SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended March 31, 2012 |
or
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-31557
Wachovia
Preferred Funding Corp.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware |
|
56-1986430 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
90 South 7th Street, 13th Floor
Minneapolis, Minnesota 55402
(Address of principal executive offices)
(Zip Code)
(855)
825-1437
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company.
|
|
|
|
|
|
|
Large accelerated filer ¨ |
|
Accelerated filer ¨ |
|
Non-accelerated filer x |
|
Smaller reporting company ¨ |
|
|
|
|
(Do not check if a smaller
reporting company.) |
|
|
Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING
FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest practicable date.
As of April 30, 2012, there were 99,999,900 shares of the
registrants common stock outstanding.
FORM 10-Q
CROSS-REFERENCE INDEX
1
PART I FINANCIAL INFORMATION
Summary Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
|
% Change March 31, 2012 from |
|
(in thousands, except per share data) |
|
|
|
Mar. 31, 2012 |
|
|
Dec. 31,
2011 |
|
|
Mar. 31, 2011 |
|
|
|
|
Dec. 31, 2011 |
|
|
Mar. 31, 2011 |
|
|
|
|
|
|
|
|
|
For the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
150,015 |
|
|
|
141,562 |
|
|
|
210,867 |
|
|
|
|
|
6 |
% |
|
|
(29 |
) |
Net income available to common stockholders |
|
|
|
|
100,429 |
|
|
|
94,669 |
|
|
|
164,921 |
|
|
|
|
|
6 |
|
|
|
(39 |
) |
Diluted earnings per common share |
|
|
|
|
1.00 |
|
|
|
0.95 |
|
|
|
1.65 |
|
|
|
|
|
5 |
|
|
|
(39 |
) |
Profitability ratios (annualized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
|
|
4.40 |
% |
|
|
4.08 |
|
|
|
5.19 |
|
|
|
|
|
8 |
|
|
|
(15 |
) |
Return on average stockholders equity |
|
|
|
|
4.45 |
|
|
|
4.11 |
|
|
|
5.26 |
|
|
|
|
|
8 |
|
|
|
(15 |
) |
Average stockholders equity to assets |
|
|
|
|
98.70 |
|
|
|
99.31 |
|
|
|
98.71 |
|
|
|
|
|
- |
|
|
|
- |
|
Dividend payout ratio |
|
|
|
|
133.00 |
|
|
|
155.33 |
|
|
|
128.02 |
|
|
|
|
|
(14 |
) |
|
|
4 |
|
Total revenue |
|
$ |
|
|
217,276 |
|
|
|
230,234 |
|
|
|
280,800 |
|
|
|
|
|
(6 |
) |
|
|
(23 |
) |
Average loans |
|
|
|
|
12,259,816 |
|
|
|
12,472,898 |
|
|
|
14,850,696 |
|
|
|
|
|
(2 |
) |
|
|
(17 |
) |
Average assets |
|
|
|
|
13,726,605 |
|
|
|
13,770,915 |
|
|
|
16,482,360 |
|
|
|
|
|
- |
|
|
|
(17 |
) |
Net interest margin |
|
|
|
|
6.26 |
% |
|
|
6.55 |
|
|
|
6.92 |
|
|
|
|
|
(4 |
) |
|
|
(10 |
) |
Net loan charge-offs |
|
$ |
|
|
53,173 |
|
|
|
50,707 |
|
|
|
65,322 |
|
|
|
|
|
5 |
|
|
|
(19 |
) |
As a percentage of average total loans (annualized) |
|
|
|
|
1.74 |
% |
|
|
1.61 |
|
|
|
1.78 |
|
|
|
|
|
8 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
At period end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
$ |
|
|
12,639,638 |
|
|
|
12,543,776 |
|
|
|
14,286,152 |
|
|
|
|
|
1 |
|
|
|
(12 |
) |
Allowance for loan losses |
|
|
|
|
309,913 |
|
|
|
313,762 |
|
|
|
389,310 |
|
|
|
|
|
(1 |
) |
|
|
(20 |
) |
As a percentage of total loans |
|
|
|
|
2.45 |
% |
|
|
2.50 |
|
|
|
2.73 |
|
|
|
|
|
(2 |
) |
|
|
(10 |
) |
Assets |
|
$ |
|
|
13,679,834 |
|
|
|
13,534,395 |
|
|
|
15,656,496 |
|
|
|
|
|
1 |
|
|
|
(13 |
) |
Total stockholders equity |
|
|
|
|
13,452,872 |
|
|
|
13,502,443 |
|
|
|
15,562,794 |
|
|
|
|
|
- |
|
|
|
(14 |
) |
Total nonaccrual loans and foreclosed assets |
|
|
|
|
414,133 |
|
|
|
356,019 |
|
|
|
363,226 |
|
|
|
|
|
16 |
|
|
|
14 |
|
As a percentage of total loans |
|
|
|
|
3.28 |
% |
|
|
2.84 |
|
|
|
2.54 |
|
|
|
|
|
15 |
|
|
|
29 |
|
Loans 90 days or more past due and still accruing (1) |
|
$ |
|
|
21,771 |
|
|
|
38,096 |
|
|
|
27,182 |
|
|
|
|
|
(43 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The carrying value of PCI loans contractually 90 days or more past due is excluded. 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. |
2
This Report on Form 10-Q for the quarter ended March 31, 2012, including the Financial
Statements and related Notes, has forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly
rely on forward-looking statements. Actual results might differ materially from our forecasts and expectations due to several factors, some of which are discussed in the Forward-Looking Statements section in this Report. Some of these
factors are also described in the Financial Statements and related Notes. For a discussion of other important factors, refer to the Risk Factors section in this Report and to the Risk Factors section in our Annual Report on
Form 10-K for the year ended December 31, 2011 (2011 Form 10-K), filed with the Securities and Exchange Commission (SEC) and available on the SECs website at www.sec.gov and on Wells Fargos website,
www.wellsfargo.com/invest_relations/filings/preferred-funding.
Wachovia Funding, we, our
and us refer to Wachovia Preferred Funding Corp. Wachovia Preferred Holding refers to Wachovia Preferred Funding Holding Corp., the Bank refers to Wells Fargo Bank, National Association including predecessor
entities, Wachovia refers to Wachovia Corporation, a North Carolina corporation, and Wells Fargo refers to Wells Fargo & Company.
Financial Review
Overview
Wachovia Funding is engaged in acquiring, holding and managing domestic real estate-related assets and
other authorized investments that generate net income for distribution to our shareholders. We are classified as a real estate investment trust (REIT) for income tax purposes. As of March 31, 2012, we had $13.7 billion in assets, which included
$12.6 billion in loans.
We are a direct subsidiary of Wachovia Preferred Holding and an indirect subsidiary of Wells Fargo
and the Bank. At March 31, 2012, the Bank was considered well-capitalized under risk-based capital guidelines issued by federal banking regulators.
REIT Tax Status
For the tax year ending December 31, 2012, we expect to be taxed as a
REIT, and we intend to comply with the relevant provisions of the Code to be taxed as a REIT. These provisions for qualifying as a REIT for federal income tax purposes are complex, involving many requirements, including among others, distributing
the majority of our earnings to shareholders and satisfying certain asset, income and stock ownership tests. To the extent we meet those provisions, with the exception of the income of our taxable REIT subsidiary, we will not be subject to federal
income tax on net income. We currently believe that we continue to satisfy each of these requirements and therefore continue to qualify as a REIT. We continue to monitor each of these complex tests.
In the event we do not continue to qualify as a REIT, we believe there should be minimal adverse effect of that characterization to us
or to our shareholders:
|
|
|
From a shareholders perspective, the dividends we pay as a REIT are ordinary income not eligible for the dividends received deduction for
corporate shareholders or for the favorable maximum 15% rate applicable to qualified dividends received by non-corporate taxpayers. If we were not a REIT, dividends we pay generally would qualify for the dividends
|
|
|
received deduction and the favorable tax rate applicable to non-corporate taxpayers. |
|
|
|
In addition, we would no longer be eligible for the dividends paid deduction, thereby creating a tax liability for us. Wells Fargo agreed to make, or
cause its subsidiaries to make, a capital contribution to us equal in amount to any income taxes payable by us. Therefore, we believe a failure to qualify as a REIT would not result in any net capital impact to us. |
Financial Performance
Our first quarter
2012 results declined from first quarter 2011 due to a year over year earnings decline in average earning assets. Our first quarter 2012 net income was $150.0 million compared with $210.9 million in first quarter 2011. Diluted earnings per common
share were $1.00, compared with $1.65 from a year ago. Our net income decline from first quarter 2011 was primarily driven by lower interest and noninterest income, which more than offset a lower provision for credit losses and lower noninterest
expense. The lower interest income was driven by a decrease in average balances of interest-earning assets and in average yield on total interest-earning assets.
Loans
Total loans, which consist of loan participation interests, were $12.6 billion at
March 31, 2012, up slightly from $12.5 billion at December 31, 2011. Loans represented approximately 92% and 93% of assets at March 31, 2012 and December 31, 2011, respectively. We continued reinvesting loan pay-downs in first
quarter 2012 through a purchase of $943.5 million of consumer loans from the Bank. In first quarter 2011, we did not purchase loans from the Bank. Our board of directors declared a special capital distribution of $2.5 billion to holders of our
common stock in first quarter 2011 that reduced relatively high levels of cash on our balance sheet, in order to continue to qualify for the exemption from registration under the Investment Company Act. If in future periods we do not reinvest loan
pay-downs at anticipated levels by purchasing loans, management may request our board of directors to consider an additional return of capital to holders of our common stock.
3
Purchased credit-impaired (PCI) loans were less than 1 percent of total loans at both
March 31, 2012 and December 31, 2011. See Note 1 (Summary of Significant Accounting Policies Loans) in our 2011 Form 10-K for additional information.
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. This action increased our nonaccrual loans by $55.2 million resulting in nonaccrual loans of $407.4 million at March 31, 2012 up from $349.1 million at December 31, 2011. See the Risk Management
Credit Risk Management Nonperforming Assets section in this report for more information.
We believe it
is important to maintain a well controlled operating environment and manage risks inherent in our business. We manage our credit risk by setting what we believe are sound credit policies for acquired loans, while monitoring and reviewing the
performance of our loan portfolio.
Capital Distributions
In first quarter 2012, our board of directors declared distributions totaling $49.6 million to holders of our preferred securities, which included $13.6 million in dividends payable on April 2, 2012
to our Series A preferred securities held by non-affiliated investors. Distributions on preferred securities were $45.9 million in first quarter 2011, which included $13.6 million in dividends on our Series A preferred securities.
In first quarter 2012, our board of directors also declared distributions totaling $150.0 million to holders of our common stock.
Distributions to holders of our common stock totaled $2.7 billion in first quarter 2011, which included $224.0 million in dividends and a $2.5 billion special capital distribution.
4
Earnings Performance
Net Income Available to Common Stockholders
We earned net income available to common stockholders of $100.4 million and $164.9 million in first quarter 2012 and 2011, respectively. The decrease in year over year first quarter net income was
primarily attributable to lower net interest income.
Interest Income
Interest income of $216.9 million in first quarter 2012 compared with $280.3 million a year ago. The decrease from 2011 relates to lower average interest-earning assets and lower average yield on total
interest-earning assets. The average yield on total interest-earning assets was 6.26% in first quarter 2012 compared with 6.92% in first quarter 2011. The overall decline in the average yield on the combined consumer and commercial loan portfolio
was primarily attributable to a decline in the accretion of discounts on purchased consumer loans. In first quarter 2012 and 2011,
interest income included discount accretion of $38.7 million and $67.5 million, respectively. The decrease
in discount accretion was primarily driven by lower loan pay-downs and pay-offs in first quarter 2012 compared to first quarter 2011 and a decrease in average discount balances year-over-year.
Average consumer loans decreased $2.4 billion to $11.0 billion compared with the first quarter of 2011 while average commercial loans decreased $236.3 million to
$1.3 billion in the same period due to pay-downs, charge-offs and loan sales. To the extent we reinvest loan pay-downs or make purchases, we anticipate that we will acquire consumer and commercial real-estate secured loans and other
REIT-eligible assets. See the interest rate risk management section under Risk Management for more information on interest rates and interest income.
Table 1 presents the components of earning assets and related average yield to provide an analysis of year-over-year changes that influenced interest income.
Table 1: Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
Average
balance |
|
|
|
Interest income |
|
|
|
Yields |
|
|
|
Average balance |
|
|
|
Interest income |
|
|
|
Yields |
|
|
|
Commercial
loans |
|
$ |
1,294,510 |
|
|
|
7,771 |
|
|
|
2.41 |
% |
|
$ |
1,530,766 |
|
|
|
8,973 |
|
|
|
2.38 |
% |
Real estate 1-4 family |
|
|
10,965,306 |
|
|
|
208,523 |
|
|
|
7.62 |
|
|
|
13,319,930 |
|
|
|
271,180 |
|
|
|
8.23 |
|
Interest-bearing deposits in banks and other interest-earning assets |
|
|
1,631,314 |
|
|
|
624 |
|
|
|
0.15 |
|
|
|
1,513,799 |
|
|
|
189 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
13,891,130 |
|
|
|
216,918 |
|
|
|
6.26 |
% |
|
$ |
16,364,495 |
|
|
|
280,342 |
|
|
|
6.92 |
% |
|
|
5
Interest Expense
Wachovia Funding has a $1.0 billion line of credit with the Bank, and our subsidiaries Wachovia Real Estate Investment Corp. and Wachovia Preferred Realty, LLC (WPR) have lines of credit with the Bank of
$1.0 billion and $200.0 million, respectively. Based on sufficient levels of cash and cash equivalents, we did not borrow on our line of credit in first quarter 2012 or 2011; accordingly, we did not incur interest expense during these periods.
Provision for Credit Losses
The provision for credit losses was $51.3 million in first quarter 2012 compared with $52.5 million in first quarter 2011. The first quarter 2012 decrease
in the provision for credit losses primarily resulted from lower net charge-offs, partially offset by a decrease in the level of allowance release in first quarter 2012 compared with first quarter 2011. The decrease in charge-offs was primarily
driven by improvement in consumer delinquency levels as well as lower loan balances. Please refer to the Balance Sheet Analysis and Risk ManagementAllowance for Credit Losses sections in this Report for additional information
on the allowance for loan losses.
Noninterest Income
Noninterest income totaled $360 thousand in first quarter 2012 compared with $460 thousand in first quarter 2011, which included a $113 thousand gain on loan sales to affiliate. Noninterest income also
includes gains on interest rate swaps of $56 thousand in first quarter 2012 compared with gains of $110 thousand in first quarter 2011. Our interest rate swaps lose value in an increasing rate environment and gain value in a declining rate
environment. The interest rate swaps terminate in June 2012.
Noninterest Expense
Noninterest expense totaled $15.9 million in first quarter 2012 compared with $17.4 million in the same period a year ago. Noninterest expense primarily
consists of loan servicing costs, and to a lesser extent, management fees, foreclosed assets expense and other expenses.
Loan servicing costs decreased $2.2 million to $10.8 million in first quarter 2012, which reflected a decrease in the
commercial and consumer loan portfolios. These costs are driven by the size and mix of our loan portfolio.
Management
fees were $1.9 million in first quarter 2012 compared with $1.2 million in first quarter 2011. The increase in management fees related to inclusion of certain technology system and support expenses in the expense base subject to allocation
which were not allocated in first quarter 2011. Management fees represent reimbursements for general overhead expenses paid on our behalf.
Foreclosed assets expense was $2.3 million in first quarter 2012 and $2.5 million in first quarter 2011.
Income Tax Expense
Income tax expense, which is based on the pre-tax income of WPR, our taxable REIT subsidiary, was $89 thousand and $92 thousand in first quarter 2012 and 2011, respectively. WPR holds our interest rate
swaps as well as certain cash investments.
6
Balance Sheet Analysis
Total Assets
Our assets primarily consist of commercial and consumer loans, although we have the authority to hold assets other than loans. Total assets were $13.7 billion at March 31, 2012, compared with $13.5
billion at December 31, 2011. The increase in total assets was primarily attributable to a $49.3 million increase in cash and cash equivalents and a $95.9 million increase in loans, net of unearned income. Loans, net of unearned income were 92%
of total assets at March 31, 2012, compared with 93% at December 31, 2011.
Cash and Cash Equivalents
Cash and cash equivalents was $1.2 billion at March 31, 2012 and December 31, 2011. In first quarter 2012, we reinvested loan pay-downs in loan
participations by purchasing $943.5 million of consumer loans from the Bank.
Loans
Loans, net of unearned income increased $95.9 million to $12.6 billion at March 31, 2012, compared with $12.5 billion at December 31, 2011,
primarily reflecting a loan purchase partially offset by pay-downs, charge-offs and loan sales across the entire portfolio. In first quarter 2012, we purchased consumer loans from the Bank at an estimated fair value of $943.5 million. We did not
purchase loans in first quarter 2011. At March 31, 2012 and December 31, 2011, consumer loans represented 90% and 89% of loans, respectively, and commercial loans represented the balance of our loan portfolio.
Allowance for Loan Losses
The allowance
for loan losses decreased $3.9 million to $309.9 million at March 31, 2012, from $313.8 million at December 31, 2011. The decrease in the allowance is due to lower levels of inherent credit loss in the portfolio compared with prior
year-end levels. The improvement in credit quality across the commercial and consumer portfolios reflected lower levels of delinquency.
At March 31, 2012, the allowance for loan losses included $290.2 million for consumer loans and $19.7 million for commercial
loans. The total allowance reflects managements estimate of credit losses inherent in the loan portfolio at the balance sheet date. The Risk ManagementAllowance for Credit Losses section in this Report describes how
management estimates the allowance for loan losses and the allowance for unfunded credit commitments.
Interest Rate Swaps
Interest rate swaps are carried at fair value, which resulted in a net asset position of $1.0 million at both March 31, 2012 and December 31,
2011. The contracts terminate in June 2012.
Accounts Receivable/PayableAffiliates, Net
The accounts payable and receivable from affiliates result from intercompany transactions related to net loan pay-downs, interest receipts, and other
transactions with the Bank.
Dividends PayableAffiliates
Dividends payable affiliates was $186.1 million at March 31, 2012, which represents first quarter 2012 accrued dividends payable primarily to Wachovia Preferred Holding, these dividends were
paid on April 2, 2012.
7
Risk Management
We use Wells Fargos risk management framework to manage our credit, interest rate, market and
liquidity risks.
For more information about how we manage these risks, see the Risk Management section in our
2011 Form 10-K. The discussion that follows is intended to provide an update on these risks.
Loans represent the largest
component of 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).
Credit Risk Management
Table 2: Total Loans Outstanding by Portfolio
Segment and Class of Financing Receivable
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31,
2012 |
|
|
Dec. 31,
2011 |
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
281,512 |
|
|
|
287,174 |
|
Real estate mortgage |
|
|
924,465 |
|
|
|
1,015,087 |
|
Real estate construction |
|
|
39,821 |
|
|
|
45,887 |
|
Total commercial |
|
|
1,245,798 |
|
|
|
1,348,148 |
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
8,124,256 |
|
|
|
7,945,746 |
|
Real estate 1-4 family junior lien mortgage |
|
|
3,269,584 |
|
|
|
3,249,882 |
|
|
|
|
Total consumer |
|
|
11,393,840 |
|
|
|
11,195,628 |
|
Total loans |
|
$ |
12,639,638 |
|
|
|
12,543,776 |
|
The discussion that follows provides analysis of the risk elements of our various loan portfolios and
updates our credit risk management and measurement practices as appropriate. See Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.
By the nature of our status as a REIT, the composition of the loans underlying the participation interests are highly concentrated in
real estate.
We continually evaluate and modify our credit policies to address appropriate levels of risk. Measuring and
monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, Fair Isaac Corporation (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.
8
LOAN PORTFOLIO BY GEOGRAPHY The following table is a summary of the geographical distribution of our loan
portfolio for the top five states by loans outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 3: Loan Portfolio by Geography |
|
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
1-4 family |
|
|
|
|
|
% of |
|
|
|
|
|
|
first |
|
|
junior lien |
|
|
|
|
|
total |
|
(in thousands) |
|
Commercial |
|
|
mortgage |
|
|
mortgage |
|
|
Total |
|
|
loans |
|
|
|
Florida |
|
$ |
319,182 |
|
|
|
1,020,423 |
|
|
|
428,488 |
|
|
|
1,768,093 |
|
|
|
14 |
% |
New Jersey |
|
|
219,113 |
|
|
|
845,061 |
|
|
|
644,224 |
|
|
|
1,708,398 |
|
|
|
14 |
|
Pennsylvania |
|
|
54,561 |
|
|
|
1,012,762 |
|
|
|
524,177 |
|
|
|
1,591,500 |
|
|
|
13 |
|
North Carolina |
|
|
221,228 |
|
|
|
841,830 |
|
|
|
254,324 |
|
|
|
1,317,382 |
|
|
|
10 |
|
Virginia |
|
|
210,753 |
|
|
|
616,615 |
|
|
|
331,674 |
|
|
|
1,159,042 |
|
|
|
9 |
|
All other states |
|
|
220,961 |
|
|
|
3,787,565 |
|
|
|
1,086,697 |
|
|
|
5,095,223 |
|
|
|
40 |
|
|
|
Total
loans |
|
$ |
1,245,798 |
|
|
|
8,124,256 |
|
|
|
3,269,584 |
|
|
|
12,639,638 |
|
|
|
100 |
% |
|
|
COMMERCIAL AND INDUSTRIAL LOANS Table 4 summarizes commercial and industrial loans by industry. We believe the commercial and industrial loans portfolio is well underwritten
and is diverse in its risk. Our credit risk management process for this portfolio primarily focuses on a customers ability to repay the loan through their cash
flow. A majority of our commercial and industrial loans portfolio is secured by short-term liquid assets, such as accounts receivable, inventory and securities, as well as long-lived assets, such
as equipment and other business assets. Generally, the collateral securing this portfolio represents a secondary source of repayment.
|
|
|
|
|
|
|
|
|
Table 4:
Commercial and Industrial Loans by Industry |
|
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
total |
|
(in thousands) |
|
Total |
|
|
loans |
|
|
|
Management of companies
and enterprises |
|
$ |
175,395 |
|
|
|
62 |
% |
Other services (except public administration) |
|
|
35,388 |
|
|
|
12 |
|
Real estate-other (1) |
|
|
27,858 |
|
|
|
10 |
|
Manufacturing |
|
|
24,789 |
|
|
|
9 |
|
Healthcare and social assistance |
|
|
5,729 |
|
|
|
2 |
|
Wholesale trade |
|
|
5,161 |
|
|
|
2 |
|
Finance and insurance |
|
|
2,116 |
|
|
|
1 |
|
Construction |
|
|
1,763 |
|
|
|
1 |
|
Other |
|
|
3,313 |
|
|
|
1 |
|
|
|
Total
loans |
|
$ |
281,512 |
|
|
|
100 |
% |
|
|
(1) Includes lessors, building operators and real estate agents.
9
COMMERCIAL REAL ESTATE (CRE) The CRE portfolio consists of both CRE mortgage loans and CRE construction loans. Table 5 summarizes CRE loans by state and property type. The underwriting of CRE loans primarily focuses on cash flows
inherent in the creditworthiness of the customer,
in addition to collateral valuations. To identify and manage newly emerging problem CRE loans, we employ a
high level of monitoring and regular customer interaction to understand and manage the risks associated with these loans, including regular loan reviews and appraisal updates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 5: CRE Loans by State and Property Type |
|
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
Real estate |
|
|
Real estate |
|
|
|
|
|
total |
|
(in thousands) |
|
mortgage |
|
|
construction |
|
|
Total |
|
|
loans |
|
|
|
By state: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida |
|
$ |
268,592 |
|
|
|
13,286 |
|
|
|
281,878 |
|
|
|
29 |
% |
North Carolina |
|
|
203,630 |
|
|
|
12,479 |
|
|
|
216,109 |
|
|
|
22 |
|
New Jersey |
|
|
168,686 |
|
|
|
2,115 |
|
|
|
170,801 |
|
|
|
18 |
|
South Carolina |
|
|
60,230 |
|
|
|
117 |
|
|
|
60,347 |
|
|
|
6 |
|
Georgia |
|
|
44,590 |
|
|
|
1,620 |
|
|
|
46,210 |
|
|
|
5 |
|
All other states |
|
|
178,737 |
|
|
|
10,204 |
|
|
|
188,941 |
|
|
|
20 |
|
|
|
Total
loans |
|
$ |
924,465 |
|
|
|
39,821 |
|
|
|
964,286 |
|
|
|
100 |
% |
|
|
By property: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office buildings |
|
$ |
241,131 |
|
|
|
5,182 |
|
|
|
246,313 |
|
|
|
26 |
% |
Industrial/warehouse |
|
|
182,041 |
|
|
|
- |
|
|
|
182,041 |
|
|
|
19 |
|
Retail (excluding shopping center) |
|
|
141,991 |
|
|
|
2,200 |
|
|
|
144,191 |
|
|
|
15 |
|
Shopping center |
|
|
86,218 |
|
|
|
- |
|
|
|
86,218 |
|
|
|
9 |
|
Hotel/motel |
|
|
82,159 |
|
|
|
153 |
|
|
|
82,312 |
|
|
|
8 |
|
Real estate - other |
|
|
68,590 |
|
|
|
6,699 |
|
|
|
75,289 |
|
|
|
8 |
|
Apartments |
|
|
57,104 |
|
|
|
713 |
|
|
|
57,817 |
|
|
|
6 |
|
Institutional |
|
|
50,019 |
|
|
|
- |
|
|
|
50,019 |
|
|
|
5 |
|
Land (excluding 1-4 family) |
|
|
8,974 |
|
|
|
19,388 |
|
|
|
28,362 |
|
|
|
3 |
|
Other |
|
|
6,238 |
|
|
|
5,486 |
|
|
|
11,724 |
|
|
|
1 |
|
|
|
Total
loans |
|
$ |
924,465 |
|
|
|
39,821 |
|
|
|
964,286 |
|
|
|
100 |
% |
|
|
10
REAL ESTATE 1-4 FAMILY MORTGAGE LOANS
The concentrations of real estate 1-4 family mortgages by state and the related combined loantovalue (CLTV) ratio are presented in Table 6. Our underwriting and periodic review of
loans collateralized by residential real property includes appraisals or estimates from automated valuation models (AVMs). Additional information about AVMs and our policy for their use can be found in the Risk Management Credit Risk
Management section in our 2011 Form 10-K.
We continue to modify real estate 1-4 family mortgage loans to assist
homeowners and other borrowers in the current difficult economic cycle. For more information on our participation in the U.S. Treasurys Making Home Affordable (MHA) programs, see the Risk Management Credit Risk Management
section in our 2011 Form 10-K.
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.
The Bank and/or other Wells Fargo affiliates act as servicer for our loan portfolio, including our consumer real estate loans.
The Board of Governors of the Federal Reserve System (FRB) and the Office of the Comptroller of the Currency (OCC) made public April 13, 2011, consent orders that require Wells Fargo and the Bank to
correct deficiencies in residential mortgage loan servicing and foreclosure practices that were identified by the FRB and OCC in their
review of foreclosure practices at large mortgage servicers conducted in fourth quarter 2010.
As announced in February 2012, Wells Fargo and the Bank reached a settlement regarding their mortgage servicing and foreclosure practices with certain federal and state government entities, which became
effective on April 5, 2012, where they committed to take certain actions, including the payment of fines, forgive principal for certain borrowers and provide additional relief to certain borrowers.
The financial impact of the settlement to Wachovia Funding is not expected to be material because any related costs are already
appropriately covered in our allowance for credit losses and in the nonaccretable difference relating to PCI loans or we believe the prospective interest income impact of a rate reduction will not be material for loans eligible for the rate
refinancing program. In addition, our loan participation and servicing agreements with the Bank include covenants by the Bank to hold us harmless from any claims, causes of action, suits, damages and costs and expenses (including reasonable
attorneys fees) arising from any unlawful act or omission occurring intentionally or unintentionally in connection with the loan products, loan applications, closings, dispositions, and servicing arising under or with respect to any of the
loan participations in our portfolio. See the Risk Management Credit Risk Management section in our 2011 Form 10-K for more details.
|
|
|
|
|
|
|
|
|
Table 6: Real Estate 1-4 Family Mortgage Loans by State and CLTV |
|
|
|
|
|
|
|
March
31, 2012 |
|
|
|
Real estate |
|
|
Current |
|
|
|
1-4 family |
|
|
CLTV |
|
(in thousands) |
|
mortgage |
|
|
ratio (1) |
|
|
|
Pennsylvania |
|
$ |
1,536,939 |
|
|
|
68 |
% |
New Jersey |
|
|
1,489,285 |
|
|
|
71 |
|
Florida |
|
|
1,448,911 |
|
|
|
87 |
|
North Carolina |
|
|
1,096,154 |
|
|
|
72 |
|
Virginia |
|
|
948,289 |
|
|
|
72 |
|
All other states |
|
|
4,874,262 |
|
|
|
72 |
|
|
|
|
|
|
|
Total
loans |
|
$ |
11,393,840 |
|
|
|
|
|
|
|
(1) |
Collateral values are generally determined using AVMs 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. |
11
HOME EQUITY PORTFOLIOS Our home equity portfolio includes real estate 1-4 family junior lien mortgages secured by real estate. The majority of our junior lien loans
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. We frequently 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 January 31, 2012 (Interagency Guidance), a junior lien is now reported as a nonaccrual loan if the related first lien is 120 days past due or is in the process of
foreclosure. This action had minimal financial impact as the expected loss content of these loans was already considered in the loan loss allowance. See the Risk ManagementCredit Risk ManagementNonperforming Assets section in
this report for more information.
Table 7 summarizes quarterly delinquency and loss rates by state for our
home equity portfolio, which reflected the largest portion of our credit losses in first quarter 2012 and 2011.
|
|
|
Table 7: Home Equity Portfolio (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of loans |
|
|
Loss rate |
|
|
|
|
|
|
|
|
|
two payments |
|
|
(annualized) |
|
|
|
Outstanding balance |
|
|
or more past
due |
|
|
Quarter ended |
|
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
Mar. 31, |
|
|
Dec. 31, |
|
(in thousands) |
|
2012 |
|
|
2011 |
|
|
2012 |
|
|
2011 |
|
|
2012 |
|
|
2011 |
|
|
|
New Jersey |
|
$ |
641,030 |
|
|
|
668,234 |
|
|
|
5.14 |
% |
|
|
5.69 |
|
|
|
3.67 |
|
|
|
4.01 |
|
Pennsylvania |
|
|
521,614 |
|
|
|
534,996 |
|
|
|
3.56 |
|
|
|
3.90 |
|
|
|
1.36 |
|
|
|
2.38 |
|
Florida |
|
|
426,225 |
|
|
|
453,952 |
|
|
|
4.53 |
|
|
|
5.66 |
|
|
|
7.03 |
|
|
|
7.52 |
|
Virginia |
|
|
329,987 |
|
|
|
332,236 |
|
|
|
2.90 |
|
|
|
3.12 |
|
|
|
2.50 |
|
|
|
2.05 |
|
North Carolina |
|
|
252,198 |
|
|
|
257,958 |
|
|
|
3.92 |
|
|
|
3.83 |
|
|
|
3.60 |
|
|
|
2.43 |
|
Other |
|
|
1,081,706 |
|
|
|
985,059 |
|
|
|
3.71 |
|
|
|
4.86 |
|
|
|
4.27 |
|
|
|
3.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,252,760 |
|
|
|
3,232,435 |
|
|
|
4.01 |
|
|
|
4.73 |
|
|
|
3.82 |
|
|
|
3.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Consists of real estate 1-4 family junior lien mortgages, excluding PCI loans of $16,824 at March 31, 2012 and $17,447 at December 31, 2011.
|
12
NONPERFORMING ASSETS (NONACCRUAL LOANS
AND FORECLOSED ASSETS) We generally place loans on nonaccrual status when:
|
|
the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrowers 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 and no restructuring has occurred; or |
|
|
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. |
Table 8 provides the comparative
data for nonaccrual loans and foreclosed assets. Foreclosed assets decreased to $6.8 million at March 31, 2012 from $6.9 million at December 31, 2011.
|
|
|
Table 8: Nonperforming Assets (Nonaccrual Loans and Foreclosed
Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
June 30, |
|
|
Mar. 31, |
|
(in thousands) |
|
|
|
2012 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
900 |
|
|
|
901 |
|
Real estate mortgage |
|
|
|
|
18,623 |
|
|
|
21,132 |
|
|
|
25,834 |
|
|
|
21,799 |
|
|
|
22,454 |
|
Real estate construction |
|
|
|
|
180 |
|
|
|
251 |
|
|
|
263 |
|
|
|
563 |
|
|
|
442 |
|
|
|
Total
commercial |
|
|
|
|
18,803 |
|
|
|
21,383 |
|
|
|
26,097 |
|
|
|
23,262 |
|
|
|
23,797 |
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
|
|
235,737 |
|
|
|
228,363 |
|
|
|
212,626 |
|
|
|
231,414 |
|
|
|
222,843 |
|
Real estate 1-4 family junior lien mortgage (1) |
|
|
|
|
152,824 |
|
|
|
99,347 |
|
|
|
102,763 |
|
|
|
108,520 |
|
|
|
107,812 |
|
|
|
Total consumer |
|
|
|
|
388,561 |
|
|
|
327,710 |
|
|
|
315,389 |
|
|
|
339,934 |
|
|
|
330,655 |
|
|
|
Total nonaccrual loans |
|
|
|
|
407,364 |
|
|
|
349,093 |
|
|
|
341,486 |
|
|
|
363,196 |
|
|
|
354,452 |
|
|
|
Foreclosed assets |
|
|
|
|
6,769 |
|
|
|
6,926 |
|
|
|
7,418 |
|
|
|
3,527 |
|
|
|
8,774 |
|
|
|
Total nonperforming assets |
|
|
|
$ |
414,133 |
|
|
|
356,019 |
|
|
|
348,904 |
|
|
|
366,723 |
|
|
|
363,226 |
|
|
|
As a percentage of total loans |
|
|
|
|
3.28 |
% |
|
|
2.84 |
|
|
|
2.73 |
|
|
|
2.71 |
|
|
|
2.54 |
|
|
|
(1) |
Includes $55.2 million at March 31, 2012, resulting from implementation of the Interagency Guidance issued on January 31, 2012. This guidance accelerated the
timing of placing these loans on nonaccrual to coincide with the timing of placing the related real estate 1-4 family first mortgage loans on nonaccrual. |
|
|
|
Table 9: Analysis of Changes in Nonaccrual Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
June 30, |
|
|
Mar. 31, |
|
(in thousands) |
|
2012 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
Commercial nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of quarter |
|
$ |
21,383 |
|
|
|
26,097 |
|
|
|
23,262 |
|
|
|
23,797 |
|
|
|
24,311 |
|
Inflows |
|
|
1,871 |
|
|
|
1,469 |
|
|
|
3,268 |
|
|
|
888 |
|
|
|
1,409 |
|
Outflows |
|
|
(4,451 |
) |
|
|
(6,183 |
) |
|
|
(433 |
) |
|
|
(1,423 |
) |
|
|
(1,923 |
) |
|
|
Balance, end of
quarter |
|
|
18,803 |
|
|
|
21,383 |
|
|
|
26,097 |
|
|
|
23,262 |
|
|
|
23,797 |
|
|
|
Consumer nonaccrual
loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of quarter |
|
|
327,710 |
|
|
|
315,389 |
|
|
|
339,934 |
|
|
|
330,655 |
|
|
|
342,515 |
|
Inflows (1) |
|
|
154,618 |
|
|
|
109,847 |
|
|
|
87,055 |
|
|
|
96,860 |
|
|
|
102,183 |
|
Outflows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returned to accruing |
|
|
(42,556 |
) |
|
|
(51,317 |
) |
|
|
(67,175 |
) |
|
|
(32,658 |
) |
|
|
(61,060 |
) |
Foreclosures |
|
|
(4,897 |
) |
|
|
(1,946 |
) |
|
|
(2,233 |
) |
|
|
(5,984 |
) |
|
|
(4,072 |
) |
Charge-offs |
|
|
(42,903 |
) |
|
|
(37,660 |
) |
|
|
(29,594 |
) |
|
|
(31,697 |
) |
|
|
(41,226 |
) |
Payment, sales and other |
|
|
(3,411 |
) |
|
|
(6,603 |
) |
|
|
(12,598 |
) |
|
|
(17,242 |
) |
|
|
(7,685 |
) |
|
|
Total outflows |
|
|
(93,767 |
) |
|
|
(97,526 |
) |
|
|
(111,600 |
) |
|
|
(87,581 |
) |
|
|
(114,043 |
) |
|
|
Balance, end of quarter |
|
|
388,561 |
|
|
|
327,710 |
|
|
|
315,389 |
|
|
|
339,934 |
|
|
|
330,655 |
|
|
|
Total nonaccrual loans |
|
$ |
407,364 |
|
|
|
349,093 |
|
|
|
341,486 |
|
|
|
363,196 |
|
|
|
354,452 |
|
|
|
(1) |
March 31, 2012 includes $55.2 million of junior liens classified as nonaccrual status as a result of implementing Interagency Guidance issued January 31,
2012. |
13
Typically, changes to nonaccrual loans period-over-period represent inflows for loans
that reach a specified past due status, offset by reductions for loans that are charged off, sold, transferred to foreclosed assets, or are no longer classified as nonaccrual as a result of continued performance and an improvement in the
borrowers financial condition and loan repayment capabilities.
Nonaccrual loans increased to $407.4 million at March 31, 2012, from $349.1 million
at December 31, 2011. As noted previously, the first quarter 2012 increase primarily related to classification of $55.2 million of junior liens to nonaccrual upon implementation of the Interagency Guidance.
TROUBLED DEBT RESTRUCTURINGS
(TDRs)
|
|
|
Table 10: Troubled Debt Restructurings (TDRs) (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
June 30, |
|
|
Mar. 31, |
|
(in thousands) |
|
2012 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
Commercial TDRs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate mortgage |
|
|
2,664 |
|
|
|
2,470 |
|
|
|
2,582 |
|
|
|
2,426 |
|
|
|
2,439 |
|
Real estate construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Total commercial TDRs |
|
|
2,664 |
|
|
|
2,470 |
|
|
|
2,582 |
|
|
|
2,426 |
|
|
|
2,439 |
|
|
|
Consumer TDRs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
198,756 |
|
|
|
191,773 |
|
|
|
179,694 |
|
|
|
162,459 |
|
|
|
133,355 |
|
Real estate 1-4 family junior lien mortgage |
|
|
110,441 |
|
|
|
111,463 |
|
|
|
109,645 |
|
|
|
103,765 |
|
|
|
92,213 |
|
Trial modifications (1) |
|
|
23,681 |
|
|
|
21,369 |
|
|
|
20,373 |
|
|
|
28,259 |
|
|
|
27,488 |
|
|
|
Total consumer TDRs |
|
|
332,878 |
|
|
|
324,605 |
|
|
|
309,712 |
|
|
|
294,483 |
|
|
|
253,056 |
|
|
|
Total TDRs |
|
$ |
335,542 |
|
|
|
327,075 |
|
|
|
312,294 |
|
|
|
296,909 |
|
|
|
255,495 |
|
|
|
TDRs on nonaccrual status |
|
$ |
97,942 |
|
|
|
85,733 |
|
|
|
87,368 |
|
|
|
106,155 |
|
|
|
78,139 |
|
TDRs on accrual status |
|
|
237,600 |
|
|
|
241,342 |
|
|
|
224,926 |
|
|
|
190,754 |
|
|
|
177,356 |
|
|
|
Total TDRs |
|
$ |
335,542 |
|
|
|
327,075 |
|
|
|
312,294 |
|
|
|
296,909 |
|
|
|
255,495 |
|
|
|
(1) |
Based on clarifying guidance from the SEC received in December 2011, we classify trial modifications as TDRs at the beginning of the trial period. For many of our
consumer real estate modification programs, we may require a borrower to make trial payments generally for a period of three to four months. Prior to the SEC clarification, we classified trial modifications as TDRs once a borrower successfully
completed the trial period in accordance with the terms. |
|
|
|
Table 11: Analysis of Changes in TDRs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
June 30, |
|
|
Mar. 31, |
|
(in thousands) |
|
2012 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
Commercial TDRs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of quarter |
|
$ |
2,470 |
|
|
|
2,582 |
|
|
|
2,426 |
|
|
|
2,439 |
|
|
|
2,454 |
|
Inflows |
|
|
1,377 |
|
|
|
- |
|
|
|
156 |
|
|
|
- |
|
|
|
2 |
|
Outflows |
|
|
(1,183 |
) |
|
|
(112 |
) |
|
|
- |
|
|
|
(13 |
) |
|
|
(17 |
) |
|
|
Balance, end of quarter |
|
|
2,664 |
|
|
|
2,470 |
|
|
|
2,582 |
|
|
|
2,426 |
|
|
|
2,439 |
|
|
|
Consumer TDRs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of quarter |
|
|
324,605 |
|
|
|
309,712 |
|
|
|
294,483 |
|
|
|
253,056 |
|
|
|
220,468 |
|
Inflows |
|
|
19,648 |
|
|
|
27,840 |
|
|
|
42,219 |
|
|
|
52,207 |
|
|
|
44,766 |
|
Outflows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(7,223 |
) |
|
|
(6,618 |
) |
|
|
(5,621 |
) |
|
|
(3,020 |
) |
|
|
(3,442 |
) |
Foreclosures |
|
|
(141 |
) |
|
|
- |
|
|
|
(36 |
) |
|
|
(230 |
) |
|
|
(26 |
) |
Payments, sales and other (1) |
|
|
(6,323 |
) |
|
|
(7,325 |
) |
|
|
(13,447 |
) |
|
|
(8,301 |
) |
|
|
(11,218 |
) |
Net change in trial modifications (2) |
|
|
2,312 |
|
|
|
996 |
|
|
|
(7,886 |
) |
|
|
771 |
|
|
|
2,508 |
|
|
|
Total outflows |
|
|
(11,375 |
) |
|
|
(12,947 |
) |
|
|
(26,990 |
) |
|
|
(10,780 |
) |
|
|
(12,178 |
) |
|
|
Balance, end of quarter |
|
|
332,878 |
|
|
|
324,605 |
|
|
|
309,712 |
|
|
|
294,483 |
|
|
|
253,056 |
|
|
|
Total TDRs |
|
$ |
335,542 |
|
|
|
327,075 |
|
|
|
312,294 |
|
|
|
296,909 |
|
|
|
255,495 |
|
|
|
(1) |
Other outflows include normal amortization/accretion of loan basis adjustments. |
(2) |
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) do 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 a
majority of the mortgages that enter a trial payment period program are successful in completing the program requirements. |
14
Table 10 provides information regarding the recorded investment of loans modified in
TDRs. Table 11 provides an analysis of the changes in TDRs. The allowance for loan losses for TDRs was $101.6 million and $104.3 million at March 31, 2012 and December 31, 2011, respectively. See Note 2 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report for more information.
We do not forgive principal for a majority of our TDRs,
but in those situations where principal is forgiven, the entire amount of such principal forgiveness is immediately charged
off to the extent not done so prior to the modification. We sometimes delay the timing on the repayment of a portion of principal (principal forbearance) and charge off the amount of forbearance
if that amount is not considered fully collectible.
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 exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans of $7.1 million at March 31, 2012, and $7.6 million at December 31, 2011, are
excluded from this disclosure even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing due to the existence of the accretable yield and not
based on consideration given to contractual interest payments.
Loans
90 days or more past due and still accruing at March 31, 2012, were down $16.3 million, or 43%, from December 31, 2011, of which $2.7 million of this decline resulted from implementation of the Interagency Guidance. The additional decline
is due to loss mitigation activities including modifications, charge-offs, seasonally lower early stage delinquency levels, and credit stabilization. Table 12 reflects non-PCI loans 90 days or more past due and still accruing.
Table 12: Loans 90 Days or More
Past Due and Still Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Mar.
31, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
June 30, |
|
|
Mar. 31, |
|
|
2012 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
6 |
|
Real estate mortgage |
|
|
- |
|
|
|
1,596 |
|
|
|
1,483 |
|
|
|
3,418 |
|
|
|
- |
|
Real estate construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total commercial |
|
|
- |
|
|
|
1,596 |
|
|
|
1,483 |
|
|
|
3,420 |
|
|
|
6 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
16,211 |
|
|
|
21,008 |
|
|
|
20,519 |
|
|
|
19,958 |
|
|
|
13,476 |
|
Real estate 1-4 family junior lien mortgage (1) |
|
|
5,560 |
|
|
|
15,492 |
|
|
|
13,688 |
|
|
|
10,449 |
|
|
|
13,700 |
|
Total consumer |
|
|
21,771 |
|
|
|
36,500 |
|
|
|
34,207 |
|
|
|
30,407 |
|
|
|
27,176 |
|
|
|
|
|
|
|
Total |
|
$ |
21,771 |
|
|
|
38,096 |
|
|
|
35,690 |
|
|
|
33,827 |
|
|
|
27,182 |
|
(1) |
During first quarter 2012, $2.7 million of 1-4 family junior lien mortgages were transferred to nonaccrual upon implementation of the Interagency Guidance issued on
January 31, 2012. |
15
NET CHARGE-OFFS
Table 13: Net Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
March 31, 2012 |
|
|
December 31, 2011 |
|
|
September
30, 2011 |
|
|
June 30, 2011 |
|
|
March 31, 2011 |
|
($ in thousands) |
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
|
Total
commercial |
|
$ |
248 |
|
|
|
0.08 |
% |
|
$ |
586 |
|
|
|
0.17 |
% |
|
$ |
85 |
|
|
|
0.02 |
% |
|
$ |
116 |
|
|
|
0.03 |
% |
|
$ |
(42 |
) |
|
|
(0.01 |
) % |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
22,865 |
|
|
|
1.18 |
|
|
|
17,959 |
|
|
|
0.92 |
|
|
|
16,324 |
|
|
|
0.79 |
|
|
|
19,272 |
|
|
|
0.89 |
|
|
|
22,969 |
|
|
|
1.00 |
|
Real estate 1-4 family junior lien mortgage |
|
|
30,060 |
|
|
|
3.80 |
|
|
|
32,162 |
|
|
|
3.85 |
|
|
|
30,784 |
|
|
|
3.49 |
|
|
|
32,108 |
|
|
|
3.49 |
|
|
|
42,395 |
|
|
|
4.38 |
|
Total
consumer |
|
|
52,925 |
|
|
|
1.94 |
|
|
|
50,121 |
|
|
|
1.79 |
|
|
|
47,108 |
|
|
|
1.60 |
|
|
|
51,380 |
|
|
|
1.66 |
|
|
|
65,364 |
|
|
|
1.99 |
|
Total
|
|
$ |
53,173 |
|
|
|
1.74 |
% |
|
$ |
50,707 |
|
|
|
1.61 |
% |
|
$ |
47,193 |
|
|
|
1.42 |
% |
|
$ |
51,496 |
|
|
|
1.49 |
% |
|
$ |
65,322 |
|
|
|
1.78 |
% |
|
|
|
(1) Quarterly net charge-offs (net recoveries) as a percentage of average loans are annualized.
Table 13 presents net charge-offs for the current and previous four quarters. Net charge-offs in first
quarter 2012 were $53.2 million (1.74% of average total loans outstanding, annualized) compared with $65.3 million (1.78%) in first quarter 2011. Total net charge-offs decreased in first quarter 2012 in part due to lower average loan
balances and as a result of continued modest improvement in economic conditions and aggressive loss mitigation activities aimed at working with our customers through their financial challenges. The majority of losses were in consumer real estate.
Net charge-offs in the 1-4 family first mortgage portfolio totaled $22.9 million in first quarter 2012 compared with
$23.0 million in first quarter 2011.
Net charge-offs in the real estate 1-4 family junior lien portfolio were
$30.1 million in first quarter 2012 reduced from $42.4 million in first quarter 2011 due to delinquency improvement within the portfolio. More information about the home equity portfolio is available in Table 7 in this Report.
Commercial and industrial and CRE net charge-offs in first quarter 2012 and 2011 were not significant. Although economic stress and
decreased CRE values have resulted in the deterioration of our commercial and industrial and CRE credit portfolios, there have been relatively small losses. Due to the larger dollar amounts associated with individual commercial and industrial and
CRE loans, loss recognition tends to be irregular and exhibits more variation than consumer loan portfolios.
16
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 managements estimate of credit losses inherent in the loan
portfolio and unfunded credit commitments at the balance sheet date. 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 2 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report.
We employ a disciplined process and methodology to establish our
allowance for credit losses each quarter. This process takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade-specific loss factors. The process involves subjective as
well as complex judgments. In addition, we review a variety of credit metrics and trends. However, these trends do not solely determine the appropriate level of the allowance as we use several analytical tools for such evaluation. For additional
information on our allowance for credit losses, see the Critical Accounting Policies Allowance for Credit Losses section and Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in our 2011 Form 10-K.
At March 31, 2012, the allowance for credit losses totaled $310.1 million, compared with $313.9 million, at December 31,
2011. We believe the allowance for credit losses of $310.1 million at March 31, 2012, was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments. The allowance for credit losses is subject to
change and considers existing factors at the time, including economic or market conditions and ongoing internal and external examination processes.
The ratio of the allowance for credit losses to total nonaccrual loans may
fluctuate from period to period due to such factors as the mix of loan types in the portfolio, the amount of nonaccrual loans that have been written down to current collateral value, borrower credit strength and the value and marketability of
collateral.
Total provision for credit losses was $51.3 million in first quarter 2012 and $52.5 million in first
quarter 2011. The first quarter 2012 provision was $1.9 million less than net charge-offs. In first quarter 2011, the provision was lower than net charge-offs by $12.9 million. Primary drivers of the first quarter 2012 and 2011 provision reductions
were decreased net charge-offs and improvement in the credit quality of the portfolios and related loss estimates as seen in lower delinquent loan levels.
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 the Wells Fargo/Bank settlement regarding mortgage servicing
and foreclosure practices and high risk portfolios defined in the Interagency Guidance.
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 managements estimate for imprecision and uncertainty.
Table 14 presents an analysis of the allowance for credit losses for the last five quarters.
Table 14: Allowance for Credit
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Mar. 31,
2012 |
|
|
Dec. 31,
2011 |
|
|
Sept. 30,
2011 |
|
|
June 30,
2011 |
|
|
Mar. 31,
2011 |
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
309,913 |
|
|
|
313,762 |
|
|
|
292,746 |
|
|
|
311,495 |
|
|
|
389,310 |
|
Allowance for unfunded credit commitments |
|
|
200 |
|
|
|
166 |
|
|
|
167 |
|
|
|
219 |
|
|
|
308 |
|
Allowance for credit losses
|
|
$ |
310,113 |
|
|
|
313,928 |
|
|
|
292,913 |
|
|
|
311,714 |
|
|
|
389,618 |
|
|
|
|
|
|
|
Allowance for loan losses as a percentage of total loans |
|
|
2.45 |
% |
|
|
2.50 |
|
|
|
2.29 |
|
|
|
2.30 |
|
|
|
2.73 |
|
Allowance for loan losses as a percentage of annualized net charge-offs |
|
|
144.91 |
|
|
|
155.97 |
|
|
|
156.35 |
|
|
|
150.81 |
|
|
|
146.96 |
|
Allowance for credit losses as a percentage of total loans |
|
|
2.45 |
|
|
|
2.50 |
|
|
|
2.30 |
|
|
|
2.30 |
|
|
|
2.73 |
|
Allowance for credit losses as a percentage of total nonaccrual loans |
|
|
76.13 |
|
|
|
89.93 |
|
|
|
85.78 |
|
|
|
85.83 |
|
|
|
109.92 |
|
17
Asset/Liability Management
Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk and liquidity and funding.
INTEREST RATE RISK Interest rate risk is the sensitivity of earnings to changes in interest rates. Approximately 17% of our loan
portfolio consisted of variable rate loans at March 31, 2012. In a declining rate environment, we may experience a reduction in interest income on our loan portfolio and a corresponding decrease in funds available to be distributed to our
shareholders. The reduction in interest income may result from downward adjustment of the indices upon which the interest rates on loans are based and from prepayments of loans with fixed interest rates, resulting in reinvestment of the proceeds in
lower yielding assets.
At March 31, 2012, approximately 83% of the balance of our loans had fixed interest rates.
Such loans tend to increase our interest rate risk. We monitor the rate sensitivity of assets acquired. Our methods for evaluating interest rate risk include an analysis of interest-rate sensitivity gap, which is defined as the
difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds interest rate-sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a
period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or
similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution is perfectly matched in each maturity category.
At March 31, 2012, $3.3 billion, or 24% of our assets, had variable interest rates and could be expected to
reprice with changes in interest rates. At March 31, 2012, our liabilities were $227.0 million, or 2% of our assets, while stockholders equity was $13.5 billion, or 98% of our assets. This positive gap between our assets and liabilities
indicates that an increase in interest rates would result in an increase in net interest income and a decrease in interest rates would result in a decrease in net interest income.
All of our derivatives are economic hedges and none are treated as accounting hedges. In addition, all our derivatives (currently
consisting of interest rate swaps) are recorded at fair value in the balance sheet. When we have more than one transaction with a counterparty and there is a legally enforceable master netting agreement between the parties, the net of the gain and
loss positions are recorded as an
asset or a liability in our consolidated balance sheet. Realized and unrealized gains and losses are recorded as a net gain or loss on interest rate swaps in our consolidated statement of income.
In 2001, the Bank contributed receive-fixed interest rate swaps with a notional amount of $4.25 billion and a fair
value of $673.0 million to us in exchange for common stock. The unaffiliated counterparty to the receive-fixed interest rate swaps provided cash collateral to us. We pay interest to the counterparty on the collateral at a short-term interest rate.
Shortly after the contribution of the receive-fixed interest rate swaps, we entered into pay-fixed interest rate swaps with a notional amount of $4.25 billion that serve as an economic hedge of the contributed swaps. All interest rate swaps are
transacted with the same unaffiliated third party.
See Note 3 (Derivatives) to Financial Statements in this Report for
more details.
MARKET RISK Market risk is the risk of loss from adverse changes in market prices and
interest rates. Market risk arises primarily from interest rate risk inherent in lending, investment in derivative financial instruments and borrowing activities.
Due to the difference in fixed rates in our interest rate swaps, volatility is expected given certain interest rate fluctuations. If market rates were to decrease 100 basis points or 200 basis
points, we would recognize short-term net gains on our interest rate swaps of $79 thousand or $157 thousand, respectively. If interest rates were to increase 100 basis points or 200 basis points, we would recognize short-term net losses on our
interest rate swaps of $78 thousand or $156 thousand, respectively. These short-term fluctuations will eventually offset over the life of the interest rate swaps when held to maturity, with no change in cash flow occurring for the net positions. The
changes in value of the net swap positions were calculated under the assumption there was a parallel shift in the LIBOR curve using 100 basis point and 200 basis point shifts, respectively.
LIQUIDITY AND FUNDING The objective of effective liquidity management is to ensure that we can meet customer loan requests and other cash commitments
efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, Wells Fargos Corporate Asset/Liability Management Committee 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.
Proceeds received from pay-downs of loans are typically sufficient to fund existing lending commitments and loan purchases. Depending upon the timing of the loan purchases, we may draw on the line
of credit we have with the Bank as a short-term liquidity source. Generally, we repay these borrowings within several months as we receive
18
cash on loan pay-downs from our loan portfolio. At March 31, 2012, there were no borrowings outstanding on our line of credit with the Bank.
Wachovia Fundings primary liquidity needs are to pay operating expenses, fund our lending commitments, purchase loans as the
underlying loans mature or repay, and pay dividends. Operating expenses and dividends are expected to be funded through cash generated by operations or paid-in capital, while funding commitments and the acquisition of additional participation
interests in loans are intended to be funded with the proceeds obtained from repayment of principal balances by individual borrowers. In first quarter 2012, we purchased $943.5 million of loan participations from the Bank. If in future periods we do
not reinvest loan pay-downs at anticipated levels, management may request our board of directors to consider an additional return of capital to holders of our common stock. We expect to distribute annually an aggregate amount of dividends with
respect to outstanding capital stock equal to approximately 100 percent of our REIT taxable income for federal tax purposes. Such distributions may in some periods exceed net income.
To the extent that we determine that additional funding is required, we could issue additional common or preferred stock, subject
to any pre-approval rights of our shareholders or raise funds through debt financings, retention of cash flows or a combination of these methods. We do not have and do not anticipate having any material capital expenditures in the foreseeable
future. We believe our existing sources of liquidity are sufficient to meet our funding needs. However, any cash flow retention must be consistent with the provisions of the Investment Company Act and the Code which requires the distribution by a
REIT of at least 90% of its REIT taxable income, excluding capital gains, and must take into account taxes that would be imposed on undistributed income.
Except in certain circumstances, our Series A preferred securities may not be redeemed prior to December 31, 2022. Prior to that date, among other things, if regulators adopt capital standards
that do not permit Wells Fargo or the Bank to treat our Series A preferred securities as Tier 1 capital, we may determine to redeem the Series A preferred securities, as provided in our certificate of incorporation. Regulatory authorities have yet
to propose final regulations to implement certain capital standards required in the Dodd-Frank Act. It is possible that such capital standards, when proposed and adopted, will affect Wells Fargos or the Banks ability to treat our Series
A preferred securities as Tier 1 capital. We will continue to monitor the proposed capital standards and whether such capital standards would result in our determination that a Regulatory Capital Event, as defined in our certificate of
incorporation, has occurred and therefore cause the Series A preferred securities to become redeemable under their terms. Although any such redemption must be in whole for a redemption price of $25.00 per Series A security, plus all authorized,
declared but unpaid dividends to the date of redemption, such event
may have an adverse effect on the trading price for the Series A preferred securities.
At March 31, 2012, our liabilities principally consist of dividends payable, deferred income tax liabilities and other liabilities. Our certificate of incorporation does not contain any
limitation on the amount or percentage of debt, funded or otherwise, we may incur, except the incurrence of debt for borrowed money or our guarantee of debt for borrowed money in excess of amounts borrowed or guaranteed. However, as part of issuing
our Series A preferred securities, we have a covenant in which we agree not to incur indebtedness over 20% of our stockholders equity unless approved by two-thirds of the Series A preferred securities, voting as a separate class.
19
Critical Accounting Policy
Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial
Statements in our 2011 Form 10-K) 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. One of these policies is critical because it requires 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. We have identified the allowance for credit losses policy as being particularly sensitive in terms of judgments and the extent to which
estimates are used.
Management has reviewed and approved this critical accounting policy and has discussed this policy
with the Audit Committee of Wachovia Fundings board of directors. This policy is described in the Critical Accounting Policy section in our 2011 Form 10-K.
Current Accounting Developments
There are no current accounting pronouncements that have been issued by the Financial Accounting Standards
Board (FASB) that would impact Wachovia Funding for this quarter.
20
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 include, but are not limited to, statements we make about: future results of Wachovia Funding; expectations for consumer and commercial credit losses, life-of-loan losses, and the sufficiency of our credit loss allowance to cover future
credit losses; possible capital distributions; the expected outcome and impact of legal, regulatory and legislative developments, including regulatory capital standards and the effects to Wachovia Funding of the agreement in principle between Wells
Fargo, the Bank and certain regulatory authorities related to mortgage servicing and foreclosure practices; and Wachovia Fundings plans, objectives and strategies.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the
future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore,
against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is
complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
|
|
|
the effect of political and economic conditions and geopolitical events; |
|
|
|
economic conditions that affect the general economy, housing prices, the job market, consumer confidence and spending habits, including our borrowers
repayment of our loan participations; |
|
|
|
the level and volatility of the capital markets, interest rates, currency values and other market indices that affect the value of our assets and
liabilities; |
|
|
|
the availability and cost of both credit and capital as well as the credit ratings assigned to our debt instruments; |
|
|
|
investor sentiment and confidence in the financial markets; |
|
|
|
the impact of current, pending and future legislation, regulation and legal actions, including capital standards applicable to the Bank or Wells Fargo;
|
|
|
|
changes in accounting standards, rules and interpretations; |
|
|
|
mergers and acquisitions, and our ability to integrate them;
|
|
|
various monetary and fiscal policies and regulations of the U.S. and foreign governments; |
|
|
a failure in or breach of our, the Banks or Wells Fargos operational or security systems or infrastructure, or those of third party vendors
and other security providers, including as a result of cyber attacks; |
|
|
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 Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and legislation; and |
|
|
the other factors described in Risk Factors in this Report. |
In addition to the above factors, we also caution that there is no assurance that our allowance for credit losses will be adequate
to cover future credit losses, especially if credit markets, housing prices and unemployment do not continue to stabilize or improve. Increases in loan charge-offs or in the allowance for credit losses and related provision expense could materially
adversely affect our financial results and condition.
Any forward-looking statement made by us in this Report speaks
only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any
forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
21
Risk Factors
An investment in Wachovia Funding 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 previously under Forward-Looking Statements and elsewhere in this Report, as well as in other documents we
file with the SEC, risk factors that could adversely affect our financial results and condition and the value of, and return on, an investment in Wachovia Funding. We refer you to the Financial Review section and Financial Statements (and related
Notes) in this Report for more information about credit, interest rate, market, and litigation risks and to the Risk Factors sections in our 2011 Form 10-K for more information about risks. Any factor in this Report or in our 2011 Form
10-K could by itself, or together with other factors, adversely affect our financial results and condition, or the value of an investment in Wachovia Funding. There are factors elsewhere in this Report that could adversely affect our financial
results and condition.
22
Controls and Procedures
Disclosure Controls and Procedures
As required by SEC rules, Wachovia
Fundings management evaluated the effectiveness, as of March 31, 2012, of disclosure controls and procedures. Wachovia Fundings chief executive officer and chief financial officer participated in the evaluation. Based on this
evaluation, the chief executive officer and chief financial officer concluded that Wachovia Fundings disclosure controls and procedures were effective as of March 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, Wachovia Fundings principal executive and principal financial officers and effected by Wachovia Fundings board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of Wachovia
Funding; |
|
|
|
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 Wachovia Funding are being made only in accordance with authorizations of management and directors of Wachovia Funding; and |
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Wachovia Fundings assets
that could have a material effect on the financial statements. |
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. No change occurred during first quarter 2012 that has materially affected, or is reasonably likely to materially affect, Wachovia Fundings internal control over financial
reporting.
23
Financial Statements
Wachovia Preferred Funding Corp. and Subsidiaries
|
|
|
|
|
|
|
|
|
Consolidated Statement of Income (Unaudited) |
|
|
|
|
|
Quarter ended March
31, |
|
(in thousands, except per share amounts) |
|
|
2012 |
|
|
|
2011 |
|
|
|
Interest income |
|
$ |
216,916 |
|
|
|
280,340 |
|
Interest expense |
|
|
- |
|
|
|
- |
|
|
|
Net interest
income |
|
|
216,916 |
|
|
|
280,340 |
|
Provision for credit losses |
|
|
51,259 |
|
|
|
52,466 |
|
|
|
Net interest income after
provision for credit losses |
|
|
165,657 |
|
|
|
227,874 |
|
|
|
Noninterest income |
|
|
|
|
|
|
|
|
Gain on interest rate swaps |
|
|
56 |
|
|
|
110 |
|
Gain on loan sales to affiliate |
|
|
- |
|
|
|
113 |
|
Other |
|
|
304 |
|
|
|
237 |
|
|
|
Total noninterest
income |
|
|
360 |
|
|
|
460 |
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
Loan servicing costs |
|
|
10,804 |
|
|
|
12,983 |
|
Management fees |
|
|
1,932 |
|
|
|
1,150 |
|
Foreclosed assets |
|
|
2,340 |
|
|
|
2,546 |
|
Other |
|
|
837 |
|
|
|
696 |
|
|
|
Total noninterest
expense |
|
|
15,913 |
|
|
|
17,375 |
|
|
|
Income before income tax expense |
|
|
150,104 |
|
|
|
210,959 |
|
Income tax expense |
|
|
89 |
|
|
|
92 |
|
|
|
Net
income |
|
|
150,015 |
|
|
|
210,867 |
|
Dividends on preferred stock |
|
|
49,586 |
|
|
|
45,946 |
|
|
|
Net income applicable
to common stock |
|
$ |
100,429 |
|
|
|
164,921 |
|
|
|
Per common share information |
|
|
|
|
|
|
|
|
Earnings per common share |
|
$ |
1.00 |
|
|
|
1.65 |
|
Diluted earnings per common share |
|
|
1.00 |
|
|
|
1.65 |
|
Dividends declared per common share |
|
$ |
1.50 |
|
|
|
2.24 |
|
Average common shares outstanding |
|
|
99,999.9 |
|
|
|
99,999.9 |
|
Diluted average common shares outstanding |
|
|
99,999.9 |
|
|
|
99,999.9 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
24
Financial Statements
Wachovia Preferred Funding Corp. and Subsidiaries
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet (Unaudited) |
|
|
|
|
|
|
|
|
(in thousands, except shares) |
|
|
March
31, 2012 |
|
|
|
December 31, 2011 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,235,466 |
|
|
|
1,186,165 |
|
Loans, net of unearned income |
|
|
12,639,638 |
|
|
|
12,543,776 |
|
Allowance for loan losses |
|
|
(309,913 |
) |
|
|
(313,762 |
) |
Net loans |
|
|
12,329,725 |
|
|
|
12,230,014 |
|
Interest rate swaps,
net |
|
|
1,028 |
|
|
|
963 |
|
Accounts receivable - affiliates, net |
|
|
48,470 |
|
|
|
64,235 |
|
Other assets |
|
|
65,145 |
|
|
|
53,018 |
|
Total assets |
|
$ |
13,679,834 |
|
|
|
13,534,395 |
|
Liabilities |
|
|
|
|
|
|
|
|
Dividends payable -
affiliates |
|
$ |
186,062 |
|
|
|
- |
|
Deferred income taxes |
|
|
4,448 |
|
|
|
9,327 |
|
Other liabilities |
|
|
36,452 |
|
|
|
22,625 |
|
Total liabilities |
|
|
226,962 |
|
|
|
31,952 |
|
Stockholders
Equity |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
743 |
|
|
|
743 |
|
Common stock - $0.01 par value, authorized 100,000,000 shares; issued and outstanding 99,999,900 shares |
|
|
1,000 |
|
|
|
1,000 |
|
Additional paid-in capital |
|
|
14,026,608 |
|
|
|
14,026,608 |
|
Retained earnings (deficit) |
|
|
(575,479 |
) |
|
|
(525,908 |
) |
Total stockholders equity |
|
|
13,452,872 |
|
|
|
13,502,443 |
|
Total liabilities and stockholders equity |
|
$ |
13,679,834 |
|
|
|
13,534,395 |
|
The accompanying notes are an integral part of these statements.
25
Financial Statements
Wachovia Preferred Funding Corp. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Changes in Stockholders Equity (Unaudited) |
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
|
Preferred stock |
|
|
|
Common stock |
|
|
|
Additional paid-in capital |
|
|
|
Retained earnings (deficit) |
|
|
|
Total stockholders equity |
|
|
|
|
|
|
|
Balance, December 31,
2010 |
|
$ |
743 |
|
|
|
1,000 |
|
|
|
18,526,608 |
|
|
|
(406,478 |
) |
|
|
18,121,873 |
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
210,867 |
|
|
|
210,867 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred securities at $0.45 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13,594 |
) |
|
|
(13,594 |
) |
Series B preferred securities at $0.13 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,332 |
) |
|
|
(5,332 |
) |
Series C preferred securities at $6.38 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27,020 |
) |
|
|
(27,020 |
) |
Common stock at $2.24 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(224,000 |
) |
|
|
(224,000 |
) |
Common stock special capital distribution |
|
|
- |
|
|
|
- |
|
|
|
(2,500,000 |
) |
|
|
- |
|
|
|
(2,500,000 |
) |
|
|
|
|
|
|
|
|
Balance, March 31,
2011 |
|
$ |
743 |
|
|
|
1,000 |
|
|
|
16,026,608 |
|
|
|
(465,557 |
) |
|
|
15,562,794 |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011 |
|
$ |
743 |
|
|
|
1,000 |
|
|
|
14,026,608 |
|
|
|
(525,908 |
) |
|
|
13,502,443 |
|
|
|
Net
income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
150,015 |
|
|
|
150,015 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred securities at $0.45 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13,594 |
) |
|
|
(13,594 |
) |
Series B preferred securities at $0.15 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,028 |
) |
|
|
(6,028 |
) |
Series C preferred securities at $7.08 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(29,964 |
) |
|
|
(29,964 |
) |
Common stock at $1.50 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(150,000 |
) |
|
|
(150,000 |
) |
|
|
|
|
|
|
|
|
Balance, March 31, 2012 |
|
$ |
743 |
|
|
|
1,000 |
|
|
|
14,026,608 |
|
|
|
(575,479 |
) |
|
|
13,452,872 |
|
|
|
The accompanying notes are an integral part of these statements.
26
Financial Statements
Wachovia Preferred Funding Corp. and Subsidiaries
Consolidated
Statement of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
(in thousands) |
|
2012 |
|
|
2011 |
|
Cash flows from
operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
150,015 |
|
|
|
210,867 |
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Accretion of discounts on loans |
|
|
(34,674 |
) |
|
|
(67,937 |
) |
Provision for credit losses |
|
|
51,259 |
|
|
|
52,466 |
|
Deferred income tax benefits |
|
|
(4,879 |
) |
|
|
(4,924 |
) |
Other operating activities, net |
|
|
1,119 |
|
|
|
(1,582 |
) |
Net cash provided by operating activities |
|
|
162,840 |
|
|
|
188,890 |
|
Cash flows from
investing activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in cash realized from |
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
Purchases |
|
|
(943,508 |
) |
|
|
- |
|
Proceeds from payments and sales |
|
|
843,563 |
|
|
|
1,501,753 |
|
Net cash provided (used) by investing activities |
|
|
(99,945 |
) |
|
|
1,501,753 |
|
Cash flows from
financing activities: |
|
|
|
|
|
|
|
|
Decrease in cash realized from |
|
|
|
|
|
|
|
|
Common stock special capital distributions |
|
|
- |
|
|
|
(2,500,000 |
) |
Cash dividends paid |
|
|
(13,594 |
) |
|
|
(269,946 |
) |
Net cash used by financing activities |
|
|
(13,594 |
) |
|
|
(2,769,946 |
) |
Net change in cash and
cash equivalents |
|
|
49,301 |
|
|
|
(1,079,303 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,186,165 |
|
|
|
2,774,299 |
|
Cash and cash equivalents at end of period |
|
$ |
1,235,466 |
|
|
|
1,694,996 |
|
Supplemental cash flow
disclosures: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
5,500 |
|
|
|
4,000 |
|
Change in non cash items: |
|
|
|
|
|
|
|
|
Transfers from loans to foreclosed assets |
|
|
4,897 |
|
|
|
4,482 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
27
Note 1: Summary of Significant Accounting Policies
Wachovia Preferred Funding Corp. (Wachovia Funding) is a direct subsidiary of Wachovia Preferred Funding
Holding Corp. (Wachovia Preferred Holding) and an indirect subsidiary of both Wells Fargo & Company (Wells Fargo) and Wells Fargo Bank, National Association (the Bank). Wachovia Funding is a real estate investment trust (REIT) for income
tax purposes.
The accounting and reporting policies of Wachovia Funding are in accordance with U.S. generally accepted
accounting principles (GAAP). Our significant accounting policies are discussed in our Form 10-K for the year ended December 31, 2011 (2011 Form 10-K). The preparation of the financial statements in accordance with GAAP requires management to
make estimates based on assumptions about future economic and market conditions 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 future 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 related to the allowance for credit losses (Note 2). Actual results could differ from those estimates.
The information furnished in these unaudited interim statements reflects all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements do not necessarily
indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our 2011 Form 10-K.
Accounting Standards Adopted in 2012
In first quarter 2012, we adopted Accounting
Standards Update (ASU or Update) ASU 2011-4, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.
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.
Significant Accounting Policy Update
In first quarter 2012, we implemented the 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 (Interagency Guidance), which was issued on January 31, 2012. As a result, we aligned our nonaccrual accounting policy with this guidance to accelerate the timing of placing junior lien loans on nonaccrual to
coincide with the timing of placing the related real estate 1-4 family first mortgage loans on nonaccrual. Our updated nonaccrual policy is as follows:
We generally place loans on nonaccrual status when:
|
|
|
the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrowers 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 and no restructuring has occurred; or |
|
|
|
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. |
There have been no other material
changes to our significant accounting policies, as discussed in Note 1 in our 2011 Form 10-K.
Subsequent Events
We have evaluated the effects of subsequent events that have occurred subsequent to period end March 31, 2012. During this period there have been no
material events that would require recognition in our first quarter 2012 consolidated financial statements or disclosure in the Notes to Financial Statements.
28
Note 2: Loans and Allowance for Credit Losses
Wachovia Funding obtains participation interests in loans originated or purchased by the Bank. By the
nature of Wachovia Fundings status as a REIT, the composition of the loans underlying the participation interests are highly concentrated in real estate. Underlying loans are concentrated primarily in Florida, New Jersey, Pennsylvania, North
Carolina and Virginia. These markets include
approximately 60% of Wachovia Fundings total loan balance at March 31, 2012.
The following table presents loans by segments and classes. Outstanding balances include a total net reduction of $570.7 million and $604.4 million at March 31, 2012 and December 31, 2011,
respectively, for unearned discounts.
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2012 |
|
|
December 31,
2011 |
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
281,512 |
|
|
|
287,174 |
|
Real estate mortgage |
|
|
924,465 |
|
|
|
1,015,087 |
|
Real estate construction |
|
|
39,821 |
|
|
|
45,887 |
|
Total commercial |
|
|
1,245,798 |
|
|
|
1,348,148 |
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
8,124,256 |
|
|
|
7,945,746 |
|
Real estate 1-4 family junior lien mortgage |
|
|
3,269,584 |
|
|
|
3,249,882 |
|
Total consumer |
|
|
11,393,840 |
|
|
|
11,195,628 |
|
Total loans |
|
$ |
12,639,638 |
|
|
|
12,543,776 |
|
The following table summarizes the proceeds paid (excluding accrued interest receivable
of $2.9 million in first
quarter 2012) or received from the Bank for purchases and sales of loans, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Commercial |
|
|
Consumer |
|
|
Total |
|
|
|
|
Commercial |
|
|
Consumer |
|
|
Total |
|
Quarter ended March
31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
$ |
- |
|
|
|
940,618 |
|
|
|
940,618 |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Sales |
|
|
(900 |
) |
|
|
(16,312 |
) |
|
|
(17,212 |
) |
|
|
|
|
(5 |
) |
|
|
(31,248 |
) |
|
|
(31,253 |
) |
Commitments to Lend
The contract or notional amount of commercial loan commitments to extend credit at March 31, 2012 and
December 31, 2011 was $247.6 million and $329.6 million, respectively.
29
Allowance for Credit Losses (ACL)
The ACL is managements estimate of credit losses inherent in the loan portfolio, including unfunded credit commitments, at the balance sheet date. We have an established process to determine the
adequacy of the allowance for credit losses that assesses the losses inherent in our portfolio and related unfunded credit commitments. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to
absorb credit losses inherent in the total loan portfolio and unfunded credit commitments.
Our process involves procedures
to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured collectively for groups of smaller loans with similar characteristics or
individually for larger impaired loans.
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 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. As appropriate, to achieve greater accuracy, we may further stratify selected portfolios by sub-product or other predictive
characteristics. Models designed for each pool are utilized to develop the loss estimates. We use assumptions for these pools in our forecast models, such as historic delinquency and default, loss severity, home price trends, unemployment trends,
and other key economic variables that may influence the frequency and severity of losses in the pool.
In determining the appropriate allowance attributable to our residential mortgage
portfolio, we incorporate the default rates and high severity of loss for junior lien mortgages behind delinquent first lien mortgages into our loss forecasting calculations. In addition, the loss rates we use in determining our allowance include
the impact of our established loan modification programs. When modifications occur or are probable to occur, our allowance considers the impact of these modifications, taking into consideration the associated credit cost, including re-defaults of
modified loans and projected loss severity. Accordingly, the loss content associated with the effects of existing and probable loan modifications and junior lien mortgages behind delinquent first lien mortgages has been considered 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 ACL for both portfolio segments includes an amount for imprecision or uncertainty that may change from period to
period. This amount represents managements 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.
Impaired loans, which predominately 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 loans effective interest rate. The allowance for an impaired loan that was
modified as 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.
30
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:
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
(in thousands) |
|
2012 |
|
|
2011 |
|
Balance, beginning of quarter |
|
$ |
313,928 |
|
|
|
403,555 |
|
Provision for credit losses |
|
|
51,259 |
|
|
|
52,466 |
|
Interest income on certain impaired loans (1) |
|
|
(1,901) |
|
|
|
(1,081) |
|
Loan charge-offs: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
- |
|
|
|
- |
|
Real estate mortgage |
|
|
(252) |
|
|
|
(43) |
|
Total commercial |
|
|
(252) |
|
|
|
(43) |
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
(23,324) |
|
|
|
(23,400) |
|
Real estate 1-4 family junior lien mortgage |
|
|
(32,422) |
|
|
|
(44,747) |
|
Total consumer |
|
|
(55,746) |
|
|
|
(68,147) |
|
Total loan charge-offs |
|
|
(55,998) |
|
|
|
(68,190) |
|
Loan
recoveries: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
- |
|
|
|
- |
|
Real estate mortgage |
|
|
4 |
|
|
|
85 |
|
Total commercial |
|
|
4 |
|
|
|
85 |
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
459 |
|
|
|
431 |
|
Real estate 1-4 family junior lien mortgage |
|
|
2,362 |
|
|
|
2,352 |
|
Total consumer |
|
|
2,821 |
|
|
|
2,783 |
|
Total loan recoveries |
|
|
2,825 |
|
|
|
2,868 |
|
Net loan charge-offs |
|
|
(53,173) |
|
|
|
(65,322) |
|
Balance, end of quarter |
|
$ |
310,113 |
|
|
|
389,618 |
|
Components: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
309,913 |
|
|
|
389,310 |
|
Allowance for unfunded credit commitments |
|
|
200 |
|
|
|
308 |
|
Allowance for credit losses |
|
$ |
310,113 |
|
|
|
389,618 |
|
Net loan charge-offs as a
percentage of average total loans |
|
|
1.74 |
% |
|
|
1.78 |
|
Allowance for loan losses as a percentage of total loans |
|
|
2.45 |
|
|
|
2.73 |
|
Allowance for credit losses as a percentage of total loans |
|
|
2.45 |
|
|
|
2.73 |
|
(1) |
Certain impaired loans with an allowance calculated by discounting expected cash flows using the loans effective interest rate over the remaining life of the loan
recognize reductions in allowance as interest income. |
31
The following table summarizes the activity in the allowance for credit losses by
our commercial and consumer portfolio segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
(in thousands) |
|
|
|
Commercial |
|
|
Consumer |
|
|
Total |
|
|
Commercial |
|
|
Consumer |
|
|
Total |
|
Balance, beginning of
quarter |
|
$ |
|
|
23,091 |
|
|
|
290,837 |
|
|
|
313,928 |
|
|
|
26,413 |
|
|
|
377,142 |
|
|
|
403,555 |
|
Provision for credit losses |
|
|
|
|
(2,886 |
) |
|
|
54,145 |
|
|
|
51,259 |
|
|
|
(3,505 |
) |
|
|
55,971 |
|
|
|
52,466 |
|
Interest income on certain impaired loans |
|
|
|
|
- |
|
|
|
(1,901 |
) |
|
|
(1,901 |
) |
|
|
- |
|
|
|
(1,081 |
) |
|
|
(1,081 |
) |
|
|
|
|
|
|
|
|
Loan charge-offs |
|
|
|
|
(252 |
) |
|
|
(55,746 |
) |
|
|
(55,998 |
) |
|
|
(43 |
) |
|
|
(68,147 |
) |
|
|
(68,190 |
) |
Loan recoveries |
|
|
|
|
4 |
|
|
|
2,821 |
|
|
|
2,825 |
|
|
|
85 |
|
|
|
2,783 |
|
|
|
2,868 |
|
Net loan charge-offs |
|
|
|
|
(248 |
) |
|
|
(52,925 |
) |
|
|
(53,173 |
) |
|
|
42 |
|
|
|
(65,364 |
) |
|
|
(65,322 |
) |
Balance, end of quarter |
|
$ |
|
|
19,957 |
|
|
|
290,156 |
|
|
|
310,113 |
|
|
|
22,950 |
|
|
|
366,668 |
|
|
|
389,618 |
|
The following table disaggregates our allowance for credit losses and recorded investment in
loans by impairment methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
Recorded investment in loans |
|
(in thousands) |
|
|
|
|
Commercial |
|
|
Consumer |
|
|
Total |
|
|
Commercial |
|
|
Consumer |
|
|
Total |
|
|
|
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated (1) |
|
$ |
|
|
|
|
12,188 |
|
|
|
189,668 |
|
|
|
201,856 |
|
|
|
1,221,133 |
|
|
|
11,007,063 |
|
|
|
12,228,196 |
|
Individually evaluated (2) |
|
|
|
|
|
|
7,769 |
|
|
|
100,488 |
|
|
|
108,257 |
|
|
|
18,097 |
|
|
|
332,878 |
|
|
|
350,975 |
|
Purchased credit-impaired (PCI) (3) |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,568 |
|
|
|
53,899 |
|
|
|
60,467 |
|
Total |
|
$ |
|
|
|
|
19,957 |
|
|
|
290,156 |
|
|
|
310,113 |
|
|
|
1,245,798 |
|
|
|
11,393,840 |
|
|
|
12,639,638 |
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated (1) |
|
$ |
|
|
|
|
12,487 |
|
|
|
188,604 |
|
|
|
201,091 |
|
|
|
1,320,845 |
|
|
|
10,815,112 |
|
|
|
12,135,957 |
|
Individually evaluated (2) |
|
|
|
|
|
|
10,436 |
|
|
|
102,233 |
|
|
|
112,669 |
|
|
|
20,198 |
|
|
|
324,605 |
|
|
|
344,803 |
|
PCI (3) |
|
|
|
|
|
|
168 |
|
|
|
- |
|
|
|
168 |
|
|
|
7,105 |
|
|
|
55,911 |
|
|
|
63,016 |
|
Total |
|
$ |
|
|
|
|
23,091 |
|
|
|
290,837 |
|
|
|
313,928 |
|
|
|
1,348,148 |
|
|
|
11,195,628 |
|
|
|
12,543,776 |
|
(1) |
Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU
2010-20 regarding allowance for unimpaired loans. |
(2) |
Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20
regarding allowance for impaired loans. |
(3) |
Represents the allowance and related loan carrying value determined in accordance with ASC 310-30, Receivables Loans and Debt Securities Acquired with
Deteriorated Credit Quality (formerly SOP 03-3) and pursuant to amendments by ASU 2010-20 regarding allowance for PCI loans. |
32
Credit Quality
We monitor credit quality as indicated by evaluating various attributes and utilize such information in our evaluation of the adequacy of the allowance for credit losses. The following sections provide
the credit quality indicators we most closely monitor. The majority of credit quality indicators are based on March 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 December 31, 2011.
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 table below provides a
breakdown of outstanding commercial loans by risk category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Commercial and industrial |
|
|
Real
estate mortgage |
|
|
Real
estate construction |
|
|
Total |
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By risk category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
280,573 |
|
|
|
771,818 |
|
|
|
32,871 |
|
|
|
1,085,262 |
|
Criticized |
|
|
939 |
|
|
|
152,647 |
|
|
|
6,950 |
|
|
|
160,536 |
|
Total commercial loans |
|
$ |
281,512 |
|
|
|
924,465 |
|
|
|
39,821 |
|
|
|
1,245,798 |
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By risk category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
286,228 |
|
|
|
852,464 |
|
|
|
35,705 |
|
|
|
1,174,397 |
|
Criticized |
|
|
946 |
|
|
|
162,623 |
|
|
|
10,182 |
|
|
|
173,751 |
|
Total commercial loans |
|
$ |
287,174 |
|
|
|
1,015,087 |
|
|
|
45,887 |
|
|
|
1,348,148 |
|
In addition, while we monitor past due status, we do not consider it a key driver of our
credit risk management practices for commercial loans. The following table provides past due information for commercial loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Commercial and industrial |
|
|
Real
estate mortgage |
|
|
Real
estate construction |
|
|
Total |
|
March 31,
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By delinquency status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current-29 days past due (DPD) and still accruing |
|
$ |
281,373 |
|
|
|
892,794 |
|
|
|
39,641 |
|
|
|
1,213,808 |
|
30-89 DPD and still accruing |
|
|
139 |
|
|
|
13,048 |
|
|
|
- |
|
|
|
13,187 |
|
90+ DPD and still accruing |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Nonaccrual loans |
|
|
- |
|
|
|
18,623 |
|
|
|
180 |
|
|
|
18,803 |
|
Total commercial loans |
|
$ |
281,512 |
|
|
|
924,465 |
|
|
|
39,821 |
|
|
|
1,245,798 |
|
December 31,
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By delinquency status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current-29 DPD and still accruing |
|
$ |
282,703 |
|
|
|
943,712 |
|
|
|
45,636 |
|
|
|
1,272,051 |
|
30-89 DPD and still accruing |
|
|
4,471 |
|
|
|
48,320 |
|
|
|
- |
|
|
|
52,791 |
|
90+ DPD and still accruing |
|
|
- |
|
|
|
1,923 |
|
|
|
- |
|
|
|
1,923 |
|
Nonaccrual loans |
|
|
- |
|
|
|
21,132 |
|
|
|
251 |
|
|
|
21,383 |
|
Total commercial loans |
|
$ |
287,174 |
|
|
|
1,015,087 |
|
|
|
45,887 |
|
|
|
1,348,148 |
|
33
CONSUMER CREDIT QUALITY INDICATORS We have various classes of consumer loans that present respective unique risks. Loan delinquency, FICO credit scores and LTV/CLTV for loan
types are common credit quality indicators that we monitor and utilize in our evaluation of the adequacy of the allowance for credit losses for the consumer portfolio segment.
The majority of our loss estimation techniques used for the allowance for credit losses
rely on delinquency matrix models or delinquency roll rate models. Therefore, delinquency is an important indicator of credit quality and the establishment of our allowance for credit losses.
The following table provides the outstanding balances of our consumer portfolio by delinquency status.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Real estate
1-4 family
first
mortgage |
|
|
Real estate 1-4 family junior lien mortgage |
|
|
Total |
|
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By delinquency status: |
|
|
|
|
|
|
|
|
|
|
|
|
Current - 29 DPD |
|
$ |
7,832,553 |
|
|
|
3,140,517 |
|
|
|
10,973,070 |
|
30-59 DPD |
|
|
68,301 |
|
|
|
37,622 |
|
|
|
105,923 |
|
60-89 DPD |
|
|
45,002 |
|
|
|
24,251 |
|
|
|
69,253 |
|
90-119 DPD |
|
|
28,298 |
|
|
|
18,219 |
|
|
|
46,517 |
|
120-179 DPD |
|
|
40,868 |
|
|
|
24,720 |
|
|
|
65,588 |
|
180+ DPD |
|
|
126,453 |
|
|
|
27,642 |
|
|
|
154,095 |
|
Remaining PCI accounting adjustments |
|
|
(17,219) |
|
|
|
(3,387) |
|
|
|
(20,606) |
|
|
|
|
|
Total consumer loans |
|
$ |
8,124,256 |
|
|
|
3,269,584 |
|
|
|
11,393,840 |
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By delinquency status: |
|
|
|
|
|
|
|
|
|
|
|
|
Current - 29 DPD |
|
$ |
7,645,674 |
|
|
|
3,098,012 |
|
|
|
10,743,686 |
|
30-59 DPD |
|
|
80,409 |
|
|
|
48,886 |
|
|
|
129,295 |
|
60-89 DPD |
|
|
42,387 |
|
|
|
27,824 |
|
|
|
70,211 |
|
90-119 DPD |
|
|
34,471 |
|
|
|
21,434 |
|
|
|
55,905 |
|
120-179 DPD |
|
|
39,314 |
|
|
|
28,939 |
|
|
|
68,253 |
|
180+ DPD |
|
|
120,819 |
|
|
|
28,874 |
|
|
|
149,693 |
|
Remaining PCI accounting adjustments |
|
|
(17,328) |
|
|
|
(4,087) |
|
|
|
(21,415) |
|
|
|
|
|
Total consumer loans |
|
$ |
7,945,746 |
|
|
|
3,249,882 |
|
|
|
11,195,628 |
|
34
The following table provides a breakdown of our consumer portfolio by updated FICO. We
obtain FICO scores at loan origination and the scores are updated at least
quarterly. FICO is not available for certain loan types and may not be obtained if we deem it unnecessary due to strong collateral and other borrower attributes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Real estate 1-4 family first
mortgage |
|
|
Real estate 1-4 family junior lien mortgage |
|
|
Total |
|
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By updated FICO: |
|
|
|
|
|
|
|
|
|
|
|
|
< 600 |
|
$ |
537,442 |
|
|
|
379,503 |
|
|
|
916,945 |
|
600-639 |
|
|
338,540 |
|
|
|
187,654 |
|
|
|
526,194 |
|
640-679 |
|
|
589,646 |
|
|
|
318,679 |
|
|
|
908,325 |
|
680-719 |
|
|
1,197,708 |
|
|
|
532,917 |
|
|
|
1,730,625 |
|
720-759 |
|
|
1,570,201 |
|
|
|
663,443 |
|
|
|
2,233,644 |
|
760-799 |
|
|
2,378,976 |
|
|
|
751,826 |
|
|
|
3,130,802 |
|
800+ |
|
|
1,370,953 |
|
|
|
399,208 |
|
|
|
1,770,161 |
|
No FICO available |
|
|
158,009 |
|
|
|
39,741 |
|
|
|
197,750 |
|
Remaining PCI accounting adjustments |
|
|
(17,219) |
|
|
|
(3,387) |
|
|
|
(20,606) |
|
|
|
|
|
Total consumer loans |
|
$ |
8,124,256 |
|
|
|
3,269,584 |
|
|
|
11,393,840 |
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By updated FICO: |
|
|
|
|
|
|
|
|
|
|
|
|
< 600 |
|
$ |
537,949 |
|
|
|
387,232 |
|
|
|
925,181 |
|
600-639 |
|
|
321,284 |
|
|
|
195,122 |
|
|
|
516,406 |
|
640-679 |
|
|
572,899 |
|
|
|
331,988 |
|
|
|
904,887 |
|
680-719 |
|
|
1,128,538 |
|
|
|
514,089 |
|
|
|
1,642,627 |
|
720-759 |
|
|
1,542,772 |
|
|
|
634,491 |
|
|
|
2,177,263 |
|
760-799 |
|
|
2,324,799 |
|
|
|
757,186 |
|
|
|
3,081,985 |
|
800+ |
|
|
1,338,881 |
|
|
|
384,579 |
|
|
|
1,723,460 |
|
No FICO available |
|
|
195,952 |
|
|
|
49,282 |
|
|
|
245,234 |
|
Remaining PCI accounting adjustments |
|
|
(17,328) |
|
|
|
(4,087) |
|
|
|
(21,415) |
|
|
|
|
|
Total consumer loans |
|
$ |
7,945,746 |
|
|
|
3,249,882 |
|
|
|
11,195,628 |
|
35
LTV refers to the ratio comparing the loans balance to the propertys
collateral value. CLTV refers to the combination of first mortgage and junior lien mortgage ratios. LTVs and CLTVs are updated quarterly using a cascade approach which first uses values provided by automated valuation models (AVMs) for the property.
If an AVM is not available, then the value is estimated using the original appraised value adjusted by the change in Home Price Index (HPI) for the property location. If an HPI is not available, the original appraised value is used. The HPI value is
normally the only method considered for high value properties as the AVM values have proven less accurate for these properties.
The following table shows the most updated LTV and CLTV distribution of the real estate 1-4 family first and junior
lien mortgage loan portfolios. The residential real estate markets remain weak and continue to experience declines in property values in some states. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Real estate 1-4 family first
mortgage
by LTV |
|
|
Real estate 1-4 family junior lien mortgage by CLTV |
|
|
Total |
|
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By LTV/CLTV: |
|
|
|
|
|
|
|
|
|
|
|
|
0-60% |
|
$ |
3,594,912 |
|
|
|
679,526 |
|
|
|
4,274,438 |
|
60.01-80% |
|
|
2,386,859 |
|
|
|
684,459 |
|
|
|
3,071,318 |
|
80.01-100% |
|
|
1,305,167 |
|
|
|
789,611 |
|
|
|
2,094,778 |
|
100.01-120% (1) |
|
|
493,843 |
|
|
|
592,086 |
|
|
|
1,085,929 |
|
> 120% (1) |
|
|
316,068 |
|
|
|
522,507 |
|
|
|
838,575 |
|
No LTV/CLTV available |
|
|
44,626 |
|
|
|
4,782 |
|
|
|
49,408 |
|
Remaining PCI accounting adjustments |
|
|
(17,219) |
|
|
|
(3,387) |
|
|
|
(20,606) |
|
|
|
|
|
Total consumer loans |
|
$ |
8,124,256 |
|
|
|
3,269,584 |
|
|
|
11,393,840 |
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By LTV/CLTV: |
|
|
|
|
|
|
|
|
|
|
|
|
0-60% |
|
$ |
3,764,740 |
|
|
|
676,585 |
|
|
|
4,441,325 |
|
60.01-80% |
|
|
2,273,111 |
|
|
|
599,394 |
|
|
|
2,872,505 |
|
80.01-100% |
|
|
1,098,818 |
|
|
|
812,647 |
|
|
|
1,911,465 |
|
100.01-120% (1) |
|
|
473,691 |
|
|
|
614,633 |
|
|
|
1,088,324 |
|
> 120% (1) |
|
|
303,808 |
|
|
|
545,323 |
|
|
|
849,131 |
|
No LTV/CLTV available |
|
|
48,906 |
|
|
|
5,387 |
|
|
|
54,293 |
|
Remaining PCI accounting adjustments |
|
|
(17,328) |
|
|
|
(4,087) |
|
|
|
(21,415) |
|
|
|
|
|
Total consumer loans |
|
$ |
7,945,746 |
|
|
|
3,249,882 |
|
|
|
11,195,628 |
|
(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. |
36
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 thousands) |
|
Mar. 31 2012 |
|
|
Dec. 31, 2011 |
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
- |
|
|
|
- |
|
Real estate mortgage |
|
|
18,623 |
|
|
|
21,132 |
|
Real estate construction |
|
|
180 |
|
|
|
251 |
|
|
|
|
Total commercial |
|
|
18,803 |
|
|
|
21,383 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
235,737 |
|
|
|
228,363 |
|
Real estate 1-4 family junior lien mortgage (1) |
|
|
152,824 |
|
|
|
99,347 |
|
|
|
|
Total consumer |
|
|
388,561 |
|
|
|
327,710 |
|
|
|
|
Total nonaccrual loans |
|
|
|
|
|
|
|
|
(excluding PCI) |
|
$ |
407,364 |
|
|
|
349,093 |
|
(1) |
Includes $55.2 million at March 31, 2012, resulting from implementation of the Interagency Guidance issued on January 31, 2012. This guidance accelerated the
timing of placing these loans on nonaccrual to coincide with the timing of placing the related real estate 1-4 family first mortgage loans on nonaccrual. |
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 exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans of $7.1 million at March 31, 2012, and $7.6 million at December 31, 2011, are excluded from this
disclosure even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.
The following table shows non-PCI loans 90 days or more past due and still accruing.
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Mar. 31, 2012 |
|
|
Dec. 31, 2011 |
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
- |
|
|
|
- |
|
Real estate mortgage |
|
|
- |
|
|
|
1,596 |
|
Real estate construction |
|
|
- |
|
|
|
- |
|
|
|
|
Total commercial |
|
|
- |
|
|
|
1,596 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
16,211 |
|
|
|
21,008 |
|
Real estate 1-4 family junior lien mortgage (1) |
|
|
5,560 |
|
|
|
15,492 |
|
|
|
|
Total consumer |
|
|
21,771 |
|
|
|
36,500 |
|
|
|
|
Total past due (excluding PCI) |
|
$ |
21,771 |
|
|
|
38,096 |
|
(1) |
During first quarter 2012, $2.7 million of 1-4 family junior lien mortgages were transferred to nonaccrual upon implementation of the Interagency Guidance issued on
January 31, 2012. |
37
IMPAIRED LOANS The table below summarizes key information for impaired loans. Our impaired loans predominately include loans on nonaccrual status in the
commercial portfolio segment and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated loss which is included in the allowance for credit losses. Impaired loans exclude PCI loans.
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 $23.7 million at March 31, 2012 and $21.4 million at December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment |
|
|
|
|
(in thousands) |
|
Unpaid principal balance |
|
|
Impaired loans |
|
|
Impaired loans with related allowance for credit losses |
|
|
Related allowance for credit losses |
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate mortgage |
|
|
23,296 |
|
|
|
17,917 |
|
|
|
17,917 |
|
|
|
7,669 |
|
Real estate construction |
|
|
195 |
|
|
|
180 |
|
|
|
180 |
|
|
|
100 |
|
|
|
|
|
|
Total commercial |
|
|
23,491 |
|
|
|
18,097 |
|
|
|
18,097 |
|
|
|
7,769 |
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
258,292 |
|
|
|
215,457 |
|
|
|
215,457 |
|
|
|
50,717 |
|
Real estate 1-4 family junior lien mortgage |
|
|
124,465 |
|
|
|
117,421 |
|
|
|
117,421 |
|
|
|
49,771 |
|
|
|
|
|
|
Total consumer |
|
|
382,757 |
|
|
|
332,878 |
|
|
|
332,878 |
|
|
|
100,488 |
|
|
|
|
|
|
Total impaired loans (excluding PCI) |
|
$ |
406,248 |
|
|
|
350,975 |
|
|
|
350,975 |
|
|
|
108,257 |
|
|
|
December 31, 2011 |
|
|
|
|
|
|
Commercial: |
|
|
|
|
Commercial and industrial |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate mortgage |
|
|
25,684 |
|
|
|
19,947 |
|
|
|
19,947 |
|
|
|
10,330 |
|
Real estate construction |
|
|
264 |
|
|
|
251 |
|
|
|
251 |
|
|
|
106 |
|
|
|
|
|
|
Total commercial |
|
|
25,948 |
|
|
|
20,198 |
|
|
|
20,198 |
|
|
|
10,436 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
245,837 |
|
|
|
207,447 |
|
|
|
207,447 |
|
|
|
50,853 |
|
Real estate 1-4 family junior lien mortgage |
|
|
124,974 |
|
|
|
117,158 |
|
|
|
117,158 |
|
|
|
51,380 |
|
|
|
|
|
|
Total consumer |
|
|
370,811 |
|
|
|
324,605 |
|
|
|
324,605 |
|
|
|
102,233 |
|
|
|
|
|
|
Total impaired loans (excluding PCI) |
|
$ |
396,759 |
|
|
|
344,803 |
|
|
|
344,803 |
|
|
|
112,669 |
|
38
The following table provides the average recorded investment in
impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
|
|
2012 |
|
|
2011 |
|
(in thousands) |
|
Average recorded investment |
|
|
Recognized interest income |
|
|
Average recorded investment |
|
|
Recognized interest income |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
- |
|
|
|
- |
|
|
|
1,957 |
|
|
|
- |
|
Real estate mortgage |
|
|
18,722 |
|
|
|
47 |
|
|
|
19,996 |
|
|
|
4 |
|
Real estate construction |
|
|
231 |
|
|
|
- |
|
|
|
366 |
|
|
|
- |
|
Total commercial |
|
|
18,953 |
|
|
|
47 |
|
|
|
22,319 |
|
|
|
4 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
203,327 |
|
|
|
2,809 |
|
|
|
143,031 |
|
|
|
1,483 |
|
Real estate 1-4 family junior lien mortgage |
|
|
113,176 |
|
|
|
1,644 |
|
|
|
84,850 |
|
|
|
1,023 |
|
|
|
|
|
|
Total consumer |
|
|
316,503 |
|
|
|
4,453 |
|
|
|
227,881 |
|
|
|
2,506 |
|
|
|
|
|
|
Total impaired loans |
|
$ |
335,456 |
|
|
|
4,500 |
|
|
|
250,200 |
|
|
|
2,510 |
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash basis of accounting |
|
|
|
|
|
$ |
59 |
|
|
|
|
|
|
|
16 |
|
Other (1) |
|
|
|
|
|
|
4,441 |
|
|
|
|
|
|
|
2,494 |
|
|
|
|
|
|
Total interest income |
|
|
|
|
|
$ |
4,500 |
|
|
|
|
|
|
|
2,510 |
|
(1) |
Includes interest recognized on accruing TDRs and interest recognized related to the passage of time on certain impaired loans. See footnote 1 to the table of changes
in the allowance for credit losses. |
39
TDRS When, for economic or legal reasons related to a borrowers financial difficulties, we grant a concession for other than an
insignificant period of time to a borrower that we would not otherwise consider, the related loan is classified as a TDR. We do not consider any loans modified through a
loan resolution such as foreclosure or short sale to be a TDR. The following table summarizes how our loans were modified as TDRs in first quarter 2012 and 2011, including the financial
effects of the modifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary modification type (1) |
|
|
Financial effects of modifications |
|
(in thousands) |
|
Principal (2) |
|
|
Interest rate reduction |
|
|
Other
interest
rate concessions (3) |
|
|
Total |
|
|
Charge- offs (4) |
|
|
Weighted average interest rate reduction |
|
|
Recorded investment related to interest rate reduction |
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
% |
|
$ |
- |
|
Real estate mortgage |
|
|
- |
|
|
|
- |
|
|
|
1,377 |
|
|
|
1,377 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
- |
|
|
|
- |
|
|
|
1,377 |
|
|
|
1,377 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
2,837 |
|
|
|
8,371 |
|
|
|
6,319 |
|
|
|
17,527 |
|
|
|
1,807 |
|
|
|
3.72 |
|
|
|
10,585 |
|
Real estate 1-4 family junior lien mortgage |
|
|
492 |
|
|
|
4,997 |
|
|
|
1,451 |
|
|
|
6,940 |
|
|
|
73 |
|
|
|
6.08 |
|
|
|
5,489 |
|
Trial modifications (5) |
|
|
- |
|
|
|
- |
|
|
|
23,681 |
|
|
|
23,681 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
3,329 |
|
|
|
13,368 |
|
|
|
31,451 |
|
|
|
48,148 |
|
|
|
1,880 |
|
|
|
4.53 |
|
|
|
16,074 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,329 |
|
|
|
13,368 |
|
|
|
32,828 |
|
|
|
49,525 |
|
|
|
1,880 |
|
|
|
4.53 |
% |
|
$ |
16,074 |
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
% |
|
$ |
- |
|
Real estate mortgage |
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
1,449 |
|
|
|
14,375 |
|
|
|
5,270 |
|
|
|
21,094 |
|
|
|
702 |
|
|
|
3.68 |
|
|
|
15,400 |
|
Real estate 1-4 family junior lien mortgage |
|
|
2,328 |
|
|
|
19,573 |
|
|
|
1,770 |
|
|
|
23,671 |
|
|
|
597 |
|
|
|
5.98 |
|
|
|
21,733 |
|
Trial modifications (5) |
|
|
- |
|
|
|
- |
|
|
|
27,488 |
|
|
|
27,488 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
3,777 |
|
|
|
33,948 |
|
|
|
34,528 |
|
|
|
72,253 |
|
|
|
1,299 |
|
|
|
5.02 |
|
|
|
37,133 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,777 |
|
|
|
33,948 |
|
|
|
34,530 |
|
|
|
72,255 |
|
|
|
1,299 |
|
|
|
5.02 |
% |
|
$ |
37,133 |
|
(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 risk, even though the rate may have been increased. These
modifications would include renewals, term extensions and other interest adjustments, but exclude modifications that also forgive principal and/or reduce the interest rate. |
(4) |
Charge-offs include write-downs of the investment in the loan in the period of modification. In some cases, the amount of charge off will differ from the modification
terms if the loan has already been charged down based on our policies. Modifications resulted in forgiving principal (actual, contingent or deferred) of $2.1 million and $1.0 million at March 31, 2012 and March 31, 2011, respectively.
|
(5) |
Trial modifications are granted a delay in payments due under the original terms during the trial payment period. However, these loans continue to advance through
delinquency status and accrue interest according to their original terms. Any subsequent permanent modification generally includes interest rate related concessions; however, the exact concession type and resulting financial effect are usually not
known until the loan is permanently modified. |
40
The previous table presents information on all loan modifications classified as TDRs. We
may require some borrowers experiencing financial difficulty to make trial payments generally for a period of three to four months, according to terms of a planned permanent modification, to determine if they can perform according to those terms.
These arrangements represent trial modifications, which we classify and account for as TDRs. The trial period terms are developed in accordance with our proprietary programs or the U.S. Treasurys 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 March 31, 2012, the loans in trial modification period were $8.5 million under
HAMP, $2.3 million under 2MP and $12.9 million under proprietary programs, compared with $ 8.7 million, $3.1 million and $9.6 million at December 31, 2011, respectively. While loans are in trial payment programs their original terms are not
considered modified and they continue to advance through delinquency status and accrue interest according to their original terms. The planned
modifications for these arrangements predominantly involve interest rate reductions or other interest rate concessions. Trial modifications with a recorded investment of $11.3 million at March
31, 2012, and $12.1 million at December 31, 2011, were accruing loans and $12.4 million and $9.3 million, respectively, were nonaccruing loans. Our recent experience is that a majority of the mortgages that enter a trial payment period program are
successful in completing the program requirements and are then permanently modified at the end of the trial period. As previously discussed, our allowance process considers the impact of those modifications that are probable to occur including the
associated credit cost and related re-default risk.
The table below summarizes permanent modification TDRs that have
defaulted in the current period within 12 months of their permanent modification date. We are reporting these defaulted TDRs based on a payment default definition of 90 days past due for the commercial portfolio segment and 60 days past due for the
consumer portfolio segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
|
|
|
|
2012 |
|
|
2011 |
|
(in thousands) |
|
|
|
Recorded investment of defaults |
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
|
|
- |
|
|
|
- |
|
Real estate mortgage |
|
|
|
|
- |
|
|
|
- |
|
Real estate construction |
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Total commercial |
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
|
|
1,999 |
|
|
|
2,630 |
|
Real estate 1-4 family junior lien mortgage |
|
|
|
|
1,352 |
|
|
|
842 |
|
|
|
|
|
Total consumer |
|
|
|
|
3,351 |
|
|
|
3,472 |
|
|
|
|
|
Total |
|
$ |
|
|
3,351 |
|
|
|
3,472 |
|
41
Note 3: Derivatives
We use derivative financial instruments as economic hedges and none are treated as accounting hedges. By
using derivatives, we are exposed to credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is equal to the amount reported as a derivative asset in our
balance sheet. The amounts reported as a derivative asset are derivative contracts in a gain position, and to the extent subject to master netting arrangements, net of derivatives in a loss position with the same counterparty and cash collateral
received. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and executing master netting arrangements and obtaining collateral, where appropriate. Derivative balances and related cash collateral amounts
are presented net in the balance sheet as long as they are subject to master netting agreements and meet the
criteria for net presentation. Counterparty credit risk related to derivatives is considered and, if
material, accounted for separately.
At March 31, 2012, receive-fixed interest rate swaps with a notional amount of $4.1
billion had a weighted average maturity of 0.21 years, weighted average receive rate of 7.45% and weighted average pay rate of 0.47%. Pay-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 0.21 years,
weighted average receive rate of 0.47% and weighted average pay rate of 5.72% at March 31, 2012. All of the interest rate swaps have variable pay or receive rates based on three- or six-month LIBOR. These swaps terminate in June 2012.
The total notional amounts and fair values for derivatives of which none are designated as hedging instruments were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012 |
|
|
December 31, 2011 |
|
|
|
Notional or |
|
|
Fair value |
|
|
Notional or |
|
|
Fair value |
|
(in thousands) |
|
contractual
amount |
|
|
Asset
derivatives |
|
|
Liability
derivatives |
|
|
contractual
amount |
|
|
Asset
derivatives |
|
|
Liability
derivatives |
|
Interest rate swaps |
|
$ |
8,200,000 |
|
|
|
146,870 |
|
|
|
111,582 |
|
|
|
8,200,000 |
|
|
|
139,056 |
|
|
|
103,833 |
|
Netting (1) |
|
|
|
|
|
|
(145,842 |
) |
|
|
(111,582 |
) |
|
|
|
|
|
|
(138,093 |
) |
|
|
(103,833 |
) |
Total |
|
|
|
|
|
$ |
1,028 |
|
|
|
- |
|
|
|
|
|
|
|
963 |
|
|
|
- |
|
|
(1) |
Derivatives are reported net of cash collateral received and paid. Additionally, positions with the same counterparty are netted as part of a legally enforceable master
netting agreement between Wachovia Funding and the derivative counterparty. |
At March 31, 2012, our position in interest rate swaps was recorded as a net asset
amount of $1.0 million on our consolidated balance sheet at fair value. The net amount was comprised of an asset of $146.9 million, a liability of $111.6 million, and a payable for cash deposited as collateral by counterparties of $34.3 million.
Gains recognized in the consolidated statement of income related to derivatives not designated as hedging instruments in
first quarter 2012 were $56 thousand compared with $110 thousand in first quarter 2011.
42
Note 4: Fair Values of Assets and Liabilities
Under our fair value framework, fair value measurements must reflect assumptions market participants would
use in pricing an asset or liability.
Fair value represents the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in the principal market. If there is no principal market, an entity should use the most advantageous market for the specific asset or liability at the measurement date
(referred to as an exit price). We group our assets and liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These
levels are:
|
|
|
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets. |
|
|
|
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
|
|
|
Level 3 Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable
assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. |
In the determination of the classification of financial instruments in Level 2 or Level 3 of the fair value hierarchy, we consider all available information, including observable market data, indications
of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. For securities in inactive markets, we use a predetermined percentage to evaluate the impact of fair value adjustments derived from
weighting both external and internal indications of value to determine if the instrument is classified as Level 2 or Level 3. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the
significance of the Level 3 inputs to the instruments fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.
Determination of Fair Value In determining fair value, Wachovia Funding uses
market prices of the same or similar instruments whenever such prices are available. A fair value measurement assumes that an asset or liability is exchanged in an orderly transaction between market participants, and accordingly, fair value is not
determined based upon a forced liquidation or distressed sale. Where necessary, Wachovia Funding estimates fair value using other market observable data such as prices for synthetic or derivative instruments, market indices, and industry ratings of
underlying collateral or models employing techniques such as discounted cash flow analyses. The assumptions used in the models, which typically include assumptions for interest rates, credit losses and prepayments,
are verified against market observable data where possible. Market observable real estate data is used in
valuing instruments where the underlying collateral is real estate or where the fair value of an instrument being valued highly correlates to real estate prices. Where appropriate, Wachovia Funding may use a combination of these valuation
approaches.
Where the market price of the same or similar instruments is not available, the valuation of financial
instruments becomes more subjective and involves a high degree of judgment. Where modeling techniques are used, the models are subject to validation procedures by our internal valuation model validation group in accordance with risk management
policies and procedures. Further, pricing data is subject to verification.
Derivatives Wachovia Fundings derivatives are executed over the counter (OTC). As no quoted market prices exist for such instruments, OTC
derivatives are valued using internal valuation techniques. Valuation techniques and inputs to internally-developed models depend on the type of derivative and the nature of the underlying rate, price or index upon which the derivatives 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 selection does not
require significant judgment, such derivatives are typically classified within Level 2 of the fair value hierarchy. Examples of derivatives within Level 2 include generic interest rate swaps.
Wachovia Fundings interest rate swaps are recorded at fair value. The fair value of interest rate swaps is estimated using
discounted cash flow analyses based on observable market data.
Loans
Wachovia Funding does not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for disclosing estimated fair values. However, from time to time, we record nonrecurring fair value
adjustments to loans to primarily reflect partial write-downs that are based on the current appraised value of the collateral.
The fair value estimates for disclosure purposes 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 and industrial and commercial real estate loans is calculated by discounting contractual cash flows, adjusted for credit loss estimates, using discount rates that reflect our
current pricing for loans with similar characteristics and remaining maturity.
For real estate 1-4 family first and junior
lien mortgages, fair value is calculated by discounting contractual cash flows, adjusted for prepayment and credit loss estimates, using discount rates based on current industry pricing (where
43
readily available) or our own estimate of an appropriate risk-adjusted discount rate for loans of similar size, type, remaining maturity and repricing characteristics.
Items Measured at Fair Value on a Recurring Basis The following table presents Wachovia
Fundings assets and liabilities that are measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011, for each of the fair value hierarchy levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Netting (1) |
|
|
Total |
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
- |
|
|
|
146,870 |
|
|
|
- |
|
|
|
(145,842) |
|
|
|
1,028 |
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
- |
|
|
|
146,870 |
|
|
|
- |
|
|
|
(145,842) |
|
|
|
1,028 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
- |
|
|
|
111,582 |
|
|
|
- |
|
|
|
(111,582) |
|
|
|
- |
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
- |
|
|
|
111,582 |
|
|
|
- |
|
|
|
(111,582) |
|
|
|
- |
|
|
|
|
|
|
|
Balance at
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
- |
|
|
|
139,056 |
|
|
|
- |
|
|
|
(138,093) |
|
|
|
963 |
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
- |
|
|
|
139,056 |
|
|
|
- |
|
|
|
(138,093) |
|
|
|
963 |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
- |
|
|
|
103,833 |
|
|
|
- |
|
|
|
(103,833) |
|
|
|
- |
|
Total liabilities at fair value |
|
$ |
- |
|
|
|
103,833 |
|
|
|
- |
|
|
|
(103,833) |
|
|
|
- |
|
(1) |
Derivatives are reported net of cash collateral received and paid. Additionally, positions with the same counterparty are netted as a part of a legally enforceable
master netting agreement between Wachovia Funding and the derivative counterparty. See Note 3 for additional information on the treatment of master netting arrangements related to derivative contracts. |
As of March 31, 2012, Wachovia Funding assets or liabilities measured at fair value
on a nonrecurring basis were insignificant. Additionally, Wachovia Funding did not elect fair value option for any financial instruments as permitted in FASB ASC 825, Financial Instruments, which allows companies to elect to carry certain financial
instruments at fair value with corresponding changes in fair value reported in the results of operations.
Disclosures about Fair Value of
Financial Instruments The table below is a summary of fair value estimates by level for financial instruments excluding financial instruments recorded
at fair value on a recurring basis as they are disclosed within the Items Measured at Fair Value on a Recurring Basis in the previous table. 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 other assets, 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 Wachovia
Funding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012 |
|
|
December 31, 2011 |
|
|
|
|
|
Carrying |
|
|
Estimated fair value |
|
|
Carrying |
|
|
Estimated |
|
(in thousands) |
|
|
|
amount |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
amount |
|
|
fair value |
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
$ |
1,235,466 |
|
|
|
1,235,466 |
|
|
|
- |
|
|
|
- |
|
|
|
1,235,466 |
|
|
|
1,186,165 |
|
|
|
1,186,165 |
|
Loans, net (1) |
|
|
|
|
12,329,725 |
|
|
|
- |
|
|
|
- |
|
|
|
13,641,666 |
|
|
|
13,641,666 |
|
|
|
12,230,014 |
|
|
|
13,381,977 |
|
(1) |
Unearned income was $570.7 million and $604.4 million at March 31, 2012 and December 31, 2011, respectively. Allowance for loan losses was $309.9 million at
March 31, 2012 and $313.8 million at December 31, 2011. |
44
Note 5: Common and Preferred Stock
Wachovia Funding has authorized preferred and
common stock. In order to remain qualified as a REIT, Wachovia Funding must distribute annually at least 90% of taxable earnings. The following table provides detail of preferred stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012 and December 31, 2011 |
|
(in thousands, except shares and liquidation preference per share) |
|
Liquidation
preference per
share |
|
|
Shares authorized |
|
|
Shares issued and outstanding |
|
|
Par value |
|
|
Carrying value |
|
|
|
|
|
|
|
|
|
Series A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.25% Non-Cumulative Exchangeable, Perpetual Series A Preferred Securities |
|
$ |
25 |
|
|
|
30,000,000 |
|
|
|
30,000,000 |
|
|
$ |
300 |
|
|
|
300 |
|
|
|
|
|
|
|
Series B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate (three-month LIBOR plus 1.83%) Non-Cumulative Exchangeable, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual Series B Preferred Securities |
|
|
25 |
|
|
|
40,000,000 |
|
|
|
40,000,000 |
|
|
|
400 |
|
|
|
400 |
|
|
|
|
|
|
|
Series C |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate (three-month LIBOR plus 2.25%) Cumulative, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual Series C Preferred Securities |
|
|
1,000 |
|
|
|
5,000,000 |
|
|
|
4,233,754 |
|
|
|
43 |
|
|
|
43 |
|
|
|
|
|
|
|
Series D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.50% Non-Cumulative, Perpetual Series D Preferred Securities |
|
|
1,000 |
|
|
|
913 |
|
|
|
913 |
|
|
|
- |
|
|
|
- |
|
Total |
|
|
|
|
|
|
75,000,913 |
|
|
|
74,234,667 |
|
|
$ |
743 |
|
|
|
743 |
|
In the event that Wachovia Funding is liquidated or dissolved, the holders of the
preferred securities will be entitled to a liquidation preference for each security plus any authorized, declared and unpaid dividends that will be paid prior to any payments to common stockholders or general unsecured creditors. With respect to the
payment of dividends and liquidation preference, the Series A preferred securities rank on parity with Series B and Series D preferred securities and senior to the common stock and Series C preferred securities. In the event that a supervisory event
occurs in which the Bank is placed into conservatorship or receivership, the Series A and Series B preferred securities are convertible into certain preferred stock of Wells Fargo.
Except upon the occurrence of a Special Event (as defined below), the Series A preferred securities are not redeemable prior to
December 31, 2022. On or after such date, we may redeem these securities for cash, in whole or in part, with the prior approval of the Office of the Comptroller of the Currency (OCC), at the redemption price of $25 per security, plus
authorized, declared, but unpaid dividends to the date of redemption. The Series B and Series C preferred securities may be redeemed for cash, in whole or in part, with the prior approval of the OCC, at redemption prices of $25 and $1,000 per
security, respectively, plus authorized, declared, but unpaid dividends to the date of redemption, including any accumulation of any unpaid dividends for the Series C preferred securities. We can redeem the Series D preferred securities in whole or
in part at any time at $1,000 per security plus authorized, declared and unpaid dividends.
A Special Event means: a Tax
Event; an Investment Company Act Event; or a Regulatory Capital Event.
Tax Event means our determination, based on the
receipt by us of a legal opinion, that there is a significant risk that dividends paid or to be paid by us with respect to our capital stock are not or will not be fully deductible by us for United
States Federal income tax purposes or that we are or will be subject to additional taxes, duties, or other governmental charges, in an amount we reasonably determine to be significant as a result
of:
|
|
|
any amendment to, clarification of, or change in, the laws, treaties, or related regulations of the United States or any of its political subdivisions
or their taxing authorities affecting taxation; or |
|
|
|
any judicial decision, official administrative pronouncement, published or private ruling, technical advice memorandum, Chief Counsel Advice, as such
term is defined in the Code, regulatory procedure, notice, or official announcement. |
Investment Company
Act Event means our determination, based on the receipt by us of a legal opinion, that there is a significant risk that we are or will be considered an investment company that is required to be registered under the Investment Company
Act, as a result of the occurrence of a change in law or regulation or a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency, or regulatory authority.
Regulatory Capital Event means our determination, based on the receipt by us of a legal opinion, that there is a significant risk that
the Series A preferred securities will no longer constitute Tier 1 capital of the Bank or Wells Fargo for purposes of the capital adequacy guidelines or policies of the OCC or the Federal Reserve Board, or their respective successor as the
Banks and Wells Fargos, respectively, primary Federal banking regulator, as a result of any amendments to, clarification of, or change in applicable laws or related regulations or official interpretations or policies; or
45
any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations.
We continue to monitor and evaluate the potential impact on regulatory capital and liquidity management of regulatory
proposals, including Basel III and those required under the Dodd-Frank Act, throughout the rule-making process.
46
Note 6: Transactions With Related Parties
Wachovia Funding engages in various transactions and agreements with affiliated parties. Due to the nature
of common ownership of Wachovia Funding and the affiliated parties by Wells Fargo, these transactions and agreements could differ from those conducted with unaffiliated parties.
The principal items related to transactions with affiliated parties included in the accompanying consolidated statement of income and consolidated balance sheet are described in the table and
narrative below.
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
(in thousands) |
|
2012 |
|
|
2011 |
|
|
|
|
Income statement data |
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
Accretion of discounts on loans |
|
$ |
38,271 |
|
|
|
67,515 |
|
Interest on Sweep/Eurodollar deposits (1) |
|
|
624 |
|
|
|
189 |
|
Total interest income |
|
|
38,895 |
|
|
|
67,704 |
|
Gain (loss) on loan sales to affiliate |
|
|
- |
|
|
|
113 |
|
Loan servicing costs (2) |
|
|
10,796 |
|
|
|
12,973 |
|
Management fees |
|
|
1,932 |
|
|
|
1,150 |
|
Cash collateral fees |
|
|
4 |
|
|
|
13 |
|
(1) |
Includes $221 thousand and $36 thousand from interest rate swaps for quarter ended March 31, 2012 and 2011, respectively. |
(2) |
Includes $3 thousand from interest rate swaps for both quarter ended March 31, 2012 and 2011, respectively. |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Dec. 31, |
|
|
|
2012 |
|
|
2011 |
|
Balance sheet related data |
|
|
|
|
|
|
|
|
Loans purchases (3) |
|
$ |
943,508 |
|
|
|
648,845 |
|
Loans sales (year-to-date data) |
|
|
(17,212 |
) |
|
|
(85,096 |
) |
Sweep/Eurodollar deposits (4) |
|
|
1,235,466 |
|
|
|
1,182,541 |
|
Dividends payable - affiliate |
|
|
186,062 |
|
|
|
- |
|
Accounts receivable - affiliates, net |
|
|
48,470 |
|
|
|
64,235 |
|
(3) |
Includes accrued interest, see Note 2 for additional details. |
(4) |
Includes $34.3 million from cash collateral investment at both March 31, 2012 and December 31, 2011. |
Loan Participations We purchase and sell loans and/or 100% interests in loan participations (which
are both reflected as loans in the accompanying consolidated financial statements) to and from the Bank. The purchases and sales are transacted at fair value resulting in purchase discounts and premiums or gains and losses on sales. The net purchase
discount accretion is reported within interest income. The gains or losses on sales of loan participations are included within noninterest income. In 2012 and 2011, all of our purchases and sales were with the Bank.
Loan Servicing Costs The loans currently in our portfolio are serviced by the Bank or their affiliates pursuant to the terms of participation and
servicing agreements. In some instances, the Bank has delegated servicing responsibility to third parties that are not affiliated with us or the Bank or its affiliates. Depending on the loan type, the monthly servicing fee charges are based in part
on (a) outstanding principal balances, (b) a flat fee per month, or (c) a total loan commitment amount.
Management Fees
We pay the Bank a management fee to reimburse for general overhead expenses paid on our behalf. Management fees for 2012 and 2011 were calculated based on
Wells Fargos total monthly allocated costs multiplied by a formula. The formula is based on our proportion of Wells Fargos consolidated: 1) full-time equivalent employees (FTEs), 2)
total average assets and 3) total revenue.
Sweep/Eurodollar Deposits Our primary cash management vehicle changed to a
sweep account with Wells Fargo during first quarter 2012. In the prior year, we had Eurodollar deposits with the Bank. Interest income earned on Sweep and Eurodollar deposit investments is included in interest income. The Sweep account is based on a
different interest rate benchmark and will yield a higher rate of return.
Interest Rate Swaps We have a swap
servicing and fee agreement with the Bank to receive operational, back office, book entry, record-keeping and valuation services related to our interest rate swaps. Further, the Bank acts as our custodian for the collateral pledged to us related to
our interest rate swaps. For a fee, the Bank is permitted to re-hypothecate and use as its own the collateral held by the Bank as our custodian. The Bank also provides a guaranty of our obligations under the interest rate swaps when the swaps are in
a net payable position.
47
Lines of Credit Wachovia Funding and its subsidiaries have lines of credit with the Bank. Under the
terms of those facilities, we can borrow up to $2.2 billion under revolving demand notes at a rate of interest equal to the average federal funds rate. At March 31, 2012 and December 31, 2011, we had no outstandings under this facility.
Dividends Payable Affiliates
Dividends payable - affiliates represents first quarter 2012 accrued dividends payable primarily to Wachovia Preferred Holding, which were paid on April 2, 2012.
Accounts Receivable/Payable, Net Accounts receivable from or payable to the Bank result from intercompany transactions which include net loan
pay-downs, interest receipts, and other transactions, including those transactions noted herein, which have not yet settled.
48
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Wachovia Funding is not currently involved in nor, to our knowledge, currently threatened with any material litigation. From time to time we may become involved in routine litigation arising in the
ordinary course of business. We do not believe that the eventual outcome of any such routine litigation will, in the aggregate, have a material adverse effect on our consolidated financial statements. However, in the event of unexpected future
developments, it is possible that the ultimate resolution of those matters, if unfavorable, could be material to our consolidated financial statements for any particular period.
Item 1A. Risk Factors
Information in response to this item can
be found under the Risk Factors section in this Report which information is incorporated by reference into this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information required by this Item 2
pursuant to Item 703 of Regulation S-K regarding issuer repurchases of equity securities is not applicable since we do not have a program providing for the repurchase of our securities.
Item 6. Exhibits
(a) Exhibits
Exhibit No.
|
|
|
(12)(a) |
|
Computation of Consolidated Ratios of Earnings to Fixed Charges. |
|
|
(12)(b) |
|
Computation of Consolidated Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. |
|
|
(31)(a) |
|
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
(31)(b) |
|
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
(32)(a) |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
(32)(b) |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
(99) |
|
Wells Fargo & Company Supplementary Consolidating Financial Information (Unaudited). |
|
|
(101) |
|
Pursuant to Rule 405 of Regulation S-T, the following financial information from Wachovia Fundings Quarterly Report on Form 10-Q for the period ended March 31, 2012,
is formatted in XBRL interactive data files: (i) Consolidated Statement of Income for the three months ended March 31, 2012 and 2011; (ii) Consolidated Balance Sheet at March 31, 2012, and December 31, 2011;
(iii) Consolidated Statement of Changes in Stockholders Equity for the three months ended March 31, 2012 and 2011; (iv) Consolidated Statement of Cash Flows for the three months ended March 31, 2012 and 2011; and
(v) Notes to Financial Statements, tagged as blocks of text.* |
* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and
12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
Dated: May 9, 2012 |
|
|
|
WACHOVIA PREFERRED FUNDING CORP. |
|
|
|
|
|
|
|
|
|
|
By: /s/ RICHARD D. LEVY |
|
|
|
|
|
|
Richard D. Levy |
|
|
|
|
|
|
Executive Vice President and Controller |
|
|
|
|
|
|
(Principal Accounting Officer) |
|
|
50