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EX-32. (B) - SECTION 906 CFO CERTIFICATION - WACHOVIA PREFERRED FUNDING CORPdex32b.htm
EX-31. (B) - SECTION 302 CFO CERTIFICATION - WACHOVIA PREFERRED FUNDING CORPdex31b.htm
EX-12. (B) - COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES - WACHOVIA PREFERRED FUNDING CORPdex12b.htm
EX-32. (A) - SECTION 906 CEO CERTIFICATION - WACHOVIA PREFERRED FUNDING CORPdex32a.htm
EX-31. (A) - SECTION 302 CEO CERTIFICATION - WACHOVIA PREFERRED FUNDING CORPdex31a.htm
EX-12. (A) - COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES - WACHOVIA PREFERRED FUNDING CORPdex12a.htm
EX-99 - SUPPLEMENTARY CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) - WACHOVIA PREFERRED FUNDING CORPdex99.htm

 

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 September 30, 2009

 

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.)

1620 East Roseville Parkway

Roseville, California 95661

(Address of principal executive offices)

(Zip Code)

 

(916) 787-9090

(Registrant’s 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  ¨  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

(Do not check if a smaller reporting company.)

 

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 issuer’s classes of common stock, as of the latest practicable date.

 

As of October 31, 2009, there were 99,999,900 shares of the registrant’s common stock outstanding.

 



Forward Looking Statements

 

Wachovia Preferred Funding Corp. (“Wachovia Funding”) may from time to time make written or oral forward-looking statements, including statements contained in Wachovia Funding’s filings with the Securities and Exchange Commission (including its Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, and the Exhibits hereto and thereto), in its reports to stockholders and in other Wachovia Funding communications, which are made in good faith by Wachovia Funding pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

 

These forward-looking statements include, among others, statements with respect to Wachovia Funding’s beliefs, plans, objectives, goals, guidelines, expectations, financial condition, results of operations, future performance and business of Wachovia Funding, including without limitation, (i) statements regarding certain of Wachovia Funding’s goals and expectations with respect to earnings, earnings per share, revenue, expenses and the growth rate in such items, as well as other measures of economic performance, including statements relating to estimates of credit quality trends, and (ii) statements preceded by, followed by or that include the words “may”, “could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan”, “projects”, “outlook” or similar expressions. These forward-looking statements involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond Wachovia Funding’s control). The following factors, among others, could cause Wachovia Funding’s financial performance to differ materially from that expressed in such forward-looking statements:

 

  Ÿ  

legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan modifications;

 

  Ÿ  

the extent of our success in our loan modification efforts;

 

  Ÿ  

the adequacy of our allowance for credit losses, especially if credit markets, housing prices and unemployment do not stabilize or improve, and the effects on our financial results and condition of increases in loan charge-offs, the allowance for credit losses and related provision expense;

 

  Ÿ  

the strength of the United States economy in general and the strength of the local economies in which Wachovia Funding owns mortgage assets and other authorized investments may be different than expected resulting in, among other things, a deterioration in credit quality of such mortgage assets and other authorized investments, including the resultant effect on Wachovia Funding’s portfolio of such mortgage assets and other authorized investments and reductions in the income generated by such assets;

 

  Ÿ  

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

 

  Ÿ  

inflation, interest rate, market and monetary fluctuations;

 

  Ÿ  

the impact of changes in financial services laws and regulations (including laws concerning banking, securities and insurance);

 

  Ÿ  

changes in economic conditions which could negatively affect the value of the collateral securing our mortgage assets;

 

  Ÿ  

unanticipated losses due to environmental liabilities of properties underlying our mortgage assets through foreclosure actions;

 

  Ÿ  

unanticipated regulatory or judicial proceedings or rulings;

 

  Ÿ  

the impact of changes in accounting principles;

 

  Ÿ  

the impact of changes in tax laws, especially tax laws pertaining to real estate investment trusts;

 

  Ÿ  

adverse changes in financial performance and/or condition of the borrowers on loans underlying Wachovia Funding’s mortgage assets which could impact repayment of such borrowers’ outstanding loans;

 

2


  Ÿ  

the impact on Wachovia Funding’s businesses, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; and

 

  Ÿ  

Wachovia Funding’s success at managing the risks involved in the foregoing.

 

Wachovia Funding cautions that the foregoing list of important factors is not exclusive. Wachovia Funding does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of Wachovia 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 Wachovia Bank, National Association, “Wachovia” refers to Wachovia Corporation, a North Carolina corporation, and “Wells Fargo” refers to Wells Fargo & Company.

 

3


PART I.    FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

 

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

September 30, 2009 and December 31, 2008

 

(In thousands, except share data)


   September 30,
2009

    December 31,
2008

 
     (Successor)     (Successor)  
ASSETS               

Cash and cash equivalents

   $ 1,723,418      1,358,129   

Loans, net of unearned income

     16,817,540      17,481,505   

Allowance for loan losses

     (317,336   (269,343
    


 

Loans, net

     16,500,204      17,212,162   
    


 

Interest rate swaps, net

     1,183      1,273   

Accounts receivable—affiliate, net

     164,902      167,004   

Other assets

     86,451      98,347   
    


 

Total assets

   $ 18,476,158      18,836,915   
    


 

LIABILITIES AND STOCKHOLDERS’ EQUITY               

Liabilities

              

Line of credit with affiliate

     —        170,000   

Deferred income tax liabilities

     51,610      62,129   

Other liabilities

     27,796      18,758   
    


 

Total liabilities

     79,406      250,887   
    


 

Stockholders’ equity

              

Preferred stock

              

Series A preferred securities, $0.01 par value per share, $750 million liquidation preference, non-cumulative and conditionally exchangeable, 30,000,000 shares authorized, issued and outstanding in 2009 and 2008

     300      300   

Series B preferred securities, $0.01 par value per share, $1.0 billion liquidation preference, non-cumulative and conditionally exchangeable, 40,000,000 shares authorized, issued and outstanding in 2009 and 2008

     400      400   

Series C preferred securities, $0.01 par value per share, $4.2 billion liquidation preference, cumulative, 5,000,000 shares authorized, 4,233,754 shares issued and outstanding in 2009 and 2008

     43      43   

Series D preferred securities, $0.01 par value per share, $913,000 liquidation preference, non-cumulative, 913 shares authorized, issued and outstanding in 2009 and 2008

     —        —     

Common stock, $0.01 par value, 100,000,000 shares authorized, 99,999,900 shares issued and outstanding in 2009 and 2008

     1,000      1,000   

Paid-in capital

     18,564,657      18,584,285   

Retained earnings (deficit)

     (169,648   —     
    


 

Total stockholders’ equity

     18,396,752      18,586,028   
    


 

Total liabilities and stockholders’ equity

   $ 18,476,158      18,836,915   
    


 

 

See accompanying notes to consolidated financial statements.

 

4


WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

Three and Nine Months Ended September 30, 2009 and 2008

 

    Three Months Ended
September 30,

  Nine Months Ended
September 30,

(In thousands, except per share data and average shares)


  2009

  2008

  2009

  2008

    (Successor)   (Predecessor)   (Successor)   (Predecessor)

Interest income

  $ 314,386   296,134   886,441   861,183

Interest expense

    148   961   380   5,799
   

 
 
 

Net interest income

    314,238   295,173   886,061   855,384

Provision for credit losses

    48,321   36,325   141,542   187,105
   

 
 
 

Net interest income after provision for credit losses

    265,917   258,848   744,519   668,279
   

 
 
 

Other income

                 

Gain on interest rate swaps

    1,853   1,586   3,530   4,548

Other income

    321   150   759   569
   

 
 
 

Total other income

    2,174   1,736   4,289   5,117
   

 
 
 

Noninterest expense

                 

Loan servicing costs

    15,750   16,552   49,757   48,273

Management fees

    2,797   1,150   8,596   13,008

Other expense

    1,754   647   2,760   1,757
   

 
 
 

Total noninterest expense

    20,301   18,349   61,113   63,038
   

 
 
 

Income before income tax expense

    247,790   242,235   687,695   610,358

Income tax expense

    856   2,365   3,422   7,669
   

 
 
 

Net income

    246,934   239,870   684,273   602,689

Dividends on preferred stock

    34,975   63,688   123,921   215,225
   

 
 
 

Net income available to common stockholders

  $ 211,959   176,182   560,352   387,464
   

 
 
 

Per common share data

                 

Basic earnings

  $ 2.12   1.76   5.60   3.87

Diluted earnings

  $ 2.12   1.76   5.60   3.87

Average shares

                 

Basic

    99,999,900   99,999,900   99,999,900   99,999,900

Diluted

    99,999,900   99,999,900   99,999,900   99,999,900
   

 
 
 

 

See accompanying notes to consolidated financial statements.

 

5


WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

Nine Months Ended September 30, 2009 and 2008

 

(In thousands, except per share data)


  Preferred
Stock


  Common
Stock


  Paid-in
Capital


    Retained
Earnings
(Deficit)


    Total

 

Balance, December 31, 2007 (Predecessor)

  $ 743   1,000   17,467,786      374,213      17,843,742   

Net income

    —     —     —        602,689      602,689   

Cash dividends

                           

Series A preferred securities at $1.36 per share

    —     —     —        (40,781   (40,781

Series B preferred securities at $0.98 per share

    —     —     —        (39,269   (39,269

Series C preferred securities at $31.92 per share

    —     —     —        (135,136   (135,136

Series D preferred securities at $42.50 per share

                  (39   (39

Common stock at $5.20 per share

    —     —     —        (520,000   (520,000
   

 
 

 

 

Balance, September 30, 2008 (Predecessor)

  $ 743   1,000   17,467,786      241,677      17,711,206   
   

 
 

 

 

Balance, December 31, 2008 (Successor)

  $ 743   1,000   18,584,285      —        18,586,028   

Net income

    —     —     —        684,273      684,273   

Cash dividends

                           

Series A preferred securities at $1.36 per share

    —     —     —        (40,781   (40,781

Series B preferred securities at $0.55 per share

    —     —     —        (21,824   (21,824

Series C preferred securities at $14.47 per share

    —     —     —        (61,277   (61,277

Series D preferred securities at $42.50 per share

    —     —     —        (39   (39

Common stock at $7.30 per share

    —     —     —        (730,000   (730,000

Changes incident to business combinations

    —     —     (19,628   —        (19,628
   

 
 

 

 

Balance, September 30, 2009 (Successor)

  $ 743   1,000   18,564,657      (169,648   18,396,752   
   

 
 

 

 

 

See accompanying notes to consolidated financial statements.

 

6


WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30, 2009 and 2008

 

(In thousands)


   2009

    2008

 
     (Successor)     (Predecessor)  

OPERATING ACTIVITIES

              

Net income

   $ 684,273      602,689   

Adjustments to reconcile net income to net cash provided (used) by operating activities

              

Provision for credit losses

     141,542      187,105   

Deferred income tax benefit

     (10,530   (8,488

Gain on interest rate swaps

     (3,829   (9,772

Accounts receivable—affiliate, net

     5,145      17,084   

Other assets and other liabilities, net

     21,028      7,032   
    


 

Net cash provided by operating activities

     837,629      795,650   
    


 

INVESTING ACTIVITIES

              

Increase (decrease) in cash realized from

              

Purchases of loans

     (2,355,966   (2,316,612

Loan pay-downs

     2,903,713      2,820,605   

Interest rate swaps

     35,523      35,523   
    


 

Net cash provided by investing activities

     583,270      539,516   
    


 

FINANCING ACTIVITIES

              

Decrease in cash realized from

              

Line of credit with affiliate

     (170,000   (300,000

Collateral held on interest rate swaps

     (31,604   (23,538

Cash dividends paid

     (854,006   (735,225
    


 

Net cash used by financing activities

     (1,055,610   (1,058,763
    


 

Increase in cash and cash equivalents

     365,289      276,403   

Cash and cash equivalents, beginning of year

     1,358,129      1,394,729   
    


 

Cash and cash equivalents, end of period

   $ 1,723,418      1,671,132   
    


 

CASH PAID FOR

              

Income taxes

   $ 10,000      13,000   

NONCASH ITEMS

              

Dividends payable to affiliates

     (85   —     

Loan payments, net, settled through accounts receivable/payable—affiliate, net

   $ (3,043   43,218   
    


 

 

See accompanying notes to consolidated financial statements.

 

 

7


WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

September 30, 2009 and December 31, 2008

 

NOTE 1:     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Wachovia Preferred Funding Corp. (“Wachovia Funding”) is a Delaware corporation, formed in July 2002, and the survivor of a merger with First Union Real Estate Asset Company of Connecticut, which was formed in 1996. Wachovia Funding is a direct subsidiary of Wachovia Preferred Funding Holding Corp. (“Wachovia Preferred Holding”) and an indirect subsidiary of both Wachovia Corporation, a Delaware corporation (“New Wachovia”) and Wachovia Bank, National Association (the “Bank”).

 

On December 31, 2008, Wells Fargo & Company (“Wells Fargo”) acquired Wachovia Corporation, a North Carolina corporation (“Wachovia”) by a merger of Wachovia with and into Wells Fargo. The acquisition did not directly affect the outstanding shares of capital stock of Wachovia Funding. However, the Wachovia Funding Series A preferred securities are now conditionally exchangeable for shares of Wells Fargo preferred stock instead of Wachovia preferred stock. Following the acquisition, all subsidiaries of Wachovia became subsidiaries of Wells Fargo. On January 2, 2009, Wells Fargo created a new legal entity, New Wachovia, to which it contributed all former subsidiaries of Wachovia.

 

As a result of the Wells Fargo acquisition of Wachovia, under purchase accounting, the assets and liabilities of Wachovia Funding were recorded at their respective fair values at December 31, 2008. The more significant fair value adjustments were recorded to the loan portfolio. Because the acquisition occurred on the last day of the reporting period, the income statement for 2008 was not affected by purchase accounting. Information for periods not affected by purchase accounting are labeled herein as “predecessor” and post-acquisition periods reflecting purchase accounting are labeled “successor”.

 

The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. The unaudited consolidated financial statements of Wachovia Funding include, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such financial statements for all periods presented. The financial position and results of operations as of and for the three and nine months ended September 30, 2009, are not necessarily indicative of the results of operations that may be expected in the future. Please refer to Wachovia Funding’s 2008 Annual Report on Form 10-K for additional information related to Wachovia Funding’s audited consolidated financial statements for the three years ended December 31, 2008, including the related notes to consolidated financial statements.

 

The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions. Wachovia Funding regularly assesses various assets for impairment in accordance with applicable GAAP, giving appropriate consideration to general economic and specific market factors. The accounting policies that are particularly sensitive to judgments and the extent to which significant estimates are used include the allowance for loan losses and the reserve for unfunded lending commitments. Refer to our 2008 Annual Report on Form 10-K for additional information.

 

8


Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards CodificationTM (“Codification”) as the source of authoritative GAAP for companies to use in the preparation of their financial statements. SEC rules and interpretive releases are also authoritative GAAP for SEC registrants. The guidance contained in the Codification supersedes all existing non-SEC accounting and reporting standards. We adopted the Codification, as required, in third quarter 2009. As a result, references to accounting literature contained in our financial statement disclosures have been updated to reflect the new Accounting Standards Codification (“ASC”) structure. References to superseded authoritative literature are shown parenthetically under “New Accounting Standards” within this Note.

 

BUSINESS COMBINATIONS

 

As a result of the December 31, 2008, Wells Fargo acquisition of Wachovia, the assets and liabilities of Wachovia Funding were adjusted to their respective acquisition date fair values. Certain loans acquired from Wachovia had evidence of deterioration in credit quality since origination, and it was probable at the date of acquisition that we would not collect all contractual principal and interest. These loans are accounted for using the measurement provisions for purchased credit-impaired (“PCI”) loans, which are contained in the Receivables topic (FASB ASC 310) of the Codification and were previously referred to as “SOP 03-3” loans. In accordance with the accounting guidance for PCI loans, no allowance for loan losses was carried over or initially recorded. At December 31, 2008, Wachovia Funding’s purchase accounting adjustments totaled $963.2 million and included a net increase of $907.1 million to loans, a reduction of $55.6 million to the allowance for loan losses related to PCI loans, an increase of $0.8 million to other assets, and an increase of $0.3 million to other liabilities. There was no goodwill recorded for Wachovia Funding in relation to the acquisition; the net purchase accounting adjustments were recorded as a net increase of $963.2 million in paid-in capital. The net adjustment to loans included a decrease for PCI loans.

 

Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on data as of an interim period with estimates through year end. Accordingly, we have re-validated and, where necessary, refined our purchase accounting adjustments. During the first nine months of 2009, Wachovia Funding’s December 31, 2008, purchase accounting adjustments were revised by $19.6 million and included a decrease of $19.3 million to loans. These refinements to the initial December 31, 2008, purchase accounting adjustments of $963.2 million resulted in revised total purchase accounting adjustments of $943.6 million.

 

At September 30, 2009 and December 31, 2008, the carrying value of PCI loans was $178.5 million and $235.1 million, respectively. As a result of accretion, the balance of the accretable yield for PCI loans declined $5.4 million, from $21.6 million at December 31, 2008 to $16.2 million at September 30, 2009. At September 30, 2009 and December 31, 2008, PCI loans had an unpaid principal balance of $250.4 million and $410.9 million, respectively. The nonaccretable difference declined $114.1 million from December 31, 2008 to September 30, 2009, related primarily to the recognition of losses from loan resolutions and write-downs. At September 30, 2009, the allowance for loan losses included $87 thousand related to PCI loans.

 

NEW ACCOUNTING STANDARDS

 

In first quarter 2009, we adopted new guidance related to the following Codification topics:

 

  Ÿ  

FASB ASC 815-10, Derivatives and Hedging (FAS 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133);

 

  Ÿ  

FASB ASC 810-10, Consolidation (FAS 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51); and

 

  Ÿ  

FASB ASC 820-10, Fair Value Measurements and Disclosures (FASB Staff Position (FSP) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly).

 

9


In second quarter 2009, we adopted new guidance related to the following Codification topics:

 

  Ÿ  

FASB ASC 825-10, Financial Instruments (FSP FAS 107-1 and APB Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments); and

 

  Ÿ  

FASB ASC 855-10, Subsequent Events (FAS 165, Subsequent Events).

 

In third quarter 2009, we adopted new guidance related to the following Codification topic:

 

  Ÿ  

FASB ASC 105-10, Generally Accepted Accounting Principles (FAS 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162).

 

Our adoption of the Codification in third quarter 2009 is discussed earlier in this section. The remaining pronouncements are described in more detail below.

 

FASB ASC 815-10 changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. We adopted this pronouncement for first quarter 2009 reporting. See Note 3 in this Report for disclosures on derivatives and hedging activities. This standard does not affect our consolidated financial statements since it amends only the disclosure requirements for derivative instruments and hedged items.

 

FASB ASC 810-10 requires that noncontrolling interests (previously referred to as minority interests) be reported as a component of equity in the balance sheet. Prior to our adoption of this standard, noncontrolling interests were classified in liabilities or between liabilities and equity. This new standard also changes the way a noncontrolling interest is presented in the income statement such that a parent’s consolidated income statement includes amounts attributable to both the parent’s interest and the noncontrolling interest. When a subsidiary is deconsolidated, a parent is required to recognize a gain or loss with any remaining interest recorded at fair value. Other changes in ownership interest where the parent continues to have a majority ownership interest in the subsidiary are accounted for as capital transactions. This guidance was effective for us on January 1, 2009. Adoption of the new accounting treatment prescribed for noncontrolling interests was not material to Wachovia Funding.

 

FASB ASC 820-10 addresses measuring fair value in situations where markets are inactive and transactions are not orderly. The guidance acknowledges that in these circumstances quoted prices may not be determinative of fair value, however, even if there has been a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement has not changed. Prior to issuance of this pronouncement, many companies, including Wachovia Funding, interpreted accounting guidance on fair value measurements to emphasize that fair value must be measured based on the most recently available quoted market prices, even for markets that have experienced a significant decline in the volume and level of activity relative to normal conditions, and therefore could have increased frequency of transactions that are not orderly. Under the provisions of this standard, price quotes for assets or liabilities in inactive markets may require adjustment due to uncertainty as to whether the underlying transactions are orderly. For inactive markets, we note there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring. The Fair Value Measurements and Disclosures topic of the Codification does not prescribe a specific method for adjusting price quotes, however, it does provide guidance for determining how much weight to give transaction or quoted prices. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and should be given little, if any, weight in measuring fair value. Price quotes based upon transactions that are orderly shall be considered in determining fair value measurement and the

 

10


weight given is based upon the facts and circumstances. If sufficient information is not available to determine if price quotes are based upon orderly transactions, less weight should be given to the price quote relative to other transactions that are known to be orderly. Adoption of this pronouncement did not affect our consolidated financial results.

 

FASB ASC 825-10 states that entities must disclose the fair value of financial instruments in interim reporting periods as well as in annual financial statements. Entities must also disclose the methods and assumptions used to estimate fair value as well as any changes in methods and assumptions that occurred during the reporting period. See Note 4 in this Report for related disclosures on financial instruments. Because the new provisions of FASB ASC 825-10 amend only the disclosure requirements related to the fair value of financial instruments, the adoption of this pronouncement does not affect our consolidated financial statements.

 

FASB ASC 855-10 describes two types of subsequent events that previously were addressed in the auditing literature, one that requires post-period end adjustment to the financial statements being issued, and one that requires footnote disclosure only. Companies are also required to disclose the date through which management has evaluated subsequent events, which for public companies is the date that financial statements are issued. The requirements for disclosing subsequent events were effective in second quarter 2009 with prospective application. Our adoption of this standard did not have a material impact on our consolidated financial statements.

 

LOANS

 

Loans include assets Wachovia Funding purchases from the Bank at fair value. While these transfers represent legal sales by the Bank, the Bank may not record the transfers as sales under GAAP because of its direct and indirect ownership interest in Wachovia Funding. Accordingly, Wachovia Funding’s assets represent non-recourse receivables from the Bank which are fully collateralized by the underlying loans. The assets continue to be classified as loans in Wachovia Funding’s financial statements because the returns on and recoverability of these non-recourse receivables are entirely dependent on the performance of the underlying loans. At September 30, 2009, the outstanding balance of these loans purchased from the Bank amounted to $13.1 billion.

 

ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS

 

In 2009, the allowance for credit losses is based upon the Wells Fargo methodology for estimating credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses and reserve for unfunded lending commitments (collectively, the “allowance for credit losses”) are maintained at levels that are adequate to absorb probable losses inherent in the loan portfolio and in unfunded commercial lending commitments, respectively, as of the date of the consolidated financial statements. See “—Critical Accounting Policies” beginning on page 16 of this Report for information on the Wells Fargo process to determine the adequacy of the allowance for loan losses.

 

SUBSEQUENT EVENTS

 

We have evaluated the effects of subsequent events that have occurred subsequent to period end September 30, 2009, and through November 13, 2009, which is the date we issued our financial statements. During this period, there have been no material events that would require recognition in our third quarter 2009 consolidated financial statements or disclosure in the Notes to Consolidated Financial Statements.

 

11


NOTE 2:     FAIR VALUE MEASUREMENTS

 

Wachovia Funding adopted accounting provisions for fair value measurements on January 1, 2008, which established a framework for measuring fair value and expanded disclosures about fair value measurements. Under the fair value framework, fair value measurements must reflect assumptions market participants would use in pricing an asset or liability.

 

The accounting guidance for fair value measurement is included in FASB ASC 820, Fair Value Measurements and Disclosures, which defines “fair value” as 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). FASB ASC 820 also includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are:

 

   

Level 1 Quoted prices in active markets for identical assets or liabilities at the measurement date.

 

   

Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

   

Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. In accordance with fair value measurement accounting requirements, Wachovia Funding is to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

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, 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 corroborated by and independently 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 independent validation procedures in accordance with risk management policies and procedures. Further, pricing data is subject to independent verification.

 

DERIVATIVES

 

Wachovia Funding’s 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 derivative’s value is based. Key inputs can include yield curves, credit curves, foreign-exchange rates, prepayment rates, volatility measurements and correlation of such inputs.

 

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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.

 

ITEMS MEASURED AT FAIR VALUE ON A RECURRING BASIS

 

The following table presents Wachovia Funding’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2009, for each of the fair value hierarchy levels.

 

     September 30, 2009

     (Successor)
(In thousands)    Level 1

   Level 2

   Level 3

   Netting (a)

    Total

ASSETS

                         

Interest rate swaps

   $  —      712,719      —      (711,536   1,183
    
  
  
  

 

Total assets at fair value

   $  —      712,719       (711,536   1,183
    
  
  
  

 

LIABILITIES

                         

Interest rate swaps

   $  —      503,224       (503,224   —  
    
  
  
  

 

Total liabilities at fair value

   $  —      503,224       (503,224   —  
    
  
  
  

 

(a) 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 in accordance with FASB ASC 815, Derivatives and Hedging. See Note 3 for additional information on the treatment of master netting arrangements related to derivative contracts.

 

As of September 30, 2009, 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.

 

NOTE 3:    DERIVATIVES

 

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, master netting arrangements and collateral, where appropriate. Derivatives balances and related cash collateral amounts are shown net in the balance sheet as long as they are subject to master netting agreements and meet the criteria for net presentation in accordance with FASB ASC 815, Derivatives and Hedging. Counterparty credit risk related to derivatives is considered and, if material, accounted for separately.

 

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The total notional amounts and fair values for derivatives of which none of the derivatives are designated as hedging instruments as prescribed in FASB ASC 815 were:

 

     September 30, 2009
(Successor)

    December 31, 2008
(Successor)

 
     Fair value

    Fair value

 

(In thousands)


   Notional Or
Contractual
Amount

   Asset
Derivatives

    Liability
Derivatives

    Notional Or
Contractual
Amount

   Asset
Derivatives

    Liability
Derivatives

 

Interest rate swaps

   $ 8,200,000      712,719      503,224      8,200,000    775,768      534,578   

Netting (1)

            (711,536   (503,224        (774,495   (534,578
           


 

      

 

Total

          $ 1,183      —             1,273      —     
           


 

      

 


(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.

 

Gains recognized in the consolidated statements of income related to derivatives not designated as hedging instruments for the first nine months of 2009 were $3.5 million.

 

 

NOTE 4: CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Information about the fair value of on-balance sheet financial instruments at September 30, 2009, and December 31, 2008, is presented below.

 

     September 30,
2009

(Successor)

   December 31,
2008

(Successor)

(In thousands)


   Carrying
Amount

   Estimated
Fair Value

   Carrying
Amount

   Estimated
Fair Value

FINANCIAL ASSETS

                     

Cash and cash equivalents

   $ 1,723,418    1,723,418    1,358,129    1,358,129

Loans, net of unearned income and allowance for loan losses (a)

     16,500,204    16,427,304    17,212,162    17,212,162

Interest rate swaps, net (b)

     1,183    1,183    1,273    1,273

Accounts receivable—affiliates, net

     164,902    164,902    167,004    167,004

Other financial assets

   $ 83,788    83,788    90,882    90,882
    

  
  
  

FINANCIAL LIABILITIES

                     

Line of credit with affiliate

     —      —      170,000    170,000

Other financial liabilities

   $ 23,746    23,746    16,666    16,666
    

  
  
  

(a) The fair values of loans at December 31, 2008, reflects the values assigned in purchase accounting as a result of the Wells Fargo acquisition of Wachovia.
(b) Interest rate swaps are reported net of cash collateral received of $208.3 million and $239.9 million at September 30, 2009, and December 31, 2008, respectively, pursuant to the accounting requirements for net presentation as prescribed in FASB ASC 815. See Note 3 for additional information on derivatives.

 

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 as required by FASB ASC 825, Financial Instruments. However, from time to time, we record nonrecurring fair value adjustments to loans to reflect (1) partial write-downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value.

 

14


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 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 home equity loans and residential mortgages, fair value is calculated by discounting contractual cash flows, adjusted for prepayment and credit loss estimates, using discount rates based on current industry pricing (where readily available) or our own estimate of an appropriate risk-adjusted discount rate for loans of similar size, type, remaining maturity and repricing characteristics.

 

Wachovia Funding’s 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. Substantially all the other financial assets and liabilities have maturities of three months or less, and accordingly, the carrying amount is deemed to be a reasonable estimate of fair value.

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and results of operations contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking statements. Please refer to our 2008 Annual Report on Form 10-K for further information related to our accounting policies and risk governance and administration.

 

For the tax year ending December 31, 2009, we expect to be taxed as a real estate investment trust (a “REIT”), and we intend to comply with the relevant provisions of the Internal Revenue 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, Wachovia Preferred Realty, LLC (“WPR”), 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:

 

  Ÿ  

From a shareholder’s 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.

 

  Ÿ  

In addition, we would no longer be eligible for the dividends paid deduction, thereby creating a tax liability for us. Wachovia agreed to make, or cause its subsidiaries to make, a capital contribution to us equal in amount to any income taxes payable by us, which obligation was assumed by Wells Fargo in the Wachovia acquisition. Therefore, we believe a failure to qualify as a REIT would not result in any net capital impact to us.

 

Please refer to our 2008 Annual Report on Form 10-K for additional information on WPR.

 

15


Critical Accounting Policies

 

Our accounting and reporting policies are in accordance with GAAP, and they conform to general practices within the applicable industries. The application of certain of these principles involves a significant amount of judgment and the use of estimates based on assumptions for which the actual results are uncertain when we make the estimation. We have identified the allowance for loan losses policy as being particularly sensitive in terms of judgments and the extent to which estimates are used. For more information on our critical accounting policies, please refer to our 2008 Annual Report on Form 10-K.

 

Allowance for Loan Losses

 

Beginning in first quarter 2009, the allowance for loan losses was based upon the Wells Fargo methodology for estimating credit losses inherent in the loan portfolio at the balance sheet date. Wells Fargo has an established process, using several analytical tools and benchmarks, to estimate a range of possible outcomes and determine the adequacy of the allowance. In connection with Wells Fargo’s acquisition of Wachovia, our methodology and processes were conformed to those of Wells Fargo. Below is more information on Wells Fargo’s process to determine the adequacy of the allowance for loan losses.

 

While we attribute portions of the allowance to specific loan categories as part of our analytical process, the entire allowance may be used to absorb credit losses inherent in the total loan portfolio. For purposes of determining the allowance for credit losses, we pool loans by product type or business unit to achieve greater precision.

 

To measure estimated losses inherent in consumer loans, we use loss models and other quantitative, mathematical techniques to forecast losses. We use forecasted losses as a measure of probable inherent losses in the consumer portfolio. We use both internally developed and vendor supplied loss models. These models are validated and are reviewed by corporate credit personnel to ensure that the theory, assumptions, data, computational processes, reporting and end-user controls of the models are appropriate and well documented. In addition, regulatory examiners review and perform detailed tests of the Wells Fargo allowance processes. Forecasted losses are compared with actual losses and this information is used by management in order to develop an allowance that management believes adequate to cover losses inherent in the loan portfolio as of the reporting date.

 

The portion of the allowance for commercial loans is estimated by applying historical loss factors statistically derived from tracking losses associated with actual portfolio movements over a specified period of time, for each specific loan grade. Based on this process, we assign loss factors to each pool of graded loans and a loan equivalent amount for unfunded loan commitments. These estimates are then adjusted or supplemented where necessary from additional analysis of long-term average loss experience, external loss data or other risks identified from current conditions and trends in selected portfolios.

 

Reflected in the portions of the allowance previously described is an amount for imprecision or uncertainty that incorporates the range of probable outcomes inherent in estimates used for the allowance, which may change from period to period. This amount is the result of our judgment of risks inherent in the portfolios, economic uncertainties, historical loss experience and other subjective factors, including industry trends, calculated to better reflect our view of risk in each loan portfolio. In addition, the allowance for credit losses included a reserve for unfunded credit commitments.

 

Loan recoveries and the provision for credit losses increase the allowance, while loan charge-offs decrease the allowance.

 

No single statistic or measurement determines the adequacy of the allowance. For more information on the process to determine the adequacy of the allowance for loan losses please refer to the Wells Fargo 2008 Annual Report on Form 10-K.

 

For more information on the previously used Wachovia estimation process, please refer to Wachovia Funding’s 2008 Annual Report on Form 10-K.

 

16


Results of Operations

 

For purposes of this discussion, the term “loans” includes loans and loan participation interests, the term “residential loans” includes home equity loans and residential mortgages and the term “commercial loans” includes commercial and commercial real estate loans. See Table 1 following “—Accounting and Regulatory Matters” for certain performance and dividend payout ratios for the nine months ended September 30, 2009 and 2008.

 

Although we have the authority to acquire interests in an unlimited number of loans and other assets from unaffiliated third parties, the majority of our interests in loans we have acquired have been acquired from the Bank or an affiliate pursuant to loan participation agreements between the Bank or an affiliate and us. The remainder of our assets were acquired directly from the Bank. The Bank either originated the assets, or purchased them from other financial institutions or acquired them as part of the acquisition of other financial institutions.

 

On December 31, 2008, Wells Fargo acquired Wachovia and accordingly, under purchase accounting, the assets and liabilities of Wachovia and its subsidiaries were recorded at their respective fair values at December 31, 2008. The more significant fair value adjustments were recorded to the loan portfolio. Because the acquisition occurred on the last day of the reporting period, the income statement for 2008 was not affected by purchase accounting. Information for periods not affected by purchase accounting are labeled herein as “predecessor” and post-acquisition periods reflecting purchase accounting are labeled “successor”. Refer to Note 1 to Notes to Consolidated Financial Statements in this Report for further information.

 

2009 to 2008 Nine Month Comparison

 

Net income available to common stockholders.    We earned net income available to common stockholders of $560.4 million and $387.5 million in the first nine months of 2009 and 2008, respectively. This increase was attributable to lower dividends on preferred stock, lower provision for credit losses, higher net interest income, lower management fees and lower income tax expense. These were partially offset by higher loan servicing costs and lower gains on interest rate swaps.

 

Interest Income.    Interest income of $886.4 million in the first nine months of 2009 increased $25.3 million, or 3%, compared with the first nine months of 2008. Higher average interest-earning assets more than offset decreases in interest rates compared with the same period a year ago. The average interest rate on total interest-earning assets was 6.29% in the first nine months of 2009 compared with 6.42% in the first nine months of 2008 which reflects the impact of a lower interest rate environment in 2009.

 

Average home equity loans increased $1.4 billion to $14.0 billion compared with the first nine months of 2008 while average commercial loans decreased $634.8 million to $2.3 billion in the same period due to pay-downs. In the first nine months of 2009, interest income included $93.4 million from the amortization of discounts on purchased loans primarily driven by an acceleration of amortization from repayment of loans during the period. All loan pay-downs were reinvested in home equity loans and residential mortgages. Average residential mortgages increased $223.7 million to $1.0 billion in the first nine months of 2009 compared with the same period a year ago. We currently anticipate that we will continue to reinvest loan pay-downs primarily in consumer real-estate secured loans. Interest income on cash invested in overnight eurodollar deposits decreased $27.9 million to $1.1 million in the first nine months of 2009 compared with the first nine months of 2008, driven by significantly lower short-term interest rates from the same period one year ago. See the interest rate risk management section under “Risk Governance and Administration” for more information on interest rates and interest income.

 

17


The average balances, interest income and rates related to interest-earning assets for the nine months ended September 30, 2009 and 2008, are presented below.

 

     Nine Months Ended
September 30, 2009

    Nine Months Ended
September 30, 2008

 

In thousands)


   Average
Balance


   Interest
Income


   Rate

    Average
Balance


   Interest
Income


   Rate

 

Commercial loans

   $ 2,272,754    44,689    2.63   $ 2,907,595    100,991    4.64

Home equity loans

     14,005,766    786,898    7.51        12,610,795    698,929    7.40   

Residential mortgages

     1,028,351    53,751    6.97        804,677    32,282    5.35   

Interest-bearing deposits in banks and other earning assets

     1,521,735    1,103    0.10        1,592,081    28,981    2.43   
    

  
  

 

  
  

Total interest-earning assets

   $ 18,828,606    886,441    6.29   $ 17,915,148    861,183    6.42
    

  
  

 

  
  

 

Interest Expense.    Interest expense, which primarily relates to interest expense paid on our line of credit with the Bank, decreased to $380 thousand in the first nine months of 2009 compared with $5.8 million in the first nine months of 2008 primarily reflecting a significantly lower rate environment in the first nine months of 2009 compared with the same period one year ago. The line of credit with the Bank averaged $281.8 million in the first nine months of 2009 compared with $271.9 million in the first nine months of 2008. At September 30, 2009, there was no outstanding balance under the line of credit with the Bank.

 

Provision for Credit Losses.    The provision for credit losses was $141.5 million in the first nine months of 2009 compared with $187.1 million in the first nine months of 2008. The decrease in the provision for credit losses resulted from the accounting for purchased credit-impaired (“PCI”) loans, which offset credit deterioration in the non-impaired portfolio. Please refer to Note 1 to Notes to Consolidated Financial Statements for more information on PCI loans and the “—Balance Sheet Analysis” section for information on the allowance for loan losses.

 

Gain on Interest Rate Swaps.    Our interest rate swaps lose value in an increasing rate environment and gain value in a declining rate environment. The gain on interest rate swaps was $3.5 million in the first nine months of 2009 compared with a gain of $4.5 million in the first nine months of 2008. The lower gain in 2009 primarily reflects a lower magnitude of interest rate decreases in the first nine months of 2009 compared with the first nine months of 2008. Included in gain on interest rate swaps was expense associated with the derivative cash collateral received of $299 thousand and $5.2 million in the first nine months of 2009 and 2008, respectively.

 

Loan Servicing Costs.    Loan servicing costs increased $1.5 million to $49.8 million in the first nine months of 2009 which reflects the impact of reinvesting pay-downs in additional purchases of residential loans. Home equity loans have a higher servicing fee compared to other loan products. These loans are serviced by the Bank pursuant to our participation and servicing agreements which include market-based fees. For home equity loans, the monthly fee is equal to the outstanding principal balance of each loan multiplied by 0.50% per annum. Servicing fees related to residential mortgages are negotiated when the Bank purchases loans from unrelated third parties, and are based on the purchase price of the loans. For commercial loans, the monthly fee is equal to the total committed amount of each loan multiplied by 0.025% per annum.

 

Management Fees.    Management fees were $8.6 million in the first nine months of 2009 compared with $13.0 million in the first nine months of 2008, reflecting a decrease in the allocable expense base. Management fees represent reimbursements to the Bank for general overhead expenses paid on our behalf. In 2009, an affiliate is assessed monthly management fees based on its relative percentage of the Bank’s total consolidated assets and noninterest expense. For 2008, monthly management fees were assessed to affiliates with over $10 million in qualifying assets. If an affiliate qualified for an allocation, the affiliate was assessed monthly management fees based on its relative percentage of the Bank’s total consolidated assets and noninterest expense.

 

18


Other Expense.    Other expense primarily consists of costs associated with foreclosures on residential properties. In the first nine months of 2009 and 2008, these costs were not significant.

 

Income Tax Expense.    Income tax expense, which is primarily based on the pre-tax income of WPR, our taxable REIT subsidiary, was $3.4 million in the first nine months of 2009 compared with $7.7 million in the first nine months of 2008. WPR holds our interest rate swaps as well as certain cash investments. The decrease in income tax expense in the nine months 2009 was driven by a lower gain on interest rate swaps and lower interest income on cash invested in overnight eurodollar deposits driven by lower short-term interest rates in the first nine months of 2009.

 

Summary Results of Operations for the Three Months Ended September 30, 2009 and 2008

 

Net income available to common stockholders increased to $212.0 million in third quarter 2009 compared with $176.2 million in third quarter 2008. The majority of income for both quarters was earned from interest on commercial loans, home equity loans and residential mortgages. Net interest income increased $19.1 million to $314.2 million in third quarter 2009 compared with third quarter 2008 driven primarily by higher average interest-earning assets. The average interest rate received on total interest-earning assets was 6.62% in third quarter 2009 compared with 6.58% in the same quarter one year ago. Average total loans increased $862.8 million in third quarter 2009 compared with third quarter 2008. Average home equity loans increased $634.9 million to $13.5 billion compared with third quarter 2008 while average commercial loans decreased $664.2 million to $2.1 billion during the same time period due to pay-downs. Commercial loan pay-downs were reinvested in home equity loans and residential mortgages. Average residential mortgages increased $892.2 million to $1.7 billion compared with third quarter 2008. Interest income on cash invested in overnight eurodollar deposits decreased $7.3 million in third quarter 2009 compared with the same period last year driven primarily by lower short-term interest rates in 2009.

 

Provision for credit losses was $48.3 million in third quarter 2009 compared with $36.3 million in third quarter 2008. The higher expense in third quarter 2009 was driven primarily by higher net charge-offs on home equity loans related to deterioration in economic conditions that increased projected losses.

 

Interest rate swaps were a gain of $1.9 million in third quarter 2009 compared with a gain of $1.6 million in third quarter 2008. Included in interest rate swaps was expense associated with the derivative cash collateral received of $82 thousand and $1.3 million in third quarter 2009 and 2008, respectively. The higher gain in third quarter 2009, compared to third quarter 2008, primarily reflects a higher magnitude of rate decreases in third quarter 2009 compared with the year ago quarter.

 

Loan servicing costs decreased by $802 thousand to $15.8 million in third quarter 2009 compared with third quarter 2008. Management fees of $2.8 million in third quarter 2009 increased from $1.2 million in third quarter 2008.

 

Income tax expense was $856 thousand in third quarter 2009 compared with $2.4 million in third quarter 2008. The higher expense in third quarter 2008 was driven primarily by higher interest income on cash invested in overnight eurodollar deposits compared with the same period one year ago.

 

19


Balance Sheet Analysis

 

September 30, 2009 to December 31, 2008

 

Total Assets.    Our assets primarily consist of commercial and residential loans although we have the authority to hold assets other than loans. Total assets were $18.5 billion at September 30, 2009, compared with $18.8 billion at December 31, 2008. Net loans were 91% of total assets at September 30, 2009, compared to 93% at December 31, 2008.

 

Loans.    Net loans decreased $664.0 million to $16.8 billion at September 30, 2009, compared with December 31, 2008, primarily reflecting an increase in home equity loan and residential mortgage reinvestments, more than offset by pay-downs across the entire portfolio. At September 30, 2009, and at December 31, 2008, home equity loans represented 78% and 81% of loans, respectively, commercial loans represented 12% and 15%, respectively, and residential mortgages represented 10% and 4%, respectively.

 

Allowance for Loan Losses.    The allowance for loan losses increased $48.0 million from December 31, 2008, to $317.3 million at September 30, 2009. The December 31, 2008, allowance reflects a reduction of $55.6 million due to the accounting for PCI loans, as described above. The 2009 reserve build was primarily driven by deterioration in economic conditions that increased projected losses in our consumer loan portfolio. Our reserve methodology relies on historical experience but also considers our current view of economic and housing market conditions. The establishment of the allowance considers credit trends, including, but not limited to growth in net charge-offs and nonaccrual loans. We use forecasted losses as a measure of probable inherent losses in the consumer portfolio and historical loss factors by current loan grade to estimate expected losses for the commercial portfolio as of the balance sheet date.

 

Nonaccrual loans increased to $158.6 million at September 30, 2009, from $11.9 million at December 31, 2008. The increase was primarily related to home equity loans. The rate of nonaccrual loan growth has been somewhat increased by the effect of accounting for substantially all of the nonaccrual loans as PCI loans at year-end 2008. This purchase accounting resulted in reclassifying nonaccruing loans to accruing status, resulting in a reduced level of nonaccrual loans. Typically, changes to nonaccrual loans period-over-period represent inflows for loans that reach a specified past due status, offset by reductions for loans that are charged off or are no longer classified as nonaccrual because they return to accrual status. The impact of purchase accounting on nonaccrual loan data should diminish over time. Net charge-offs were $93.9 million and $50.0 million for the nine months ended September 30, 2009 and 2008, respectively. The increase in nonaccrual loans and net charge-offs is primarily attributable to deterioration in home equity loans. The increase in home equity loan losses also reflects the fact that charge-offs are just now coming through the portfolio, after having eliminated nonaccruals through purchase accounting at the end of 2008.

 

Total residential loan troubled debt restructurings (“TDRs”) amounted to $106.3 million at September 30, 2009, compared with $85.4 million at June 30, 2009. At September 30, 2009 and June 30, 2009, nonaccruing TDRs were $1.4 million and $401 thousand, respectively. We consider a loan to be impaired under the loan impairment provisions contained in FASB ASC 310-10 (FAS 114) when, based on current information and events, we determine that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When a loan is restructured in a TDR, an impairment reserve is established in accordance with FASB ASC 310-10.

 

We have increased loan modifications and restructurings to assist homeowners in the current difficult economic cycle. For residential loans that have been modified, if the borrower has demonstrated performance under the previous terms and shows the capacity to continue to perform under the restructured terms, the loan will remain in accruing status. Otherwise, the loan will be placed in a nonaccrual status until the borrower has made six consecutive contractual payments. We strive to identify troubled loans and work with a customer to modify to more affordable terms before their loan reaches nonaccrual status.

 

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At September 30, 2009, the allowance for loan losses included $285.5 million for residential loans, $15.9 million for commercial loans and $15.9 million for imprecision or uncertainty that incorporates the range of probable outcomes inherent in estimates used for the allowance. In the first nine months of 2009, the allowance for loan losses is based upon the Wells Fargo methodology for estimating credit losses. In connection with Wells Fargo’s acquisition of Wachovia, our methodology and processes were conformed to those of Wells Fargo. See “—Critical Accounting Policies” for more information on the allowance for loan losses.

 

The reserve for unfunded lending commitments, which is included in other liabilities, was $433 thousand at September 30, 2009, compared with $570 thousand at December 31, 2008.

 

See tables following “—Accounting and Regulatory Matters” for additional information related to loans, loan losses and recoveries, nonaccrual loans, and the reserve for unfunded lending commitments.

 

Interest Rate Swaps, Net.    Interest rate swaps, net were $1.2 million at September 30, 2009, and $1.3 million at December 31, 2008, which represents the fair value of our net position in interest rate swaps.

 

Accounts Receivable—Affiliate, Net.    Accounts receivable from affiliate, net was $164.9 million at September 30, 2009, compared with $167.0 million at December 31, 2008, as a result of intercompany cash transactions related to net loan pay-downs, interest receipts and funding with the Bank.

 

Commitments

 

Our commercial loan portfolio includes unfunded loan commitments that are provided in the normal course of business. For commercial borrowers, loan commitments generally take the form of revolving credit arrangements to finance customers’ working capital requirements. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. For lending commitments, the contractual amount of a commitment represents the maximum potential credit risk if the entire commitment is funded and the borrower does not perform according to the terms of the contract. Some of these commitments expire without being funded, and accordingly, total contractual amounts are not representative of our actual future credit exposure or liquidity requirements. The “Risk Governance and Administration—Credit Risk Management” section in our 2008 Annual Report on Form 10-K describes how Wells Fargo, as owner of the Bank which originates and services the loans, manages credit risk when extending credit.

 

Loan commitments create credit risk in the event the counterparty draws on the commitment and subsequently fails to perform under the terms of the lending agreement. This risk is incorporated into an overall evaluation of credit risk and to the extent necessary, reserves are recorded on these commitments. Uncertainties around the timing and amount of funding under these commitments may create liquidity risk. At September 30, 2009, and at December 31, 2008, unfunded commitments to extend credit were $758.7 million and $730.8 million, respectively.

 

Liquidity and Capital Resources

 

Our internal sources of liquidity are primarily cash generated from interest and principal payments on loans in our portfolio. Our primary liquidity needs are to pay operating expenses, fund our lending commitments, purchase loans as existing loans mature or prepay, and pay dividends. We expect to distribute annually an aggregate amount of dividends with respect to our outstanding capital stock equal to approximately 100% of our REIT taxable income for federal income tax purposes, which primarily results from interest income on our loan portfolio. Such distributions may in some periods exceed net income determined under generally accepted accounting principles.

 

Proceeds received from paydowns 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

 

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of credit we have with the Bank as a short-term liquidity source. Wachovia Funding has a $1.0 billion line of credit with the Bank, and our subsidiaries Wachovia Real Estate Investment Corp. and WPR have lines of credit with the Bank of $1.0 billion and $200.0 million, respectively. Each of these lines is under a revolving demand note at a rate equal to the federal funds rate. Generally, we repay these borrowings within several months as we receive cash on loan pay-downs from our loan portfolio. At September 30, 2009, there were no borrowings on our line of credit with the Bank. Should a longer-term liquidity need arise, we could issue additional common or preferred stock, subject to any pre-approval rights of our shareholders. 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.

 

Risk Governance and Administration

 

For additional information on credit risk management, concentration of credit risk, operational risk management, liquidity risk management and financial disclosure, please refer to our 2008 Annual Report on Form 10-K.

 

As a result of Wells Fargo’s acquisition of Wachovia on December 31, 2008, our credit risk, operational risk management, liquidity risk management and financial disclosure processes are managed by Wells Fargo. The management of these processes by Wells Fargo is not materially different than the previous processes managed by Wachovia. For more information on these processes please refer to the “Risk Management” section within the Financial Review of the Wells Fargo 2008 Annual Report on Form 10-K.

 

Interest Rate Risk Management

 

Interest rate risk is the sensitivity of earnings to changes in interest rates. Our loan portfolio included approximately 17% of variable rate loans at September 30, 2009. 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 adjustments 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. In December 2001, the Bank contributed received-fixed interest rate swaps to us in exchange for common stock. Subsequent to the contribution, we entered into pay-fixed interest rate swaps that serve as an economic hedge to the receive-fixed interest rate swaps. Currently, we do not expect to enter into additional derivative transactions, although we may enter into such transactions in the future.

 

At September 30, 2009, 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 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.

 

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At September 30, 2009, $4.5 billion, or 24% of our assets, had variable interest rates and could be expected to reprice with changes in interest rates. At September 30, 2009, our liabilities were $79.4 million, or less than 1%, of our assets, while stockholders’ equity was $18.4 billion, or greater than 99%, 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.

 

We report and account for derivative financial instruments in accordance with FASB ASC 815, Derivatives and Hedging. 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 sheets. 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 sheets. Realized and unrealized gains and losses are recorded as a net gain or loss on interest rate swaps in our consolidated statements of income.

 

At September 30, 2009, our receive-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 2.72 years, weighted average receive rate of 7.45% and weighted average pay rate of 0.29%. Our pay-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 2.72 years, weighted average receive rate of 0.29% and weighted average pay rate of 5.72% at September 30, 2009. Since the swaps have a weighted average maturity of 2.72 years, their value is primarily driven by changes in long-term interest rates. All the interest rate swaps have variable pay or receive rates based on three-month LIBOR, and they are the pay or receive rates in effect at September 30, 2009.

 

Market Risk Management

 

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 $3.1 million or $6.3 million, respectively. If market rates were to increase 100 basis points or 200 basis points, we would recognize short-term net losses on our interest rate swaps of $3.0 million or $6.0 million, 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.

 

Transactions with Related Parties

 

We are subject to certain income and expense allocations from affiliated parties for various services received. In addition, we enter into transactions with affiliated parties in the normal course of business. The nature of the transactions with affiliated parties is discussed below.

 

The Bank services our loans on our behalf, which includes delegating servicing to third parties in the case of residential mortgages. We pay the Bank a 0.025% per annum fee for this service on commercial loans and a 0.50% per annum fee on home equity loans. Servicing fees related to residential mortgages are negotiated when the Bank purchases loans from unrelated third parties, and are based on the purchase price of the loans. The Notes to Consolidated Financial Statements has information about the accounting treatment of loan purchases. Additionally, we are subject to the Bank’s management fee policy and are assessed monthly management fees based on our relative percentage of the Bank’s total consolidated assets and noninterest expense. We also have a swap servicing and fee arrangement with the Bank, whereby the Bank provides

 

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operations, back office, book entry, record keeping and valuation services related to our interest rate swaps, for which we pay a fee to the Bank.

 

Eurodollar deposits with the Bank are our primary cash management vehicle. We have also entered into certain loan participations with affiliates and are allocated a portion of all income associated with these loans.

 

As of September 30, 2009, there were no borrowings on our line of credit with the Bank. Under the terms of that facility, Wachovia Funding can borrow up to $2.2 billion under a revolving demand note at a rate of interest equal to the average federal funds rate.

 

The Bank acts as our collateral custodian in connection with cash collateral pledged to us related to our interest rate swaps. For this service, we pay the Bank a fee based on the value of the collateral. In addition, the Bank is permitted to rehypothecate and use as its own the collateral held by the Bank as our custodian. The Bank pays us a fee based on the value of the collateral involved for this right. The Bank also provides a guaranty of our obligations under the interest rate swaps when the swaps are in a net payable position, for which we pay a monthly fee based on the absolute value of the net notional amount of the interest rate swaps.

 

Accounting and Regulatory Matters

 

Various legislative and regulatory proposals concerning the financial services industry are pending in Congress, the legislatures in states in which we conduct operations, and before various regulatory agencies that supervise our operations. Given the uncertainty of the legislative and regulatory process, we cannot assess the impact of any such legislation or regulations on our consolidated financial position or results of operations.

 

FAS 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140, modifies certain guidance contained in FASB ASC 860, Transfers and Servicing. This standard eliminates the concept of qualifying special purpose entities (“QSPEs”) and provides additional criteria transferors must use to evaluate transfers of financial assets. To determine if a transfer is to be accounted for as a sale, the transferor must assess whether it and all of the entities included in its consolidated financial statements have surrendered control of the assets. A transferor must consider all arrangements or agreements made or contemplated at the time of transfer before reaching a conclusion on whether control has been relinquished. FAS 166 addresses situations in which a portion of a financial asset is transferred. In such instances the transfer can only be accounted for as a sale when the transferred portion is considered to be a participating interest. FAS 166 also requires that any assets or liabilities retained from a transfer accounted for as a sale be initially recognized at fair value. This standard is effective for us as of January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date. This standard is not expected to have a significant impact on our financial statements.

 

FAS 167, Amendments to FASB Interpretation No. 46(R), amends several key consolidation provisions related to variable interest entities (“VIEs”), which are included in FASB ASC 810, Consolidation. First, the scope of FAS 167 includes entities that are currently designated as QSPEs. Second, FAS 167 changes the approach companies use to identify the VIEs for which they are deemed to be the primary beneficiary and are required to consolidate. Under existing rules, the primary beneficiary is the entity that absorbs the majority of a VIE’s losses and receives the majority of the VIE’s returns. The guidance in FAS 167 identifies a VIE’s primary beneficiary as the entity that has the power to direct the VIE’s significant activities, and has an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. Third, FAS 167 requires companies to continually reassess whether they are the primary beneficiary of a VIE. Existing rules only require companies to reconsider primary beneficiary conclusions when certain triggering events have occurred. FAS 167 is effective for us as of January 1, 2010, and applies to all existing QSPEs and VIEs, and VIEs created after the effective date. FAS 167 is not expected to have a significant impact on our financial statements.

 

 

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Accounting Standards Update (“ASU” or “Update”) 2009-5, Measuring Liabilities at Fair Value, describes the valuation techniques companies should use to measure the fair value of liabilities for which there is limited observable market data. If a quoted price in an active market is not available for an identical liability, an entity should use one of the following approaches: (1) the quoted price of the identical liability when traded as an asset, (2) quoted prices for similar liabilities or similar liabilities when traded as an asset, or (3) another valuation technique that is consistent with the principles of FASB ASC 820, Fair Value Measurements and Disclosures. When measuring the fair value of liabilities, the Update reiterates that companies should apply valuation techniques that maximize the use of relevant observable inputs, which is consistent with existing accounting provisions for fair value measurement. In addition, the Update clarifies when an entity should adjust quoted prices of identical or similar assets that are used to estimate the fair value of liabilities. For example, an entity should not include separate adjustments for contractual restrictions that prevent the transfer of the liability because the restriction would be factored into other inputs used in the fair value measurement of the liability. However, separate adjustments are needed in situations where the unit of account for the asset is not the same as for the liability. This guidance is effective for us in fourth quarter 2009 with adoption applied prospectively. We are currently evaluating the impact ASU 2009-5 may have on our financial statements.

 

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Table 1    PERFORMANCE AND DIVIDEND PAYOUT RATIOS

 

              
     Nine Months Ended
September 30,


 
     2009

    2008

 

RATIOS

     (Successor   (Predecessor

Return on average assets

     4.82   4.40   

Return on average stockholders’ equity

     4.91      4.49   

Average stockholders’ equity to average assets

     98.18      98.09   

Dividend payout ratio

     124.79   121.99   
    


 

Table 2    LOANS

 

              

(In thousands)


   September 30,
2009

    December 31,
2008


 
     (Successor)     (Successor)  

COMMERCIAL

              

Commercial and commercial real estate

   $ 2,058,582      2,524,032   

RESIDENTIAL LOANS

              

Residential mortgages

     1,646,990      742,500   

Home equity loans

     13,112,158      14,214,973   
    


 

Total loans

     16,817,730      17,481,505   

Unearned income

     190      —     
    


 

Total loans, net of unearned income

   $ 16,817,540      17,481,505   
    


 

Table 3    LOAN LOSSES AND RECOVERIES

 

              
     Nine Months Ended
September 30,

 

(In thousands)


   2009

    2008

 
     (Successor)     (Predecessor)  

ALLOWANCE FOR LOAN LOSSES

              

Balance, beginning of period

   $ 269,343      93,095   

Provision for credit losses

     141,684      187,330   

Allowance relating to loans sold

     —        (237

Allowance refinement related to business combinations (PCI loans) (1)

     160      —     

Net charge-offs

     (93,851   (50,033
    


 

Balance, end of period

   $ 317,336      230,155   
    


 

as a % of loans, net

     1.89   1.43   
    


 

as a % of nonaccrual loans

     200   524   
    


 

LOAN LOSSES

              

Commercial and commercial real estate loans

   $ 37      20   

Residential mortgages

     1,651      431   

Home equity loans

     94,727      50,123   
    


 

Total loan losses

     96,415      50,574   
    


 

LOAN RECOVERIES

              

Commercial and commercial real estate loans

     —        135   

Residential mortgages

     123      1   

Home equity loans

     2,441      405   
    


 

Total loan recoveries

     2,564      541   
    


 

Net charge-offs

   $ 93,851      50,033   
    


 

Total net charge-offs as a % of average loans, net

     0.73   0.41   
    


 


(1)      As a result of purchase accounting, the allowance for loan losses is not carried over for purchased credit- impaired (“PCI”) loans. Further information on PCI loans is presented in Note 1 to Notes to Consolidated Financial Statements.

           

 

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Table 4    NONACCRUAL LOANS (1)

 

              

(In thousands)


   September 30,
2009

    December 31,
2008


 
     (Successor)     (Successor)  

Commercial and commercial real estate loans

   $ 4,284      —     

Residential mortgages

     15,653      6,359   

Home equity loans

     138,620      5,522   
    


 

Total nonaccrual loans

   $ 158,557      11,881   
    


 

as a % of loans, net

     0.94   0.07   
    


 

Accruing loans past due 90 days or more

   $ 85,449      53,575   
    


 


(1)      Excludes purchased credit-impaired loans.

         

Table 5    RESERVE FOR UNFUNDED LENDING COMMITMENTS

              
     Nine Months Ended
September 30,

 

(In thousands)


   2009

    2008

 
     (Successor)     (Predecessor)  

RESERVE FOR UNFUNDED LENDING COMMITMENTS

              

Balance, beginning of period

   $ 570      488   

Provision for (reversal of) credit losses

     (142   (225

Allowance refinement related to business combinations

     5      —     
    


 

Balance, end of period

   $ 433      263   
    


 

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

 

Information required by this Item 3 is set forth in Item 2 under the caption “Risk Governance and Administration” and is incorporated herein by reference.

 

Item 4.    Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures.    As of September 30, 2009, the end of the period covered by this Quarterly Report on Form 10-Q, Wachovia Funding’s management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, Wachovia Funding’s Chief Executive Officer and Chief Financial Officer each concluded that as of September 30, 2009, the end of the period covered by this Quarterly Report on Form 10-Q, Wachovia Funding maintained effective disclosure controls and procedures.

 

Changes in Internal Control Over Financial Reporting.    No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter ended September 30, 2009, that has materially affected, or is reasonably likely to materially affect, Wachovia Funding’s internal control over financial reporting.

 

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Part II.    OTHER INFORMATION

 

Item 1.    Legal Proceedings.

 

We, Wells Fargo and the Bank are not currently involved in nor, to our knowledge, currently threatened with any material litigation with respect to the assets included in our portfolio, other than routine litigation arising in the ordinary course of business. Based on information currently available, advice of counsel, available insurance coverage and established reserves, we believe that the eventual outcome of the actions against us and/or our subsidiaries will not, in the aggregate, have a material adverse effect on our consolidated financial position or results of operations. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to our results of operations for any particular period.

 

Item 1A. Risk Factors.

 

An investment in Wachovia Funding’s securities may involve risk due to the nature of the business we engage in and activities related to that business. For more information on risk factors, please see Part 1, Item 1A of Wachovia Funding’s 2008 Annual Report on Form 10-K.

 

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 3.    Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4.    Submission of Matters to a Vote of Security Holders.

 

Not applicable.

 

Item 5.    Other Information.

 

None.

 

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Item 6.    Exhibits.

 

(a)    Exhibits.

 

Exhibit No.


 

Description


(12)(a)  

Computations of Consolidated Ratios of Earnings to Fixed Charges.

(12)(b)  

Computations 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 and Wachovia Corporation Supplementary Consolidating Financial Information.

 

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SIGNATURES

 

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 hereunto duly authorized.

 

        WACHOVIA PREFERRED FUNDING CORP.
        By:  

/s/ RICHARD D. LEVY


               

Richard D. Levy

Executive Vice President and Controller

(Principal Accounting Officer)

 

Date: November 13, 2009

 

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