 table of this Note for a definition of the valuation technique(s) and significant unobservable inputs.
(2) Weighted averages are calculated using outstanding unpaid principal balance of the loans.
(3) Consists of approximately $942 million government insured/guaranteed loans purchased from GNMA-guaranteed mortgage securitization and $103 million of other mortgage
loans which are not government insured/guaranteed.
(4) Applies only to non-government insured/guaranteed loans.
(5) Includes the impact on prepayment rate of expected defaults for the government insured/guaranteed loans, which impacts the frequency and timing of early resolution of
loans.
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, 2012
Offshore funds
Funds of funds
Hedge funds
Private equity funds
Venture capital funds
Total
December 31, 2011
Offshore funds
Funds of funds
Hedge funds
Private equity funds
Venture capital funds
Total
N/A - Not applicable
Fair
Unfunded
value commitments
Redemption
frequency
Redemption
notice
period
$
379
1
2
807
82
$
1,271
$
352
1
22
976
83
$
1,434
Daily - Annually
1 - 180 days
Quarterly
90 days
Daily - Annually
5 - 95 days
N/A
N/A
N/A
N/A
Daily - Annually
1 - 180 days
Quarterly
Daily - Annually
N/A
N/A
90 days
5 - 95 days
N/A
N/A
-
-
-
195
21
216
-
-
-
240
28
268
Offshore funds primarily invest in investment grade
European fixed-income securities. Redemption restrictions are
in place for these investments with a fair value of $189 million
and $200 million at December 31, 2012 and 2011, 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 eight 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 five years.
216
Fair Value Option
We measure MHFS at fair value for prime MHFS originations
for which an active secondary market and readily available
market prices exist to reliably support fair value pricing models
used for these loans. Loan origination fees on these loans are
recorded when earned, and related direct loan origination costs
are recognized when incurred. We also measure at fair value
certain of our other interests held related to residential loan
sales and securitizations. We believe fair value measurement for
prime MHFS and other interests held, which we hedge with free-
standing derivatives (economic hedges) along with our MSRs
measured at fair value, reduces certain timing differences and
better matches changes in the value of these assets with changes
in the value of derivatives used as economic hedges for these
assets.
We elected to measure certain LHFS portfolios at fair value in
conjunction with customer accommodation activities, to better
align the measurement basis of the assets held with our
management objectives given the trading nature of these
portfolios. 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.
Loans that we measure at fair value consist predominantly of
reverse mortgage loans previously transferred under a GNMA
reverse mortgage securitization program accounted for as a
secured borrowing. Before the transfer, they were classified as
MHFS measured at fair value and, as such, remain carried on
our balance sheet under the fair value option.
Similarly, we may elect fair value option for the assets and
liabilities of certain consolidated VIEs. This option is generally
elected for newly consolidated VIEs for which predominantly all
of our interests, prior to consolidation, are carried at fair value
with changes in fair value recorded to earnings. Accordingly,
such an election allows us to continue fair value accounting
through earnings for those interests and eliminate income
statement mismatch otherwise caused by differences in the
measurement basis of the consolidated VIEs assets and
liabilities.
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.
December 31, 2012
December 31, 2011
Fair value
carrying
amount
less
Fair value
carrying
amount
less
Fair value Aggregate aggregate
Fair value Aggregate aggregate
carrying
unpaid
unpaid
carrying
unpaid
unpaid
amount
principal
principal
amount
principal
principal
$
42,305
41,183
1,122 (1)
44,791
43,687
1,104 (1)
309
49
6
2
655
64
10
6
6,206
89
5,669
89
(346)
(15)
(4)
(4)
537
-
(1)
(1,157)
1,156 (2)
265
44
584
56
(319)
(12)
1,176
1,216
25
39
5,916
32
-
5,441
32
-
(40)
(14)
475
-
-
(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
Long-term debt
(1) The difference between fair value carrying amount and aggregate unpaid principal includes changes in fair value recorded at and subsequent to funding, gains and losses on
the related loan commitment prior to funding, and premiums on acquired loans.
(2) Represents collateralized, non-recourse debt securities issued by certain of our consolidated securitization VIEs that are held by third party investors. To the extent cash
flows from the underlying collateral are not sufficient to pay the unpaid principal amount of the debt, those third party investors absorb losses.
217
Note 17: Fair Values of Assets and Liabilities (continued)
The assets and liabilities 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 and liabilities measured at
fair value are shown, by income statement line item, below.
2012
2011
2010
Net gains
Net gains
Net gains
Mortgage
(losses)
Mortgage
(losses)
Mortgage
(losses)
banking
from
Other
banking
from
Other
banking
from
Other
noninterest
trading noninterest
noninterest
trading noninterest
noninterest
trading noninterest
(in millions)
income activities
income
income
activities
income
income
activities
income
Year ended December 31,
Mortgages held for sale
$
8,240
Loans held for sale
Loans
Long-term debt
Other interests held
-
-
-
-
-
-
-
-
(42)
1
21
63
(27)
34
6,084
-
13
(11)
-
-
-
-
-
(25)
-
32
80
-
-
6,512
-
55
(48)
-
-
-
-
-
(13)
-
24
-
-
-
For performing loans, instrument-specific credit risk gains or
losses were derived principally by determining the change in fair
value of the loans due to changes in the observable or implied
credit spread. Credit spread is the market yield on the loans less
the relevant risk-free benchmark interest rate. 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. The following table shows the estimated
gains and losses from earnings attributable to instrument-
specific credit risk related to assets accounted for under the fair
value option.
(in millions)
Gains (losses) attributable to
instrument-specific credit risk:
Mortgages held for sale
Loans held for sale
Year ended December 31,
2012
2011
2010
$
(124)
21
(144)
32
(28)
24
Total
$
(103)
(112)
(4)
218
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial
instruments, excluding financial instruments recorded at fair
value on a recurring basis as they are included within the Assets
and Liabilities Recorded at Fair Value on a Recurring Basis table
included earlier in this Note. 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
Cash and due from banks (1)
Federal funds sold, securities purchased
under resale agreements and
other short-term investments (1)
Mortgages held for sale (2)
Loans held for sale (2)
Loans, net (3)
Nonmarketable equity investments (cost method)
Financial liabilities
Deposits
Short-term borrowings (1)
Long-term debt (4)
December 31, 2012
December 31, 2011
Estimated fair value
Carrying
amount
Level 1
Level 2
Level 3
Total
Carrying
amount
Estimated
fair value
$
21,860
21,860
-
-
21,860
19,440
19,440
137,313
5,046
132,267
-
137,313
44,367
44,367
4,844
104
763,968
6,799
1,002,835
57,175
127,366
-
-
-
-
-
-
-
3,808
83
1,045
29
4,853
112
3,566
162
3,566
176
56,237
2
716,114
8,229
772,351
8,231
731,308
8,061
723,867
8,490
946,922
57,020 1,003,942
920,070
921,803
57,175
119,220
-
11,063
57,175
130,283
49,091
125,238
49,091
126,484
(1) Amounts consist of financial instruments in which carrying value approximates fair value.
(2) Balance reflects MHFS and LHFS, as applicable, other than those MHFS and LHFS for which election of the fair value option was made.
(3) Loans exclude balances for which the fair value option was elected and also exclude lease financing with a carrying amount of $12.4 billion and $13.1 billion at
December 31, 2012 and 2011, respectively.
(4) The carrying amount and fair value exclude balances for which the fair value option was elected and obligations under capital leases of $12 million and $116 million at
December 31, 2012 and 2011, 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 $586 million and $495 million at
December 31, 2012 and 2011, respectively.
219
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
DEP Shares
Dividend Equalization Preferred Shares
Series G
7.25% Class A Preferred Stock
Series H
Floating Class A Preferred Stock
Series I
Floating Class A Preferred Stock
Series J
8.00% Non-Cumulative Perpetual Class A Preferred Stock
Series K
7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
Series L
7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock
Series N
5.20% Non-Cumulative Perpetual Class A Preferred Stock
Series O
5.125% Non-Cumulative Perpetual Class A Preferred Stock
Total
preferred stock includes Dividend Equalization Preferred (DEP)
shares and Series I, J, K, L, N and O which are presented in the
following two tables, and Employee Stock Ownership Plan
(ESOP) Cumulative Convertible Preferred Stock, which is
presented in the second table below and the table on the
following page.
2012
December 31,
2011
Liquidation
preference
per share
Shares
authorized
and designated
Liquidation
preference
per share
Shares
authorized
and designated
$
10
97,000
$
10
97,000
15,000
50,000
15,000
50,000
20,000
50,000
20,000
50,000
100,000
25,010
100,000
25,010
1,000
2,300,000
1,000
2,300,000
1,000
3,500,000
1,000
3,500,000
1,000
4,025,000
1,000
4,025,000
25,000
30,000
25,000
27,600
-
-
-
-
10,104,610
10,047,010
(in millions, except shares)
DEP Shares
Dividend Equalization Preferred Shares
Series I (1)
Floating Class A Preferred Stock
Series J (1)
8.00% Non-Cumulative Perpetual Class A Preferred Stock
Series K (1)
7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
Series L (1)
7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock
Series N (1)
5.20% Non-Cumulative Perpetual Class A Preferred Stock
Series O (1)
5.125% Non-Cumulative Perpetual Class A Preferred Stock
ESOP
Cumulative Convertible Preferred Stock
December 31, 2012
December 31, 2011
Shares
issued and
outstanding
Par Carrying
value
value Discount
Shares
issued and
outstanding
Par Carrying
value
value Discount
96,546 $
-
-
25,010
2,501
2,501
-
-
96,546 $
-
-
25,010
2,501
2,501
-
-
2,150,375
2,150
1,995
155
2,150,375
2,150
1,995
155
3,352,000
3,352
2,876
476
3,352,000
3,352
2,876
476
3,968,000
3,968
3,200
768
3,968,000
3,968
3,200
768
30,000
750
750
26,000
650
650
910,934
911
911
-
-
-
-
-
-
-
-
-
858,759
859
859
-
-
-
Total
10,558,865 $
14,282
12,883
1,399
10,450,690 $
12,830 11,431
1,399
(1) Preferred shares qualify as Tier 1 capital.
220
In August 2012, we issued 30 million Depositary Shares, each
representing a 1/1,000th interest in a share of the Non-
Cumulative Perpetual Class A Preferred Stock, Series N, for an
aggregate public offering price of $750 million.
In November 2012, we issued 26 million Depositary Shares,
each representing a 1/1,000th interest in a share of the Non-
Cumulative Perpetual Class A Preferred Stock, Series O, for an
aggregate public offering price of $650 million.
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)
2012
2011
2012
2011
Minimum
Maximum
Shares issued and outstanding
Carrying value
Adjustable
December 31,
December 31,
dividend rate
ESOP Preferred Stock
$1,000 liquidation preference per share
2012
2011
2010
2008
2007
2006
2005
2004
2003
$
245,604
277,263
201,011
73,434
53,768
33,559
18,882
7,413
-
-
370,280
231,361
89,154
68,414
46,112
30,092
17,115
6,231
246
277
201
73
54
34
19
7
-
-
370
232
89
69
46
30
17
6
10.00 %
9.00
9.50
10.50
10.75
10.75
9.75
8.50
8.50
11.00
10.00
10.50
11.50
11.75
11.75
10.75
9.50
9.50
Total ESOP Preferred Stock (1)
910,934
858,759
$
911
859
Unearned ESOP shares (2)
$
(986)
(926)
(1) At December 31, 2012 and 2011, additional paid-in capital included $75 million and $67 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.
221
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, 2012.
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
4,818,377
1,215,481
652,061,838
104,944,767
763,040,463
5,481,811,474
2,755,148,063
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, 2012, we have warrants outstanding and
exercisable to purchase 39,109,299 shares of our common stock
with an exercise price of $34.01 per share, expiring on
October 28, 2018. We purchased 70,210 and 264,972 of these
warrants in 2012 and 2011, respectively. These warrants were
issued in connection with our participation in the TARP CPP.
Dividend Reinvestment and Common Stock
Purchase Plans
Participants in our dividend reinvestment and common stock
direct purchase plans may purchase shares of our common stock
at fair market value by reinvesting dividends and/or making
optional cash payments, under the plan's terms.
Employee Stock Plans
We offer stock-based employee compensation plans as described
below. For information on our accounting for stock-based
compensation plans, see Note 1.
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 2012, 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 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
222
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,
2012
2011
2010
$
435
112
13
338
128
63
252
66
118
Total stock incentive compensation
expense
Related recognized tax benefit
$
$
560
529
436
211
200
165
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, 2012, was 173 million.
PARTNERSHARES PLAN In 1996, we adopted the
PartnerShares® Stock Option Plan, a broad-based employee
stock option plan. It covered 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, and no options were outstanding as of
December 31, 2012.
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, 2012, and changes during 2012 is in the
following table:
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. The awards vest
in the quarter after the end of the performance period. For
performance share awards whose performance period ended
December 31, 2012, the determination of the awards that will
vest will occur in the first quarter of 2013, after review of the
Company’s performance by the Human Resources Committee of
the Board of Directors.
A summary of the status of our performance awards at
December 31, 2012, and changes during 2012 is in the following
table, based on the target amount of awards:
Number
Nonvested at January 1, 2012
6,404,965
$
Granted
3,889,916
Nonvested at December 31, 2012
10,294,881
Weighted-
average
grant date
fair value
29.68
31.44
30.35
Number
Nonvested at January 1, 2012
39,280,129
$
Granted
Vested
Canceled or forfeited
19,766,280
(2,620,424)
(1,138,648)
Nonvested at December 31, 2012
55,287,337
Weighted-
average
grant-date
fair value
28.81
31.49
28.53
29.10
29.78
The weighted-average grant date fair value of performance
awards granted during 2011 and 2010 was $31.26 and $27.46,
respectively.
At December 31, 2012, there was $89 million of total
unrecognized compensation cost related to nonvested
performance awards. The cost is expected to be recognized over
a weighted-average period of 1.8 years. As of December 31, 2012,
no performance shares were vested.
The weighted-average grant date fair value of RSRs granted
during 2011 and 2010 was $31.02 and $27.29, respectively.
At December 31, 2012, there was $671 million of total
unrecognized compensation cost related to nonvested RSRs. The
cost is expected to be recognized over a weighted-average period
of 2.9 years. The total fair value of RSRs that vested during 2012,
2011 and 2010 was $89 million, $41 million and $15 million,
respectively.
223
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
Aggregate
average
remaining
exercise
contractual
intrinsic
value
Number
price term (in yrs.)
(in millions)
Incentive compensation plans
Options outstanding as of December 31, 2011
271,298,603
$
Granted
Canceled or forfeited
Exercised
Options exercisable and outstanding as of December 31, 2012
PartnerShares Plan
Options outstanding as of December 31, 2011
Canceled or forfeited
Exercised
1,828,758
(11,376,806)
(58,824,163)
202,926,392
7,477,472
(606,614)
(6,870,858)
38.14
31.82
73.59
21.78
40.84
25.25
25.25
25.25
3.7
$
1,119
Options outstanding as of December 31, 2012
-
-
-
-
721,432
82,893
(19,232)
(197,071)
588,022
29.56
33.82
33.41
25.45
31.42
3.2
2
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 reload options granted is generally
based on the midpoint between the valuation date and the
contractual termination date of the original option. 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. The expected
dividend is based on a fixed dividend amount.
Director awards
Options outstanding as of December 31, 2011
Granted
Canceled or forfeited
Exercised
Options exercisable and outstanding as of December 31, 2012
As of December 31, 2012, there was no unrecognized
compensation cost related to stock options. The total intrinsic
value of options exercised during 2012, 2011 and 2010 was
$694 million, $246 million and $298 million, respectively.
Cash received from the exercise of stock options for 2012,
2011 and 2010 was $1.5 billion, $554 million and $687 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.
224
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 the years shown resulted from the reload
feature.
Per share fair value of options granted $
Expected volatility
Expected dividends
Expected term (in years)
Risk-free interest rate
$
Year ended December 31,
2012
2011
2010
2.79
29.2 %
0.68
0.7
3.78
32.7
0.32
1.0
6.11
44.3
0.20
1.3
0.1 %
0.2
0.6
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. The ESOP feature enables the 401(k) Plan
to borrow money to purchase our preferred or common stock.
From 1994 through 2012, 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 401(k) Plan to make ESOP loan
payments, the ESOP preferred stock in the 401(k) Plan is
released and converted into our common stock shares.
Dividends on the common stock 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
stock shares, which are allocated to the 401(k) Plan participants
and invested in the Wells Fargo ESOP Fund within the 401(k)
Plan.
The balance of common stock and unreleased preferred stock
held in the Wells Fargo ESOP Fund, the fair value of unreleased
ESOP preferred stock and the dividends on allocated shares of
common stock and unreleased ESOP preferred stock paid to the
401(k) Plan were:
(in millions, except shares)
Allocated shares (common)
Unreleased shares (preferred)
Shares outstanding
December 31,
2012
2011
2010
136,821,035 131,046,406 118,901,327
618,382
910,934
858,759
Fair value of unreleased ESOP preferred shares
$
911
859
618
Allocated shares (common)
Unreleased shares (preferred)
Dividends paid
Year ended December 31,
$
2012
117
115
2011
60
95
2010
23
76
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.
225
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.
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 credits
after June 30, 2009. Investment credits continue to be allocated
to participants based on their accumulated balances.
We did not make a contribution to our Cash Balance Plan in
2012. We do not expect that we will be required to make a
contribution to the Cash Balance Plan in 2013; however, this is
dependent on the finalization of the actuarial valuation in 2013.
Our decision of whether to make a contribution in 2013 will be
based on various factors including the actual investment
performance of plan assets during 2013. Given these
uncertainties, we cannot estimate at this time the amount, if any,
that we will contribute in 2013 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 postretirement 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
Medicare Part D subsidy
Curtailment
Amendments
Liability transfer
Foreign exchange impact
2012
December 31,
2011
Pension benefits
Pension benefits
Non-
Other
Non-
Other
Qualified qualified
benefits
Qualified qualified
benefits
$
10,634
691
1,304
10,337
693
1,398
3
514
-
1,242
(725)
-
-
1
47
1
-
32
-
62
11
60
80
(23)
(66)
(147)
-
-
-
-
-
11
(3)
-
-
-
6
520
-
501
(726)
-
(3)
-
-
(1)
1
34
-
33
(70)
-
-
-
-
-
13
71
88
(105)
(171)
10
-
-
-
-
Benefit obligation at end of year
11,717
719
1,293
10,634
691
1,304
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
Medicare Part D subsidy
Asset transfer
Foreign exchange impact
Fair value of plan assets at end of year
9,061
1,149
9
-
-
-
66
-
640
55
(3)
80
9,639
139
10
-
-
-
70
-
697
10
6
88
(725)
(66)
(147)
(726)
(70)
(171)
-
44
1
9,539
-
-
-
-
11
-
-
-
-
(1)
636
9,061
-
-
-
-
10
-
-
640
Funded status at end of year
$
(2,178)
(719)
(657)
(1,573)
(691)
(664)
Amounts recognized in the balance sheet at end of year:
Liabilities
$
(2,178)
(719)
(657)
(1,573)
(691)
(664)
226
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,
2012
2011
$
12,391
12,389
11,325
11,321
9,490
9,061
The components of net periodic benefit cost and other
comprehensive income were:
2012
2011
December 31,
2010
Pension benefits
Pension benefits
Pension benefits
Non-
Other
Non-
Other
Non-
Other
Qualified qualified
benefits
Qualified qualified
benefits
Qualified
qualified
benefits
(in millions)
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service credit
Settlement loss
Curtailment loss (gain)
$
3
514
(652)
131
-
2
-
-
32
-
10
-
5
-
Net periodic benefit cost
(2)
47
Other changes in plan assets
and benefit obligations
recognized in other
comprehensive income:
Net actuarial loss (gain)
Amortization of net actuarial loss
Prior service cost
Amortization of prior service credit
Settlement
Curtailment
Translation adjustments
Total recognized in other
comprehensive income
Total recognized in net periodic
benefit cost and other
758
(131)
(2)
-
(1)
-
-
62
(10)
-
-
(5)
-
-
11
60
(36)
-
(2)
-
(3)
30
(42)
-
-
2
-
-
-
6
520
(759)
86
-
4
-
1
34
-
6
-
3
-
(143)
44
1,120
(86)
-
-
(4)
(3)
(1)
33
(6)
-
-
(3)
-
-
13
71
(41)
-
(3)
-
-
40
(74)
-
-
3
-
-
-
5
554
(717)
105
-
-
3
-
37
-
3
-
-
-
(50)
40
(59)
(105)
2
-
-
(3)
-
46
(3)
-
-
-
-
-
13
78
(29)
1
(4)
-
(4)
55
(9)
(1)
-
4
-
4
-
624
47
(40)
1,026
24
(71)
(165)
43
(2)
comprehensive income
$
622
94
(10)
883
68
(31)
(215)
83
53
227
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
Total
2012
December 31,
2011
Pension benefits
Pension benefits
Non-
Other
Non-
Other
Qualified qualified
benefits
Qualified qualified
benefits
$
3,323
184
(2)
-
-
-
19
(25)
1
2,699
137
-
-
-
-
$
3,321
184
(5)
2,699
137
61
(27)
1
35
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 2013 is
$182 million. The net prior service credit for the defined benefit
pension plans and other post retirement plans that will be
amortized from accumulated OCI into net periodic benefit cost
in 2013 is $2 million.
Plan Assumptions
For the years ended December 31, 2012 and 2011, the weighted-
average discount rate used to estimate the projected benefit
obligation for pension benefits (qualified and nonqualified) was
4.00% and 5.00%, respectively, and for other postretirement
benefits was 3.75% and 4.75%, respectively. For additional
information on our pension accounting assumptions, see Note 1.
The weighted-average assumptions used to determine the net periodic benefit cost were:
2012
Pension
Other
Pension
December 31,
2011
Other
Pension
2010
Other
benefits (1)
benefits
benefits (1)
benefits
benefits (1)
benefits
Discount rate
Expected return on plan assets
5.00 %
7.50
4.75
6.00
5.25
8.25
5.25
6.00
5.75
8.25
5.75
8.25
(1)
Includes both qualified and nonqualified pension benefits.
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 a range of average annual increases
of approximately 7.00% and 8.75%, dependent on plan type, for
health care costs in 2013. These rates are assumed to trend down
0.25% per year until the trend rate reaches an ultimate rate of
5.00% in 2020 through 2028, dependent on plan type. The 2012
periodic benefit cost was determined using initial annual trend
rates of 7.75%. These rates were assumed to decrease 0.25% per
year until they reached ultimate rates of 5.00% in 2023.
Increasing the assumed health care trend by one percentage
point in each year would increase the benefit obligation as of
December 31, 2012, by $58 million and the total of the interest
cost and service cost components of the net periodic benefit cost
for 2012 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, 2012, by $52 million and
the total of the interest cost and service cost components of the
net periodic benefit cost for 2012 by $2 million.
228
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.
Other benefit plan assets include (1) assets held in a 401(h)
trust, which are invested with a target mix of 40-60% for both
equities and fixed income, and (2) assets held in the Retiree
Medical Plan Voluntary Employees' Beneficiary Association
(VEBA) trust, which are invested with a general target asset mix
of 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.
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,
2013
$
2014
2015
2016
2017
838
813
789
785
782
74
69
64
64
59
2018-2022
3,454
274
98
100
103
105
106
511
13
14
11
11
11
53
229
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. 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, 2012
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
$
-
312
545
3,124
71
5
251
854
283
309
578
-
100
-
-
-
355
367
112
499
158
15
341
538
1
187
-
31
-
1
-
-
-
-
-
-
1
-
328
71
145
48
312
3,670
426
372
363
1,353
441
324
920
538
429
258
145
79
164
-
65
-
-
-
-
-
28
-
-
-
-
1
23
-
116
-
-
102
41
30
47
-
-
-
-
-
Total plan investments
$
2,996
6,040
594
9,630
258
359
Payable upon return of securities loaned
Net receivables (payables)
Total plan assets
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
$
-
376
88
10
147
1,163
364
281
570
-
102
-
-
-
432
2,229
380
366
184
600
183
10
349
574
-
-
-
29
Total plan investments
$
3,101
5,336
Payable upon return of securities loaned
Net receivables (payables)
Total plan assets
(112)
21
$
9,539
-
1
6
1
-
2
-
-
1
-
355
251
129
46
792
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
9,229
285
314
(145)
(23)
$
9,061
-
-
-
-
-
-
-
-
-
-
-
-
-
22
22
-
-
-
-
-
-
-
-
-
-
12
8
4
23
47
187
-
181
-
-
102
41
30
75
-
-
-
-
23
639
(3)
-
636
213
87
64
12
11
70
33
26
59
19
15
8
4
25
646
(5)
(1)
640
(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.
(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 eight unique investment strategies. For December 31, 2012 and 2011, respectively, approximately 24%
and 34% 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 six 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 across more than 30 hedge fund managers. Single manager allocation exposure is limited to 0.15%
(15 basis points) of total plan assets.
230
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)
Purchases,
sales
and
Transfers
Into/(Out
of)
Balance
end of
Year ended December 31, 2012
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, 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
$
$
$
$
$
$
$
$
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
-
-
-
-
-
22
1
8
1
32
-
-
-
-
-
-
-
-
-
-
10
5
1
4
20
-
-
-
-
-
-
-
-
-
-
2
2
10
3
17
-
-
-
-
-
-
1
-
(1)
(1)
22
(3)
16
-
34
-
-
-
-
-
-
-
-
-
1
(51)
8
(2)
(2)
-
(6)
(1)
(2)
(1)
-
(191)
-
-
(46)
(201)
(12)
(8)
(4)
(1)
(25)
1
(5)
-
(1)
(4)
(37)
(64)
-
1
(109)
-
(2)
-
1
(1)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1
-
-
-
1
328
71
145
48
594
-
-
-
22
22
1
6
1
2
1
355
251
129
46
792
12
8
4
23
47
(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 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.
Long Duration, Intermediate (Core), High-Yield, and
International Fixed Income – includes investments traded on
the secondary markets; prices are measured by using quoted
market prices for similar securities, pricing models, and
discounted cash flow analyses using significant inputs
observable in the market where available, or a combination of
multiple valuation techniques. This group of assets also includes
investments in registered investment companies valued at the
NAV of shares held at year end, highly liquid government
securities such as U.S. Treasuries and collective investment
funds described above.
Domestic, International and Emerging Market Stocks –
investments in exchange-traded equity securities are valued at
quoted market values. This group of assets 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-
231
Note 20: Employee Benefits and Other Expenses (continued)
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. This group of assets 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. This group of assets 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). 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 eligible certified
compensation. Effective January 1, 2010, previous and future
matching contributions are 100% vested for active participants.
In 2009, the 401(k) Plan was amended to permit us to make
discretionary profit sharing contributions. Based on 2012, 2011
and 2010 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 each
respective year, which resulted in recognizing $318 million, $311
million and $316 million of defined contribution retirement plan
expense recorded in 2012, 2011 and 2010, respectively. Total
defined contribution retirement plan expenses were $1,143
million, $1,104 million and $1,092 million in 2012, 2011 and
2010, 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,
2012
2011
2010
Outside professional services
$
2,729
2,692 2,370
Contract services
Foreclosed assets
Operating losses
Outside data processing
Postage, stationery and supplies
1,011
1,407 1,642
1,061
1,354 1,537
2,235
1,261 1,258
910
799
935 1,046
942
944
232
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 decreased OCI by $1.4 billion in
2012.
We have determined that a valuation reserve is required for
2012 in the amount of $579 million predominantly 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, 2012, we had net operating loss and credit
carry forwards with related deferred tax assets of $900 million
and $158 million, respectively. If these carry forwards are not
utilized, they will expire in varying amounts through 2032.
At December 31, 2012, we had undistributed foreign earnings
of $1.3 billion related to foreign subsidiaries. We intend to
reinvest these earnings indefinitely outside the U.S. and
accordingly have not provided $367 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. Our effective tax rate is calculated by dividing income tax
expense by income before income tax expense less the net
income from noncontrolling interests.
Note 21: Income Taxes
The components of income tax expense were:
(in millions)
Current:
Federal
State and local
Foreign
Year ended December 31,
2012
2011
2010
$
9,141
3,352
1,425
1,198
61
468
52
548
78
Total current
10,400
3,872
2,051
Deferred:
Federal
State and local
Foreign
(1,151)
3,088
4,060
(166)
20
471
14
211
16
Total deferred
(1,297)
3,573
4,287
Total
$
9,103
7,445
6,338
The tax effects of our temporary differences that gave rise to
significant portions of our deferred tax assets and liabilities are
presented in the following table.
(in millions)
Deferred tax assets
December 31,
2012
2011
Allowance for loan losses
$
6,192
6,955
Deferred compensation
and employee benefits
Accrued expenses
PCI loans
Basis difference in investments
Net operating loss and tax
credit carry forwards
Other
4,701
1,692
2,692
1,182
4,115
1,598
3,851
2,104
1,058
1,701
1,868
402
Total deferred tax assets
19,385
20,726
Deferred tax assets valuation allowance
(579)
(918)
Deferred tax liabilities
Mortgage servicing rights
Leasing
Mark to market, net
Intangible assets
Net unrealized gains on
securities available for sale
Insurance reserves
Other
(7,360)
(7,388)
(4,414)
(4,344)
(2,401)
(4,027)
(2,157)
(2,608)
(4,135)
(2,619)
(1,707)
(1,197)
(1,683)
(2,539)
Total deferred tax liabilities
(23,857) (24,722)
Net deferred tax liability (1) $
(5,051)
(4,914)
(1) Included in accrued expenses and other liabilities.
233
Note 21: Income Taxes (continued)
(in millions)
Amount
Rate
Amount
Rate
Amount
Rate
Statutory federal income tax expense and rate
$
9,800
35.0 %
$
8,160
35.0 %
$
6,545
35.0 %
2012
2011
2010
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
856
(414)
(132)
(815)
(524)
347
(15)
3.1
(1.5)
(0.5)
(2.9)
(1.9)
1.2
-
730
3.1
(334)
(1.4)
(247)
(1.1)
(735)
(3.2)
(222)
(1.0)
272
1.2
(179)
(0.7)
586
3.1
(283)
(1.5)
(258)
(1.3)
(577)
(3.1)
(223)
(1.2)
461
2.5
87
0.4
Effective income tax expense and rate
$
9,103
32.5 %
$
7,445
31.9 %
$
6,338
33.9 %
We are subject to U.S. federal income tax as well as income
tax in numerous state and foreign jurisdictions. We are routinely
examined by tax authorities in these various jurisdictions. The
IRS is currently examining the 2007 through 2010 consolidated
federal income tax returns of Wells Fargo & Company and its
subsidiaries. In addition, we are currently subject to examination
by various state, local and foreign taxing authorities. 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. Wachovia Corporation and its
subsidiaries are no longer subject to federal examination; with
few exceptions, they remain subject to state, local and foreign
income tax examinations for 2008.
We are also litigating or appealing various issues related to
our prior IRS examinations for the periods 1999 and 2003
through 2006. On December 1, 2011, we filed a Notice of Appeal
to the U.S. Court of Appeals for the Eighth Circuit relating to our
lease restructuring transaction and that case is still pending. 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. It is
possible that one or more of these examinations, appeals or
litigation may be resolved within the next twelve months
resulting in a decrease of up to $1.5 billion to our gross
unrecognized tax benefits.
The lower effective tax rates for 2012 and 2011, as compared
to 2010, were primarily due to the realization, for tax purposes,
of tax benefits on previously written down investments. For 2012
this includes a tax benefit resulting from the surrender of
previously written-down Wachovia life insurance investments.
In addition, the 2011 effective tax rate was lower than the 2010
effective tax rate due to 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)
Balance at beginning of year
Additions:
Year ended
December 31,
2012
2011
$
5,005 5,500
For tax positions related to the current year
For tax positions related to prior years
877
491
279
255
Reductions:
For tax positions related to prior years
Lapse of statute of limitations
Settlements with tax authorities
(114)
(358)
(23)
(167)
(75)
(596)
Balance at end of year
$
6,069 5,005
Of the $6.1 billion of unrecognized tax benefits at
December 31, 2012, approximately $4.3 billion would, if
recognized, affect the effective tax rate. The remaining
$1.8 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. At December 31, 2012 and 2011, we have
accrued approximately $1.0 billion and $871 million for the
payment of interest and penalties, respectively. We recognized in
income tax expense in 2012 and 2011, interest and penalties of
$92 million and $32 million, respectively.
234
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.
See Note 1 for discussion of private share repurchases and the
Consolidated Statement of Changes in Equity and Note 19 for
information about stock and options activity and terms and
conditions of warrants.
(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)
Year ended December 31,
2012
2011
2010
$
18,897
15,869
12,362
898
844
730
$
17,999
15,025
11,632
5,287.6
5,278.1
5,226.8
$
3.40
2.85
2.23
5,287.6
5,278.1
5,226.8
27.5
36.4
24.2
21.1
28.3
8.0
5,351.5
5,323.4
5,263.1
Per share
2.82
(1) Includes series J, K, L, I and N preferred stock dividends of $892 million, $844 million and $737 million for the years ended 2012, 2011 and 2010, respectively.
3.36
$
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,
2012
2011
2010
56.4
198.8
212.1
39.2
39.4
66.9
2.21
235
Note 23: Other Comprehensive Income
The components of other comprehensive income (OCI) and the related tax effects were:
(in millions)
Foreign currency translation adjustments:
Net unrealized gains (losses)
arising during the period
Reclassification of net gains
to net income
Net unrealized gains (losses)
arising during the period
Securities available for sale:
Net unrealized gains (losses)
arising during the period
Reclassification of net (gains) losses
Before
tax
Tax
effect
2012
Net of
tax
Before
tax
Tax
effect
2011
Net of
tax
Year ended December 31,
Before
tax
Tax
effect
2010
Net of
tax
$
(6)
(10)
2
4
(4)
(6)
(37)
13
(24)
83
(26)
57
-
-
-
-
-
-
(16)
6
(10)
(37)
13
(24)
83
(26)
57
5,143 (1,921)
3,222
(588)
359
(229)
2,624
(1,134)
1,490
to net income
(271)
102
(169)
(696)
262
(434)
77
(29)
48
Net unrealized gains (losses)
arising during the period
Derivatives and hedging activities:
Net unrealized gains arising
during the period
Reclassification of net gains on cash flow
4,872 (1,819)
3,053
(1,284)
621
(663)
2,701
(1,163)
1,538
52
(12)
40
190
(85)
105
750
(282)
468
hedges to net income
(388)
147
(241)
(571)
217
(354)
(613)
234
(379)
Net unrealized gains (losses)
arising during the period
Defined benefit plans adjustments:
Net actuarial gains (losses) arising
(336)
135
(201)
(381)
132
(249)
137
(48)
89
during the period
(775)
290
(485)
(1,079)
411
(668)
20
(9)
11
Amortization of net actuarial loss and prior
service cost to net income
144
(54)
90
99
(38)
61
104
(45)
59
Net unrealized gains (losses)
arising during the period
(631)
236
(395)
(980)
373
(607)
124
(54)
70
Other comprehensive income (loss)
$
3,889 (1,442)
2,447
(2,682)
1,139 (1,543)
3,045
(1,291)
1,754
Less: Other comprehensive income (loss) from
noncontrolling interests, net of tax
Wells Fargo other comprehensive
income (loss), net of tax
Cumulative OCI balances were:
(in millions)
Balance, December 31, 2009
Net change
Less: Other comprehensive income (loss)
from noncontrolling interests
Balance, December 31, 2010
Net change
Less: Other comprehensive income (loss)
from noncontrolling interests
Balance, December 31, 2011
Net change
Less: Other comprehensive income (loss)
from noncontrolling interests
Balance, December 31, 2012
236
4
$
2,443
(12)
(1,531)
25
1,729
Foreign
currency
translation
adjustments
$
$
67
57
12
112
(24)
(2)
90
(10)
-
80
Derivatives
and
hedging
activities
Defined
benefit
plans
adjustments
Cumulative
other
compre-
hensive
income
650
89
-
739
(249)
-
490
(201)
(1,249)
70
3,009
1,754
-
25
(1,179)
(607)
4,738
(1,543)
-
(1,786)
(395)
(12)
3,207
2,447
Securities
available
for sale
3,541
1,538
13
5,066
(663)
(10)
4,413
3,053
4
-
-
4
7,462
289
(2,181)
5,650
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 2011, we
realigned a private equity business into Wholesale Banking from
Community Banking. In first quarter 2012, we modified internal
funds transfer rates and the allocation of funding. 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 offers
private label financing solutions for retail merchants across the
United States and purchases 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.
Abbot Downing, a Wells Fargo business, provides
comprehensive wealth management services to ultra high net
worth families and individuals as well as their endowments and
foundations. 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.
237
Note 24: Operating Segments (continued)
(income/expense in millions, average balances in billions)
Banking
Banking Retirement Other (1)
Company
Community Wholesale
Brokerage
and
Wealth,
Consolidated
2012
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
Net interest income (2)
Provision (reversal of provision) for credit losses
Noninterest income
Noninterest expense
$
29,045
12,648
2,768
(1,231)
43,230
6,835
286
125
(29)
7,217
24,360
11,444
9,392
(2,340)
42,856
30,840
12,082
9,893
(2,417)
50,398
15,730
11,724
2,142
(1,125)
28,471
4,774
3,943
814
(428)
9,103
10,956
7,781
1,328
(697)
19,368
464
7
-
-
471
$
10,492
7,774
1,328
(697)
18,897
$
29,657
11,616
2,844
(1,354)
42,763
7,976
21,124
(110)
9,952
170
(137)
7,899
9,333
(2,224)
38,185
29,252
11,177
9,934
(970)
49,393
Income (loss) before income tax expense (benefit)
13,553
10,501
2,073
(2,471)
23,656
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
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)
2012
Average loans
Average assets
Average core deposits
2011
Average loans
Average assets
Average core deposits
4,104
9,449
316
3,495
7,006
19
785
(939)
7,445
1,288
(1,532)
16,211
7
-
342
$
9,133
6,987
1,281
(1,532)
15,869
$
31,885
11,474
2,707
(1,309)
44,757
13,807
1,920
334
(308)
15,753
22,604
10,951
9,023
(2,125)
40,453
30,071
11,269
9,768
(652)
50,456
10,611
3,347
9,236
3,315
1,628
(2,474)
19,001
616
(940)
6,338
7,264
5,921
1,012
(1,534)
12,663
274
20
7
-
301
$
6,990
5,901
1,005
(1,534)
12,362
$
$
487.1
761.1
591.2
273.8
481.7
227.0
42.7
(28.4)
775.2
164.6
137.5
(65.8)
1,341.6
(61.8)
893.9
496.3
752.3
556.3
249.1
428.1
202.1
43.0
(31.3)
757.1
155.2
130.0
(65.3)
1,270.3
(61.7)
826.7
(1) Includes Wachovia integration expenses, through completion in the first quarter of 2012, 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.
238
Note 25: Parent-Only Financial Statements
The following tables present Parent-only condensed financial
statements.
Parent-Only Statement of Income
(in millions)
Income
Dividends from subsidiaries:
Bank
Nonbank
Interest income from subsidiaries
Other interest income
Other income
Total income
Expense
Interest Expense:
Indebtedness to nonbank subsidiaries
Short-term borrowings
Long-term debt
Other
Noninterest expense
Total expense
Income before income tax benefit and
equity in undistributed income of subsidiaries
Income tax benefit
Equity in undistributed income of subsidiaries
Year ended December 31,
2012
2011
2010
$
11,767
11,546
1,150
897
222
267
140
914
242
460
12,896
21
1,375
304
363
14,303
13,302
14,959
287
1
1,877
23
1,127
3,315
10,988
(903)
7,006
254
1
2,423
8
77
2,763
10,539
(584)
4,746
312
1
2,874
2
1,335
4,524
10,435
(749)
1,178
Net income
$
18,897
15,869
12,362
239
Note 25: Parent-Only Financial Statements (continued)
Parent-Only Statement of Comprehensive Income
(in millions)
Net income
Other comprehensive income (loss), net of tax:
Securities available for sale
Derivatives and hedging activities
Defined benefit plans adjustment
Equity in other comprehensive income of subsidiaries
Other comprehensive income (loss), net of tax:
Year ended December 31,
2012
2011
2010
$
18,897
15,869
12,362
61
31
(379)
2,730
2,443
(50)
(1)
(650)
(830)
(1,531)
(30)
(88)
114
1,733
1,729
Total comprehensive income
$
21,340
14,338
14,091
December 31,
2012
2011
$
35,697
5
7,268
19,312
30
7,427
-
41,068
3,885
46,987
148,693
135,155
19,492
7,880
17,294
7,579
$
260,103
237,669
$
1,592
8,332
76,233
16,392
759
7,052
77,613
12,004
102,549
97,428
157,554
140,241
$
260,103
237,669
Parent-Only Balance Sheet
(in millions)
Assets
Cash and cash equivalents due from:
Subsidiary banks
Nonaffiliates
Securities available for sale
Loans to subsidiaries:
Bank
Nonbank
Investments in subsidiaries:
Bank
Nonbank
Other assets
Total assets
Liabilities and equity
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Indebtedness to nonbank subsidiaries
Total liabilities
Stockholders' equity
Total liabilities and equity
240
Parent-Only Statement of Cash Flows
(in millions)
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:
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
Other, net
Net cash provided by investing activities
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings and
indebtedness to subsidiaries
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
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
Year ended December 31,
2012
2011
2010
$
13,365
15,049
14,180
6,171
30
11,459
-
(5,845)
(16,487)
9,191
(1,850)
2,462
(5,218)
(2)
4,939
1,318
(1,340)
5,779
(610)
230
349
2,441
-
(119)
(5,485)
-
11,282
1,198
15
9,332
5,456
(242)
1,860
16,989
(18,693)
7,058
(31,198)
1,789
(23,281)
1,377
(892)
(1)
2,091
(3,918)
(4,565)
226
(14)
2,501
(844)
(2)
1,296
(2,416)
(2,537)
79
-
-
(737)
(545)
1,375
(91)
(1,045)
98
-
(1,944)
(26,305)
(20,577)
16,360
19,342
(10,907)
30,249
2,935
27,314
Cash and due from banks at end of year
$
35,702
19,342
30,249
241
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 $4.8 billion at
December 31, 2012. During 2012, we redeemed $2.7 billion of
trust preferred securities. Under applicable regulatory capital
guidelines issued by bank regulatory agencies, upon notice of
redemption, the redeemed trust preferred securities no longer
qualify as Tier 1 Capital for the Company. This redemption is
consistent with the Capital Plan the Company submitted to the
Federal Reserve Board and the actions the Company previously
announced on March 13, 2012.
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, 2012, 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, 2012, 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 (3)
Total capital (3)
Tier 1 leverage (2)
Wells Fargo & Company
Wells Fargo Bank, N.A.
Well-
Minimum
2012
2011
2012
2011
ratios (1)
ratios (1)
December 31,
capitalized
capital
$
126.6
157.6
114.0
148.5
101.3
124.8
92.6
117.9
$
1,077.1
1,336.4
1,005.6
1,262.6
1,002.0
923.2
1,195.9
1,115.4
11.75 %
14.63
9.47
11.33
14.76
9.03
10.11
12.45
8.47
10.03
12.77
8.30
6.00
10.00
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.
(3) Effective September 30, 2012, we refined our determination of the risk weighting of certain unused lending commitments that provide for the ability to issue standby letters
of credit and commitments to issue standby letters of credit under syndication arrangements where we have an obligation to issue in a lead agent or similar capacity beyond
our contractual participation level.
242
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, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in equity, and cash
flows for each of the years in the three-year period ended December 31, 2012. 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, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-
year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
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, 2012, 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 27, 2013, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.
San Francisco, California
February 27, 2013
243
Quarterly Financial Data
Condensed Consolidated Statement of Income - Quarterly (Unaudited)
2012
Quarter ended
2011
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
$
11,857
11,925
12,354
12,255
12,378
12,178
12,384
12,472
1,214
1,263
1,317
1,367
1,486
1,636
1,706
1,821
10,643
10,662
11,037
10,888
10,892
10,542
10,678
10,651
1,831
1,591
1,800
1,995
2,040
1,811
1,838
2,210
8,812
9,071
9,237
8,893
8,852
8,731
8,840
8,441
Service charges on deposit accounts
1,250
1,210
1,139
1,084
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains from trading activities
Net gains (losses) on debt securities available for
sale
Net gains from equity investments
Operating leases
Other
3,199
2,954
2,898
2,839
736
744
704
654
1,193
3,068
1,097
2,807
1,134
1,095
2,893
2,870
395
275
(63)
715
170
367
414
529
3
164
218
411
522
263
(61)
242
120
398
519
640
(7)
364
59
631
1,091
2,658
680
1,096
2,364
466
430
48
61
60
759
1,103
2,786
1,013
1,085
1,833
423
(442)
300
344
284
357
1,074
2,944
1,003
1,023
1,619
568
414
1,012
2,916
957
989
2,016
503
612
(128)
(166)
724
103
364
353
77
409
Total noninterest income
11,305
10,551
10,252
10,748
9,713
9,086
9,708
9,678
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Other
3,735
2,365
891
542
728
418
307
3,648
2,368
1,063
510
727
419
359
3,705
3,601
2,354
2,417
1,049
1,608
459
698
418
333
557
704
419
357
3,706
2,251
1,012
607
759
467
314
3,718
2,088
780
516
751
466
332
3,584
2,171
1,164
528
749
464
315
3,454
2,347
1,392
632
752
483
305
3,910
3,018
3,381
3,330
3,392
3,026
3,500
3,368
Total noninterest expense
12,896
12,112
12,397
12,993
12,508
11,677
12,475
12,733
Income before income tax expense
Income tax expense
Net income before
7,221
1,924
7,510
2,480
7,092
6,648
2,371
2,328
6,057
1,874
6,140
1,998
6,073
2,001
5,386
1,572
noncontrolling interests
Less: Net income from noncontrolling interests
5,297
207
5,030
4,721
4,320
4,183
4,142
4,072
3,814
93
99
72
76
87
124
55
Wells Fargo net income
Less: Preferred stock dividends and accretion and
other
Wells Fargo net income
$
5,090
4,937
4,622
4,248
4,107
4,055
3,948
3,759
233
220
219
226
219
216
220
189
applicable to common stock
$
4,857
4,717
4,403
4,022
3,888
3,839
3,728
3,570
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
Market price per common share (1)
$
0.92
0.91
0.89
0.88
0.83
0.82
0.76
0.75
0.74
0.73
0.73
0.72
0.70
0.70
0.68
0.67
0.22
5,272.4
0.22
5,288.1
0.22
5,306.9
0.22
5,282.6
0.12
5,271.9
0.12
5,275.5
0.12
5,286.5
0.12
5,278.8
5,338.7
5,355.6
5,369.9
5,337.8
5,317.6
5,319.2
5,331.7
5,333.1
High
Low
Quarter-end
$
36.34
31.25
36.60
32.62
34.59
29.80
34.59
27.94
34.18
34.53
33.44
34.14
27.97
22.61
27.56
29.63
22.58
24.12
32.63
25.26
28.06
34.25
29.82
31.71
(1) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
244
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
Funding sources
Deposits:
Average
balance
Yields/
rates
$
117,047
42,005
0.41 % $
3.28
5,281
36,391
1.64
4.64
90,898
32,669
123,567
50,025
215,264
47,241
135
179,493
105,107
17,502
12,461
39,665
2.71
6.53
3.72
3.91
3.87
3.50
9.03
3.85
4.02
4.97
6.43
2.32
354,228
3.87
244,634
76,908
23,839
87,601
4.39
4.28
12.43
6.05
432,982
5.15
787,210
4,280
4.58
5.21
2012
Interest
income/
expense
121
345
22
422
617
533
1,150
490
2,084
413
3
1,736
1,061
218
201
231
3,447
2,686
826
745
1,333
5,590
9,037
56
Quarter ended December 31,
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
Total earning assets
$
1,213,182
3.96 % $
12,059
1,135,733
4.41 % $
12,572
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
$
30,858
518,593
56,743
13,612
69,398
689,204
52,820
127,505
9,975
879,504
333,678
0.06 % $
0.10
1.27
1.51
0.15
0.23
0.21
2.30
2.27
0.55
-
5
135
181
51
27
399
28
735
56
1,218
-
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
-
Total funding sources
$
1,213,182
0.40
1,218
1,135,733
0.52
6
175
233
60
33
507
17
885
80
1,489
-
1,489
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
$
$
$
$
$
16,361
25,637
131,876
173,874
286,924
63,025
157,603
(333,678)
173,874
1,387,056
3.56 % $
10,841
3.89 % $
11,083
17,718
25,057
128,220
170,995
246,692
63,556
140,766
(280,019)
170,995
1,306,728
(1) Our average prime rate was 3.25% for the quarters ended December 31, 2012 and 2011. The average three-month London Interbank Offered Rate (LIBOR) was 0.32%
and 0.48% 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
(4) Nonaccrual loans and related income are included in their respective loan categories.
(5)
Includes taxable-equivalent adjustments of $198 million and $191 million for the quarters ended December 31, 2012 and 2011, respectively primarily related to tax-
amounts represent amortized cost for the periods presented.
exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.
245
Glossary of Acronyms
ACL
Allowance for credit losses
IFRS
International Financial Reporting Standards
ALCO
Asset/Liability Management Committee
LHFS
Loans held for sale
ARM
Adjustable-rate mortgage
LIBOR
London Interbank Offered Rate
ARS
ASC
ASU
AVM
BCBS
BHC
Auction rate security
LIHTC
Low-Income Housing Tax Credit
Accounting Standards Codification
LOCOM
Lower of cost or market value
Accounting Standards Update
Automated valuation model
LTV
MBS
Loan-to-value
Mortgage-backed security
Basel Committee on Bank Supervision
MHA
Making Home Affordable programs
Bank holding company
MHFS
Mortgages held for sale
CCAR
Comprehensive Capital Analysis and Review
CD
CDO
CLO
Certificate of deposit
Collateralized debt obligation
Collateralized loan obligation
CLTV
Combined loan-to-value
Capital Purchase Program
Constant prepayment rate
Commercial real estate
CPP
CPR
CRE
DOJ
DPD
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
OTTI
Other-than-temporary impairment
United States Department of Justice
PCI Loans
Purchased credit-impaired loans
Days past due
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
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
FHFA
Federal Housing Finance Agency
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FICO
Fair Isaac Corporation (credit rating)
FNMA
Federal National Mortgage Association
FRB
FSB
FTC
Board of Governors of the Federal Reserve System
Financial Stability Board
Federal Trade Commission
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
Home Price Index
Department of Housing and Urban Development
HPI
HUD
246
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, 2012, 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
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Ten Year Performance Graph
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247
Wells Fargo & Company
Wells Fargo & Company (NYSE: WFC) is a nationwide, diversified, community−based financial services company with $1.4 trillion in assets.
Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and
commercial finance through more than 9,000 stores, 12,000 ATMs, and the Internet, and has offices in 37 countries to support the bank’s customers
who conduct business in the global economy. With more than 265,000 team members, Wells Fargo serves one in three households in the United
States. Wells Fargo & Company was ranked No. 26 on Fortune’s 2012 rankings of America’s largest corporations. Wells Fargo’s vision is to satisfy
all our customers’ financial needs and help them succeed financially.
Common stock
Wells Fargo & Company is listed and trades on the
New York Stock Exchange: WFC
5,266,314,176 common shares outstanding (12/31/12)
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 2012 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, One Wells Fargo Center,
MAC D1053−300, 301 S. College Street, 30th Floor,
Charlotte, North Carolina 28202.
SEC filings
Our annual reports on Form 10−K, quarterly reports
on Form 10−Q, current reports on Form 8−K, and
amendments to those reports are available free of charge
on our website (www.wellsfargo.com) as soon as practical
after they are electronically filed with or furnished to the
SEC. Those reports and amendments are also available
free of charge on the SEC’s website at www.sec.gov.
Independent registered
public accounting firm
KPMG LLP
San Francisco, California
1−415−963−5100
Contacts
Investor Relations
1−415−371−2921
investorrelations@wellsfargo.com
Shareowner Services and
Transfer Agent
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164−0854
1−877−840−0492
www.shareowneronline.com
Annual Stockholders’ Meeting
8:30 a.m. Mountain Time
Tuesday, April 23, 2013
The Grand America Hotel
555 South Main Street
Salt Lake City, Utah 84111
Our reputation
American Banker
Most Powerful Women in Banking;
One of America’s Top Banking Teams
Barron’s
World’s 27th Most Respected Company
BLACK ENTERPRISE
One of the Top 40 Best Companies
for Diversity
Brand Finance
The Most Valuable Bank Brand
in the U.S.
Brand Z
Among the Top 20 Most Valuable
Brands in the World
CAREERS & the disABLED
Among Top 50 Employers
by Readers Choice
CIO
Among the Top 100 Companies for
Technology Innovations that Advance
Business Results
Corporate Responsibility
Among the 100 Best Corporate Citizens
DiversityInc
33rd Best Company for Diversity;
Top Company for Lesbian, Gay,
Bisexual & Transgender Employees;
Top Company for Community
Development
Forbes
Top 20 Biggest Public Companies
in the World
Fortune
World’s 45th Most Admired
Company, 26th in Revenue Among All
Companies in All Industries
Global Finance
Best Consumer Internet Bank in
the United States; Best Corporate/
Institutional Internet Bank
in North America; Best Mobile
Solution Provider
Human Rights Campaign
Perfect Score on Corporate
Equality Index
LATINAStyle
14th Best Company for Latinas
The Chronicle of Philanthropy
America’s Fourth Most Generous
Cash Donor
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.
248
Wells Fargo’s extensive network
Washington
228
Oregon
169
Nevada
145
California
1,416
Montana
57
Idaho
105
Wyoming
32
Utah
151
Colorado
243
Arizona
337
New Mexico
106
Alaska
57
Hawaii
3
Minnesota
244
Iowa
101
North Dakota
34
South Dakota
56
Nebraska
64
Kansas
46
Oklahoma
23
Texas
850
Wisconsin
109
Michigan
81
Vt.
7
N.H.
19
New York
228
Illinois
140
Indiana
92
Ohio
104
Pennsylvania
412
W. Virginia
25
Virginia
377
Kentucky
24
Tennessee
59
North Carolina
450
Mississippi
27 Alabama
170
South Carolina
179
Georgia
369
New Jersey
392
Delaware
32
Maryland
138
D.C.
41
Florida
801
Missouri
64
Arkansas
29
Louisiana
24
Chile
China
Colombia
Dominican Republic
Ecuador
Egypt
France
Germany
Hong Kong
India
Indonesia
Ireland
Italy
Japan
Jersey
Korea
Malaysia
Mexico
Philippines
Russia
Singapore
South Africa
Spain
Taiwan
Thailand
Turkey
United Arab Emirates
United Kingdom
Vietnam
(cid:1)(cid:45)(cid:42)(cid:48)(cid:41)(cid:31)(cid:580)(cid:47)(cid:35)(cid:32)(cid:580)(cid:50)(cid:42)(cid:45)(cid:39)(cid:31)
Argentina
Australia
Bahamas
Bangladesh
Brazil
Canada
Cayman Islands
Key rankings
Maine
6
Massachusetts
58
Rhode Island
7
Connecticut
101
Stores
(cid:379)(cid:391)(cid:370)(cid:379)(cid:377)
worldwide
(cid:1)(cid:21)(cid:13)(cid:46)
(cid:371)(cid:372)(cid:391)(cid:372)(cid:377)(cid:373)
wellsfargo.com
(cid:372)(cid:373)(cid:390)(cid:378)(cid:580)(cid:40)(cid:36)(cid:39)(cid:39)(cid:36)(cid:42)(cid:41)
active online
customers
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9.4 million
active mobile
customers
Wells Fargo
Customer
Connection
approximately
(cid:375)(cid:370)(cid:370)(cid:580)(cid:40)(cid:36)(cid:39)(cid:39)(cid:36)(cid:42)(cid:41)
customer
contacts
#1
#1
#1
#1
#1
#1
#1
#1
#1
#1
#1
#1
#1
#1
#1
Retail banking deposits 1
Total stores
Retail mortgage lender
Home loan originator to minority and low- to moderate-income
consumers & in low- to moderate-income neighborhoods
(2011 HMDA data)
Auto lender and used car auto lender
(AutoCount Jan. 2012–Dec. 2012, excluding leases)
Small Business lender (U.S. in dollars per 2011 Community
Reinvestment Act government data)
U.S. Small Business Administration’s (SBA) 7(a) lender in dollar
volume (2012)
Preferred stock underwriter (FY 2012, Bloomberg)
REIT preferred stock underwriter (FY 2012, Bloomberg)
Oil & gas loan syndications (FY 2012, Thomson Reuters LPC)
Consumer Internet Bank in the U.S. (2012 Global Finance
Magazine); and on “The Innovators” list at Bank Technology News
for online banking services (2012)
Corporate/Institutional Internet Bank in North America
(Global Finance Magazine)
in Mobile Banking for privacy, security, quality and availability
(Keynote’s Mobile Banking Scorecard 2012)
Mortgage servicer
Business and #2 Consumer Debit card issuer
#2
#2
#2
#2
#2
#2
#2
#3
#3
#3
#3
#4
#4
#4
#4
#5
#7
#7
#8
U.S. deposits
Annuity distributor (Transamerica Roundtable Survey)
Real estate loan syndications (FY 2012, Thomson Reuters LPC)
Asset-based loans (FY 2012, Thomson Reuters LPC)
REIT loan syndications (FY 2012, Thomson Reuters LPC)
Utilities loan syndications (FY 2012, Thomson Reuters LPC)
Provider of private student loans
Non-investment grade loan syndications (FY 2012, Thomson
Reuters LPC)
Middle market loan syndications (FY 2012, Thomson Reuters LPC)
Branded bank ATM owner (12,273 Wells Fargo ATMs)
Full-service retail brokerage provider based on number of
Financial Advisors
Loan syndications (FY 2012, Thomson Reuters LPC)
High grade loan syndications (FY 2012, Thomson Reuters LPC)
High grade bonds (FY 2012, Dealogic)
Wealth management provider (Barron’s)
IRA provider (Cerulli Associates)
Institutional retirement plan recordkeeper
(PLANSPONSOR Magazine)
Merchant processor for Credit and Debit Cards
Family wealth provider (Bloomberg)
1 Deposits up to $500 million in a single banking store, excludes non-retail stores and credit unions. Source: SNL
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.
Together we’ll go far
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