Attached files
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
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
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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 issuers classes of common stock, as of the latest practicable date.
As of April 30, 2010, there were 99,999,900 shares of the registrants common stock outstanding.
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CROSS-REFERENCE INDEX
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PART I |
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Financial Statements |
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Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of |
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Item 3. |
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Item 4. |
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PART II |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 6. |
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PART I FINANCIAL INFORMATION
This Report on Form 10-Q for the quarter ended March 31, 2010, including the Financial Statements and related Notes, has forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results might differ materially from our forecasts and expectations due to several factors. Some of these factors are described in the Financial Statements and related Notes. For a discussion of other factors, refer to the Risk Factors section in this Report and to the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K), filed with the Securities and Exchange Commission (SEC) and available on the SECs website at www.sec.gov.
Wachovia Funding, we, our and us refer to Wachovia Preferred Funding Corp. Wachovia Preferred Holding refers to Wachovia Preferred Funding Holding Corp., the Bank refers to Wells Fargo Bank, National Association including predecessor entities, Wachovia refers to Wachovia Corporation, a North Carolina corporation, and Wells Fargo refers to Wells Fargo & Company.
Managements Discussion and Analysis of Financial Condition and Results of Operations
On March 20, 2010, Wachovia Bank, National Association, a wholly-owned subsidiary of Wells Fargo, merged with and into the Bank, with the Bank as the surviving entity. As a result of this merger, the Bank acquired all of the assets and assumed all of the liabilities of Wachovia Bank, National Association, including without limitation, the liabilities as a servicer of our loan participation interest portfolio. At March 31, 2010, the Bank was considered well-capitalized under risk-based capital guidelines issued by banking regulators.
For the tax year ending December 31, 2010, 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 (the Code) to be taxed as a REIT. These provisions for qualifying as a REIT for federal income tax purposes are complex, involving many requirements, including among others, distributing the majority of our earnings to shareholders and satisfying certain asset, income and stock ownership tests. To the extent we meet those provisions, with the exception of the income of our taxable REIT subsidiary, 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:
| From a shareholders perspective, the dividends we pay as a REIT are ordinary income not eligible for the dividends received deduction for corporate shareholders or for the favorable maximum 15% rate applicable to qualified dividends received by non-corporate taxpayers. If we were not a REIT, dividends we pay generally would qualify for the dividends received deduction and the favorable tax rate applicable to non-corporate taxpayers. |
| In addition, we would no longer be eligible for the dividends paid deduction, thereby creating a tax liability for us. Wells Fargo agreed to make, or cause its subsidiaries to make, a capital contribution to us equal in amount to any income taxes payable by us. Therefore, we believe a failure to qualify as a REIT would not result in any net capital impact to us. |
For purposes of this discussion, the term loans includes loans and loan participation interests, the term consumer loans includes real estate 1-4 family first mortgages and real estate 1-4 family junior lien mortgages, and the term commercial loans includes commercial and commercial real estate loans. The following table presents certain performance and dividend payout ratios for the three months ended March 31, 2010 and 2009.
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Quarter ended March 31, | |||||
2010 | 2009 | ||||
Return on average assets |
2.88 | % | 5.18 | ||
Return on average stockholders equity |
2.89 | 5.33 | |||
Average stockholders equity to assets |
99.50 | 97.25 | |||
Dividend payout ratio |
180.47 | 88.68 |
Although we have the authority to acquire interests in an unlimited number of loans and other assets from unaffiliated third parties, substantially all 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.
In the three months ended March 31, 2010 and 2009, we purchased loans from the Bank at estimated fair value. Wachovia Funding paid $344.8 million and $1.3 billion, respectively, for consumer loans in these periods.
2010 to 2009 Three Month Comparison
Net income available to common stockholders. We earned net income available to common stockholders of $86.2 million and $197.6 million in first quarter 2010 and 2009, respectively. This decrease was primarily attributable to higher provision for credit losses and lower net interest income, partially offset by lower noninterest expense.
Interest Income. Interest income of $272.4 million in first quarter 2010 decreased $5.7 million, or 2%, compared with first quarter 2009. Lower average interest-earning assets more than offset increasing consumer interest rates compared with first quarter 2009. The average interest rate on total interest-earning assets was 5.97% in first quarter 2010 and in first quarter 2009.
Average consumer loans decreased $918.9 million to $14.1 billion compared with first quarter 2009 while average commercial loans decreased $536.6 million to $1.9 billion in the same period due to paydowns. In first quarter 2010, interest income included $35.0 million from the accretion of discounts on purchased consumer loans primarily driven by an acceleration of accretion from repayment of loans during the period. All loan paydowns were reinvested in consumer loans. We currently anticipate that we will continue to reinvest loan paydowns primarily in consumer real-estate secured loans. Interest income on cash invested in overnight eurodollar deposits decreased $308 thousand to $315 thousand in first quarter 2010 compared with first quarter 2009, driven by lower short-term interest rates from the same period one year ago. See the interest rate risk management section under Risk Management for more information on interest rates and interest income.
The average balances, interest income and rates related to interest-earning assets for the three months ended March 31, 2010 and 2009, are presented below.
Quarter ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(in thousands) | Average balance |
Interest income |
Yields/ rates |
Average balance |
Interest income |
Yields/ rates |
||||||||||
Commercial loans |
$ | 1,873,171 | 10,428 | 2.26 | % | $ | 2,409,772 | 13,912 | 2.34 | % | ||||||
Real estate 1-4 family |
14,088,584 | 261,685 | 7.52 | 15,007,439 | 263,572 | 7.12 | ||||||||||
Interest-bearing deposits in banks and other earning assets |
2,524,684 | 315 | 0.05 | 1,458,465 | 623 | 0.17 | ||||||||||
Total interest-earning assets |
$ | 18,486,439 | 272,428 | 5.97 | % | $ | 18,875,676 | 278,107 | 5.97 | % |
Interest Expense. We did not have any borrowings on our line of credit in first quarter 2010; therefore, no interest expense was incurred, compared with $164 thousand in first quarter 2009. The line of credit with the Bank averaged $381.6 million in first quarter 2009.
Provision for Credit Losses. The provision for credit losses was $124.1 million in first quarter 2010 compared with $13.9 million in first quarter 2009. The increase in the provision for credit losses resulted from higher net charge-offs as well as a credit reserve build to increase the allowance for loan losses. The increase in charge-offs is largely attributable to the
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challenging economic and housing conditions impacting the consumer real estate portfolio. Please refer to 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 $1.1 million in first quarter 2010 compared with a gain of $1.3 million in first quarter 2009. The lower gain in first quarter 2010 primarily reflects a lower magnitude of interest rate decreases compared with first quarter 2009. Included in gain on interest rate swaps was expense associated with the derivative cash collateral received of $58 thousand and $111 thousand in first quarter 2010 and 2009, respectively.
Loan Servicing Costs. Loan servicing costs decreased $1.8 million to $15.6 million in first quarter 2010, which reflects the impact of paydowns on commercial and consumer loans. These costs are driven by the size and mix of our loan portfolio. Home equity loan products cost more to service than other loan products. All loans are serviced by the Bank pursuant to our participation and servicing agreements which include market-based fees. For home equity loan products, the monthly servicing fee charge is equal to the outstanding principal balance of each loan multiplied by a percentage per annum. For servicing fees related to residential mortgage products the monthly fee is equal to the outstanding principal of each loan multiplied by a percentage per annum or a flat fee per month. For commercial loans, the monthly fee is equal to the total committed amount of each loan multiplied by a percentage per annum.
Management Fees. Management fees were $1.1 million in first quarter 2010 compared with $3.1 million in first quarter 2009, primarily reflecting a change in allocation methodology. Management fees represent reimbursements for general overhead expenses paid on our behalf. For 2010, management fees are calculated based on Wells Fargos total monthly allocated costs multiplied by a formula. The formula is based on Wachovia Fundings proportion of Wells Fargos consolidated: 1) full-time equivalent employees (FTEs), 2) total average assets and 3) total revenue. In 2009, Wachovia Funding was assessed monthly management fees based on its relative percentage of the Banks total consolidated assets and noninterest expense.
Other Expense. Other expense primarily consists of costs associated with foreclosures on residential properties.
Income Tax Expense. Income tax expense, which is primarily based on the pre-tax income of WPR, our taxable REIT subsidiary, was $437 thousand in first quarter 2010 compared with $1.1 million in first quarter 2009. WPR holds our interest rate swaps as well as certain cash investments. The decrease in income tax expense for 2010 is primarily related to the reduction in pre-tax income and lower state income tax expense.
Total Assets. Our assets primarily consist of commercial and consumer loans, although we have the authority to hold assets other than loans. Total assets were $18.3 billion at March 31, 2010, compared with $18.4 billion at December 31, 2009. Loans, net of unearned income were 87% of total assets at March 31, 2010, compared to 89% at December 31, 2009.
Loans. Loans, net of unearned income decreased $480.9 million to $15.9 billion at March 31, 2010, compared with December 31, 2009, primarily reflecting paydowns across the entire portfolio, partially offset by consumer loan reinvestments. At both March 31, 2010, and December 31, 2009, consumer loans represented 88% of loans and commercial loans represented 12%.
Allowance for Loan Losses. The allowance for loan losses increased $44.3 million from December 31, 2009, to $381.8 million at March 31, 2010. The first quarter 2010 reserve build was primarily driven by continuing housing related economic conditions, a continuing cautious economic outlook and increased uncertainty around the projected benefits of loan modifications.
At March 31, 2010, the allowance for loan losses included $356.3 million for consumer loans and $25.5 million for commercial loans. The total allowance reflects managements estimate of credit losses inherent in the loan portfolio at the balance sheet date. We consider the allowance for loan losses of $381.8 million adequate to cover credit losses inherent in the loan portfolio at March 31, 2010.
Net charge-offs in first quarter 2010 were $79.7 million (2.03% of average total loans outstanding, annualized) compared with $11.9 million (0.27%) in first quarter 2009. The increase in losses resulted from the economic conditions in the marketplace affecting our customers. The increase was concentrated in consumer real estate. For the consumer real estate portfolios, early stage delinquencies and property values are beginning to stabilize. The increase in losses is attributable to previous deterioration in the credit quality of assets in this portfolio and although we are encouraged by current delinquency
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trends we expect losses to remain elevated near term. Net charge-offs in the consumer loan portfolio totaled $79.9 million in first quarter 2010. Improvement in loss levels will correlate with improvements in the unemployment rates and residential real estate values in the markets where our loan customers reside.
Interest Rate Swaps. Interest rate swaps, net were $1.1 million at March 31, 2010, and $1.0 million at December 31, 2009, which represents the fair value of our net position in interest rate swaps.
Accounts ReceivableAffiliates, Net. Accounts receivable from affiliates, net was $162.6 million at March 31, 2010, compared with $166.4 million at December 31, 2009, as a result of intercompany transactions related to net loan paydowns, interest receipts and funding with the Bank.
Our commercial loan relationships include 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 ManagementCredit Risk Management section describes how we use Wells Fargos risk management framework to manage credit risk.
Loan commitments create credit risk in the event that 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. The Risk ManagementLiquidity and Funding section describes the way we manage liquidity and fund these commitments, to the extent funding is required. At March 31, 2010 and December 31, 2009, unfunded commitments to extend credit were $632.4 million and $666.7 million, respectively.
We use Wells Fargos risk management framework to manage our credit, interest rate, market, operational and liquidity risks. The following discussion highlights this framework as it relates to how we manage each of these risks.
Credit Risk Management
The credit risk management process is governed centrally, but provides for decentralized management and accountability. Our overall credit process includes comprehensive credit policies, judgmental or statistical credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process. In addition, regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes.
Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of risk to loss. Our credit risk monitoring process is designed to enable early identification of developing risk to loss and to support our determination of an adequate allowance for loan losses. During the current economic cycle our monitoring and resolution efforts have focused on loan portfolios exhibiting the highest levels of risk including mortgage loans supported by real estate (both consumer and commercial), junior lien and commercial portfolios.
Our underwriting of commercial real estate (CRE) loans is focused primarily on cash flows and creditworthiness, not solely collateral valuations. To identify and manage newly emerging problem CRE loans we employ a high level of surveillance and regular customer interaction to understand and manage the risks associated with these assets, including regular loan reviews and appraisal updates. As issues are identified, management is engaged and dedicated workout groups are in place to manage problem assets.
Concentration of credit risk generally arises with respect to our loans when a significant number of underlying loans have borrowers that engage in similar business activities or activities in the same industry or geographical region. Concentration of credit risk indicates the relative sensitivity of performance to both positive and negative developments affecting a particular industry. By the nature of our status as a REIT, the composition of the loans underlying the participation interests are highly concentrated in real estate. The following table is a summary of the geographical distribution of our loan portfolio for the states with more than five percent of the total loans outstanding.
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(in thousands) | Commercial and real estate |
Real estate 1-4 family first mortgage |
Real estate 1-4 family junior lien mortgage |
Total | % of total loans |
|||||||
December 31, 2009 |
||||||||||||
Florida |
$ | 529,202 | 1,366,181 | 726,688 | 2,622,071 | 16 | % | |||||
Pennsylvania |
265,808 | 1,282,162 | 896,169 | 2,444,139 | 15 | |||||||
New Jersey |
284,655 | 991,811 | 1,072,175 | 2,348,641 | 14 | |||||||
North Carolina |
365,005 | 888,388 | 432,254 | 1,685,647 | 10 | |||||||
Virginia |
150,151 | 666,856 | 543,912 | 1,360,919 | 9 | |||||||
Georgia |
86,649 | 492,159 | 432,805 | 1,011,613 | 6 | |||||||
All other states |
310,263 | 3,445,726 | 1,172,585 | 4,928,574 | 30 | |||||||
Total loans |
$ | 1,991,733 | 9,133,283 | 5,276,588 | 16,401,604 | 100 | % | |||||
March 31, 2010 |
||||||||||||
Florida |
$ | 453,936 | 1,383,200 | 696,395 | 2,533,531 | 16 | % | |||||
Pennsylvania |
232,907 | 1,214,112 | 833,150 | 2,280,169 | 14 | |||||||
New Jersey |
282,598 | 963,566 | 1,024,417 | 2,270,581 | 14 | |||||||
North Carolina |
348,286 | 977,174 | 413,074 | 1,738,534 | 11 | |||||||
Virginia |
143,649 | 660,570 | 513,018 | 1,317,237 | 9 | |||||||
Georgia |
87,963 | 466,461 | 408,171 | 962,595 | 6 | |||||||
All other states |
308,741 | 3,423,690 | 1,085,617 | 4,818,048 | 30 | |||||||
Total loans |
$ | 1,858,080 | 9,088,773 | 4,973,842 | 15,920,695 | 100 | % | |||||
For purposes of portfolio risk management, we aggregate commercial loans according to market segmentation and standard industry codes. This portfolio has experienced less credit deterioration than our CRE portfolio. We believe this portfolio is well underwritten and is diverse in its risk with relatively even concentrations across several industries. The following table is a summary of our commercial loans by industry.
March 31, 2010 | December 31, 2009 | |||||||||||
(in thousands) | Total | % of total loans |
Total | % of total loans |
||||||||
Finance |
$ | 57,436 | 25 | % | $ | 45,544 | 16 | % | ||||
Public administration |
30,810 | 14 | 96,987 | 34 | ||||||||
Real estate-other (1) |
26,720 | 12 | 33,815 | 12 | ||||||||
Investors |
25,833 | 11 | 25,900 | 9 | ||||||||
Industrial equipment |
23,880 | 10 | 17,290 | 6 | ||||||||
Food and beverage |
16,981 | 8 | 28,705 | 10 | ||||||||
Crops |
15,035 | 7 | 9,667 | 3 | ||||||||
Real estate investment trust |
10,904 | 5 | 6,878 | 2 | ||||||||
Healthcare |
7,320 | 3 | 7,330 | 3 | ||||||||
Other |
10,412 | 5 | 15,462 | 5 | ||||||||
Total commercial loans |
$ | 225,331 | 100 | % | $ | 287,578 | 100 | % | ||||
(1) | Includes lessors, building operators and real estate agents. |
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The following table is a summary of commercial real estate loans by state and property type.
March 31, 2010 | December 31, 2009 | |||||||||||||||||||
(in thousands) | Real estate |
Real estate |
Total | % of total |
Real estate |
Real estate |
Total | % of total loans |
||||||||||||
By state: |
||||||||||||||||||||
Florida |
$ | 387,261 | 16,652 | 403,913 | 25 | % | $ | 396,877 | 18,577 | 415,454 | 25 | % | ||||||||
North Carolina |
335,928 | 10,147 | 346,075 | 21 | 352,165 | 10,347 | 362,512 | 21 | ||||||||||||
New Jersey |
228,997 | - | 228,997 | 14 | 226,074 | - | 226,074 | 13 | ||||||||||||
Pennsylvania |
149,385 | 49,997 | 199,382 | 12 | 172,083 | 52,372 | 224,455 | 13 | ||||||||||||
South Carolina |
119,671 | 152 | 119,823 | 7 | 104,979 | 147 | 105,126 | 6 | ||||||||||||
Georgia |
86,139 | 1,563 | 87,702 | 6 | 84,785 | 1,575 | 86,360 | 5 | ||||||||||||
Virginia |
77,416 | 3,508 | 80,924 | 5 | 95,610 | 3,561 | 99,171 | 6 | ||||||||||||
All other states |
165,629 | 304 | 165,933 | 10 | 185,003 | - | 185,003 | 11 | ||||||||||||
Total loans |
$ | 1,550,426 | 82,323 | 1,632,749 | 100 | % | $ | 1,617,576 | 86,579 | 1,704,155 | 100 | % | ||||||||
By property: |
||||||||||||||||||||
Office buildings |
$ | 396,003 | 1,531 | 397,534 | 24 | % | $ | 411,774 | 1,661 | 413,435 | 24 | % | ||||||||
Industrial/warehouse |
301,346 | 4,112 | 305,458 | 19 | 312,131 | 4,172 | 316,303 | 19 | ||||||||||||
Retail (excluding shopping center) |
209,467 | - | 209,467 | 13 | 212,383 | 3,482 | 215,865 | 13 | ||||||||||||
Real estateother |
153,978 | 3,713 | 157,691 | 10 | 168,410 | 3,803 | 172,213 | 10 | ||||||||||||
Shopping center |
150,003 | - | 150,003 | 9 | 152,633 | - | 152,633 | 9 | ||||||||||||
Hotel/motel |
111,107 | - | 111,107 | 7 | 111,538 | - | 111,538 | 7 | ||||||||||||
Apartments |
85,705 | 12,576 | 98,281 | 6 | 91,970 | 12,703 | 104,673 | 6 | ||||||||||||
Institutional |
76,100 | 2,483 | 78,583 | 5 | 78,870 | 2,496 | 81,366 | 5 | ||||||||||||
Land (excluding 1-4 family) |
58,707 | 2,724 | 61,431 | 4 | 70,450 | 3,004 | 73,454 | 4 | ||||||||||||
1-4 family structure |
5,070 | 53,891 | 58,961 | 3 | 5,209 | 54,284 | 59,493 | 3 | ||||||||||||
Other |
2,940 | 1,293 | 4,233 | - | 2,208 | 974 | 3,182 | - | ||||||||||||
Total loans |
$ | 1,550,426 | 82,323 | 1,632,749 | 100 | % | $ | 1,617,576 | 86,579 | 1,704,155 | 100 | % | ||||||||
The following table is a summary of real estate 1-4 family mortgage loans by state and loan-to-value (LTV) ratio:
March 31, 2010 | December 31, 2009 | |||||||||||
(in thousands) | Real estate 1-4 family |
Current LTV ratio (1) |
Real estate 1-4 family |
Current LTV ratio (1) |
||||||||
Florida |
$ | 2,079,595 | 85 | % | $ | 2,092,869 | 85 | % | ||||
Pennsylvania |
2,047,262 | 71 | 2,178,331 | 72 | ||||||||
New Jersey |
1,987,983 | 72 | 2,063,986 | 74 | ||||||||
North Carolina |
1,390,248 | 75 | 1,320,642 | 76 | ||||||||
Virginia |
1,173,588 | 74 | 1,210,768 | 76 | ||||||||
Georgia |
874,632 | 88 | 924,964 | 88 | ||||||||
All other states |
4,509,307 | 73 | % | 4,618,311 | 76 | % | ||||||
Total loans |
$ | 14,062,615 | $ | 14,409,871 | ||||||||
(1) | Collateral values are determined using automated valuation models (AVMs) and are updated quarterly. AVMs are computer-based tools used to estimate market values of homes based on processing large volumes of market data including market comparables and price trends for local market areas. |
Nonaccrual loans increased to $251.2 million at March 31, 2010, from $207.5 million at December 31, 2009. The increase was primarily related to real estate 1-4 family first mortgage loans. All real estate 1-4 family loans increased largely due to slower disposition, not increased quarterly inflow. Federal government programs, such as Home Affordability Modification Program (HAMP), require customers to provide updated documentation and complete trial repayment periods before the loan can be removed from nonaccrual status. A loan is considered to be impaired when based on current information, it is probable Wachovia Funding will not receive all amounts due in accordance with the contractual terms of a loan agreement. The amount of a loans impairment is measured based on either the present value of expected future cash flows discounted at the loans effective interest rate, the loans observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is also considered impaired if its terms are modified in a troubled debt restructuring. Note 1 (Summary of Significant Accounting and Reporting PoliciesLoans) to Financial Statements in our 2009 Form 10-K describes our accounting policy for nonaccrual loans.
There were no commercial loan troubled debt restructurings (TDRs) at March 31, 2010 and December 31, 2009. Total consumer loan TDRs amounted to $132.8 million at March 31, 2010 and $116.0 million at December 31, 2009. At March 31,
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2010 and December 31, 2009, nonaccruing TDRs were $14.5 million and $9.8 million, respectively. Consumer loans that enter into a TDR before they reach nonaccrual status remain in accrual status as long as they continue to perform according to the terms of the TDR. We strive to identify troubled loans and work with the customer to modify to more affordable terms before their loan reaches nonaccrual status. We establish an impairment reserve when a loan is restructured in a TDR.
NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS
(in thousands) | March 31, 2010 |
December 31, 2009 | ||||
Nonaccrual loans |
||||||
Commercial and commercial real estate: |
||||||
Commercial |
$ | - | 3,510 | |||
Real estate mortgage |
9,274 | 4,869 | ||||
Real estate construction |
- | - | ||||
Total commercial and commercial real estate |
9,274 | 8,379 | ||||
Consumer: |
||||||
Real estate 1-4 family first mortgage |
155,812 | 119,666 | ||||
Real estate 1-4 family junior lien mortgage |
86,129 | 79,495 | ||||
Total consumer |
241,941 | 199,161 | ||||
Total nonaccrual loans |
251,215 | 207,540 | ||||
Other nonperforming assets |
||||||
Foreclosed assets |
2,798 | 2,282 | ||||
Total nonaccrual loans and other nonperforming assets |
$ | 254,013 | 209,822 | |||
As a percentage of total loans |
1.60 | % | 1.28 | |||
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(in thousands) | March 31, 2010 |
December 31, 2009 | |||
Commercial and commercial real estate: |
|||||
Commercial |
$ | 5 | - | ||
Real estate mortgage |
14,044 | 9,445 | |||
Real estate construction |
- | - | |||
Total commercial and commercial real estate |
14,049 | 9,445 | |||
Consumer: |
|||||
Real estate 1-4 family first mortgage |
20,422 | 20,681 | |||
Real estate 1-4 family junior lien mortgage |
19,473 | 20,406 | |||
Total consumer |
39,895 | 41,087 | |||
Total |
$ | 53,944 | 50,532 | ||
Net Charge-offs
Net charge-offs in first quarter 2010 were $79.7 million (2.03% of average total loans outstanding, annualized) compared with $11.9 million (0.27%) a year ago. The increase in losses this quarter resulted from the economic conditions in the marketplace affecting our customers. The majority of the increase was concentrated in consumer real estate, which is attributable to previous deterioration in the credit quality of assets in this portfolio and although we are encouraged by current credit metrics we expect losses to remain elevated near term.
Net charge-offs in the 1-4 family first mortgage portfolio totaled $28.0 million in first quarter 2010 compared with $8.6 million a year ago. Our relatively high-quality 1-4 family first mortgage portfolio continued to reflect relatively low loss rates, although until housing prices fully stabilize, these credit losses will continue to remain elevated.
Net charge-offs in the real estate 1-4 family junior lien portfolio were $51.9 million in first quarter 2010 compared with $3.3 million a year ago. The current unemployment levels impact the frequency of loss.
Commercial and CRE net charge-offs in first quarter 2010 and 2009 were not significant.
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Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, is managements estimate of credit losses inherent in the loan portfolio at the balance sheet date. The process for determining the adequacy of the allowance for credit losses is critical to our financial results. It requires difficult, subjective, and complex judgments, as a result of the need to make estimates about the effect of matters that are uncertain. The detail of the changes in the allowance for credit losses, including charge-offs and recoveries by loan category, is in Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
We employ a disciplined process and methodology to establish our allowance for loan losses each quarter. This process takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade specific loss factors. In addition, we review several credit ratio trends, such as the ratio of the allowance for loan losses to nonaccrual loans and the ratio of the allowance for loan losses to net charge-offs. These trends are not determinative of the adequacy of the allowance as we use several analytical tools in determining the adequacy of the allowance.
For statistically evaluated portfolios (typically consumer), we generally leverage models which use credit-related characteristics such as delinquency migration rates, vintages, and portfolio concentrations to estimate loss content. Additionally, the allowance for consumer TDRs is based on the risk characteristics of the modified loans and the resultant estimated cash flows discounted at the pre-modification effective yield of the loan. While the allowance is determined using product and business segment estimates, it is available to absorb losses in the entire loan portfolio.
At March 31, 2010, the allowance for loan losses totaled $381.8 million (2.40% of total loans), compared with $337.4 million (2.06%), at December 31, 2009.
The ratio of the allowance for credit losses to total nonaccrual loans was 152% and 163% at March 31, 2010 and December 31, 2009, respectively. In general, this ratio may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, borrower credit strength and the value and marketability of collateral.
We believe the allowance for credit losses of $382.3 million was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31, 2010. The allowance for credit losses is evaluated on a quarterly basis and considers existing factors at the time, including economic or market conditions and ongoing internal and external examination processes. Due to the sensitivity of the allowance for credit losses to changes in the economic environment, it is possible that unanticipated economic deterioration would create incremental credit losses not anticipated as of the balance sheet date. Our process for determining the adequacy of the allowance for credit losses is discussed in the Critical Accounting Policies section in our 2009 Form 10-K.
Interest Rate Risk Management
Interest rate risk is the sensitivity of earnings to changes in interest rates. Approximately 18% of our loan portfolio consisted of variable rate loans at March 31, 2010. In a declining rate environment, we may experience a reduction in interest income on our loan portfolio and a corresponding decrease in funds available to be distributed to our shareholders. The reduction in interest income may result from downward adjustment of the indices upon which the interest rates on loans are based and from prepayments of loans with fixed interest rates, resulting in reinvestment of the proceeds in lower yielding assets.
At March 31, 2010, approximately 82% of the balance of our loans had fixed interest rates. Such loans tend to increase our interest rate risk. We monitor the rate sensitivity of assets acquired. Our methods for evaluating interest rate risk include an analysis of interest-rate sensitivity gap, which is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds interest rate-sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution is perfectly matched in each maturity category.
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At March 31, 2010, $5.3 billion, or 29% of our assets, had variable interest rates and could be expected to reprice with changes in interest rates. At March 31, 2010, our liabilities were $69.8 million, or less than 1% of our assets, while stockholders equity was $18.2 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.
All of our derivatives are accounted for as economic hedges and none are treated as accounting hedges. In addition, all our derivatives (currently consisting of interest rate swaps) are recorded at fair value in the balance sheet. When we have more than one transaction with a counterparty and there is a legally enforceable master netting agreement between the parties, the net of the gain and loss positions are recorded as an asset or a liability in our consolidated balance sheet. Realized and unrealized gains and losses are recorded as a net gain or loss on interest rate swaps in our consolidated statement of income.
In 2001, the Bank contributed receive-fixed interest rate swaps with a notional amount of $4.25 billion and a fair value of $673.0 million to us in exchange for common stock. The unaffiliated counterparty to the receive-fixed interest rate swaps provided cash collateral to us. We pay interest to the counterparty on the collateral at a short-term interest rate. Shortly after the contribution of the receive-fixed interest rate swaps, we entered into pay-fixed interest rate swaps with a notional amount of $4.25 billion that serve as an economic hedge of the contributed swaps. All interest rate swaps are transacted with the same unaffiliated third party.
At March 31, 2010, our position in interest rate swaps was an asset of $638.8 million, a liability of $463.0 million, and a cash collateral payable of $175.8 million which is recorded as a net amount on our consolidated balance sheet at fair value.
At March 31, 2010, our receive-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 2.22 years, weighted average receive rate of 7.45% and weighted average pay rate of 0.26%. Our pay-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 2.22 years, weighted average receive rate of 0.26% and weighted average pay rate of 5.72% at March 31, 2010. Since the swaps have a weighted average maturity of 2.22 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- or six-month LIBOR, and they are the pay or receive rates in effect at March 31, 2010.
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 $2.2 million or $4.4 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 $2.1 million or $4.2 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.
Liquidity and Capital Resources
The objective of effective liquidity management is to ensure that we can meet customer loan requests and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, Wells Fargos Corporate Asset/Liability Management Committee establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets.
Wachovia Fundings primary liquidity needs are to pay operating expenses, fund our lending commitments, purchase loans as the underlying loans mature or repay, and pay dividends. Operating expenses and dividends are expected to be funded through cash generated by operations, while funding commitments and the acquisition of additional participation interests in loans are intended to be funded with the proceeds obtained from repayment of principal balances by individual borrowers. We do not have and do not anticipate having any material capital expenditures in the foreseeable future.
To the extent that Wachovia Fundings board of directors determines that additional funding is required, we may raise funds through additional equity offerings, debt financings, retention of cash flow or a combination of these methods. However, any cash flow retention must be consistent with the provisions of the Investment Company Act and the Code which requires the distribution by a REIT of at least 90% of its REIT taxable income, excluding capital gains, and must take into account taxes that would be imposed on undistributed income. In addition, any necessary liquidity could be obtained by drawing on lines of
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credit with the Bank. Wachovia Funding has a $1.0 billion line of credit with the Bank, and our subsidiaries Wachovia Real Estate Investment Corp. (WREIC) and WPR have lines of credit with the Bank of $1.0 billion and $200.0 million, respectively. Each of those lines is under a revolving demand note at a rate equal to the federal funds rate. During first quarter 2010, we made no draws under our lines of credit with the Bank; therefore, there were no outstandings on the lines of credit with the Bank at the end of first quarter 2010.
At March 31, 2010, our liabilities principally consist of deferred income tax liabilities. Our certificate of incorporation does not contain any limitation on the amount or percentage of debt, funded or otherwise, we may incur, except the incurrence of debt for borrowed money or our guarantee of debt for borrowed money in excess of amounts borrowed or guaranteed. However, as part of issuing our Series A preferred securities, we have a covenant in which we agree not to incur indebtedness over 20% of our stockholders equity unless approved by two-thirds of the Series A preferred securities, voting as a separate class.
Transactions with Affiliated 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 a portion of our residential mortgage products. We pay the Bank a percentage per annum fee for this service on commercial loans and a percentage per annum fee on home equity loan products. For servicing fees related to residential mortgage products the monthly fee is equal to the outstanding principal of each loan multiplied by a percentage per annum or a flat fee per month. Additionally, we are subject to the Banks management fee policy and are assessed monthly management fees based on our relative percentage of Wells Fargos total FTEs, total average assets and total revenue. We also have a swap servicing and fee arrangement with the Bank, whereby the Bank provides 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 as discussed in Results of Operations.
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.
In first quarter 2010, we paid the Bank $344.8 million in cash for consumer loans, which reflected fair value purchase prices. In conjunction with these purchases, we did not borrow under our existing line of credit with the Bank and incurred no interest expense owed to the Bank in first quarter 2010. The interest if incurred under this line of credit is at a rate equal to the federal funds rate. Our borrowings on our line of credit with the Bank were zero at March 31, 2010. The Notes to Financial Statements has information about the accounting treatment of these loan purchases.
The Bank acts as our collateral custodian in connection with 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.
Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles (GAAP), and they conform to general practices of the financial services industry. 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.
Management has reviewed and approved this critical accounting policy and has discussed this policy with the Audit Committee of Wachovia Fundings board of directors. This policy is described in the Critical Accounting Policies section in our 2009 Form 10-K.
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This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as anticipates, intends, plans, seeks, believes, estimates, expects, projects, outlook, forecast, will, may, could, should, can and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make about: future results of Wachovia Funding; expectations for consumer and commercial credit losses, life-of-loan losses, and the sufficiency of our credit loss allowance to cover future credit losses; the expected outcome and impact of legal, regulatory and legislative developments; and Wachovia Fundings plans, objectives and strategies.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
| the effect of political and economic conditions and geopolitical events; |
| economic conditions that affect the general economy, housing prices, the job market, consumer confidence and spending habits; |
| the level and volatility of the capital markets, interest rates, currency values and other market indices that affect the value of our assets and liabilities; |
| the availability and cost of both credit and capital as well as the credit ratings assigned to our debt instruments; |
| investor sentiment and confidence in the financial markets; |
| our reputation; |
| the impact of current, pending and future legislation, regulation and legal actions; |
| changes in accounting standards, rules and interpretations; |
| mergers and acquisitions, and our ability to integrate them; |
| various monetary and fiscal policies and regulations of the U.S. and foreign governments; and |
| the other factors described in Risk Factors below. |
Any forward-looking statement made by us in this Report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
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An investment in Wachovia Funding involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. We discuss risk factors that could adversely affect our financial results and condition and the value of, and return on, an investment in Wachovia Funding in Part I, Item 1A of our 2009 Form 10-K.
The following risk factor supplements and restates the risk factor captioned Legislative and regulatory proposals may restrict or limit our ability to engage in our current businesses or in businesses that we desire to enter into set forth on page 15 of our 2009 Form 10-K and should be read in conjunction with the other risk factors in our 2009 Form 10-K and in this Report.
Legislative and regulatory proposals may restrict or limit our ability to engage in our current businesses or in businesses that we desire to enter into and may have a material adverse effect on our business operations, income, and/or competitive position.
Many legislative and regulatory proposals directed at the financial services industry are being proposed or are pending in the U.S. Congress to address perceived weaknesses in the financial system and regulatory oversight thereof that may have contributed to the financial disruption over the last two years and to provide additional protection for consumers and investors. These proposals or others affecting taxation may limit our revenues in businesses, impose fees or taxes on us, and/or intensify the regulatory supervision of us and the financial services industry. These proposals, if adopted, may have a material adverse effect on our business operations, income, and/or competitive position.
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Disclosure Controls and Procedures
As required by SEC rules, Wachovia Fundings management evaluated the effectiveness, as of March 31, 2010, of disclosure controls and procedures. Wachovia Fundings chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the chief executive officer and chief financial officer concluded that Wachovia Fundings disclosure controls and procedures were effective as of March 31, 2010.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, Wachovia Fundings principal executive and principal financial officers and effected by Wachovia Fundings board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:
| pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of Wachovia Funding; |
| provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of Wachovia Funding are being made only in accordance with authorizations of management and directors of Wachovia Funding; and |
| provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Wachovia Fundings assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during first quarter in 2010 that has materially affected, or is reasonably likely to materially affect, Wachovia Fundings internal control over financial reporting.
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WACHOVIA PREFERRED FUNDING CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Quarter ended March 31, | |||||
(in thousands, except per share amounts) |
2010 | 2009 | |||
Interest income |
$ | 272,428 | 278,107 | ||
Interest expense |
| 164 | |||
Net interest income |
272,428 | 277,943 | |||
Provision for credit losses |
124,139 | 13,884 | |||
Net interest income after provision for credit losses |
148,289 | 264,059 | |||
Noninterest income |
|||||
Gain on interest rate swaps |
1,148 | 1,349 | |||
Other income |
197 | 180 | |||
Total noninterest income |
1,345 | 1,529 | |||
Noninterest expense |
|||||
Loan servicing costs |
15,625 | 17,411 | |||
Management fees |
1,100 | 3,102 | |||
Other |
1,005 | 442 | |||
Total noninterest expense |
17,730 | 20,955 | |||
Income before income tax expense |
131,904 | 244,633 | |||
Income tax expense |
437 | 1,136 | |||
Net income |
131,467 | 243,497 | |||
Dividends on preferred stock |
45,263 | 45,942 | |||
Net income available to common stockholders |
$ | 86,204 | 197,555 | ||
Per share information |
|||||
Basic earnings |
$ | 0.86 | 1.98 | ||
Diluted earnings |
$ | 0.86 | 1.98 | ||
Average shares |
|||||
Basic |
99,999.9 | 99,999.9 | |||
Diluted |
99,999.9 | 99,999.9 |
The accompanying notes are an integral part of these statements.
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WACHOVIA PREFERRED FUNDING CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except shares) | March 31, 2010 |
Dec. 31, 2009 |
|||||
Assets | |||||||
Cash and cash equivalents |
$ | 2,513,505 | 2,092,523 | ||||
Loans, net of unearned income |
15,920,695 | 16,401,604 | |||||
Allowance for loan losses |
(381,773 | ) | (337,431 | ) | |||
Net loans |
15,538,922 | 16,064,173 | |||||
Interest rate swaps |
1,091 | 976 | |||||
Accounts receivableaffiliates, net |
162,631 | 166,388 | |||||
Other assets |
83,162 | 86,068 | |||||
Total assets |
$ | 18,299,311 | 18,410,128 | ||||
Liabilities | |||||||
Line of credit with affiliate |
$ | - | - | ||||
Deferred income tax liabilities |
45,879 | 49,971 | |||||
Other liabilities |
23,905 | 24,834 | |||||
Total liabilities |
69,784 | 74,805 | |||||
Stockholders Equity |
|||||||
Preferred stock |
|||||||
Series A preferred securities, $0.01 par value per share, $750 million |
300 | 300 | |||||
Series B preferred securities, $0.01 par value per share, $1.0 billion |
400 | 400 | |||||
Series C preferred securities, $0.01 par value per share, $4.2 billion |
43 | 43 | |||||
Series D preferred securities, $0.01 par value per share, $913,000 |
- | - | |||||
Common stock, $0.01 par value, 100,000,000 shares authorized, 99,999,900 |
1,000 | 1,000 | |||||
Additional paid-in capital |
18,526,608 | 18,526,608 | |||||
Retained earnings (deficit) |
(298,824 | ) | (193,028 | ) | |||
Total stockholders equity |
18,229,527 | 18,335,323 | |||||
Total liabilities and stockholders equity |
$ | 18,299,311 | 18,410,128 |
The accompanying notes are an integral part of these statements.
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WACHOVIA PREFERRED FUNDING CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
(In thousands, except per share data) | Preferred stock |
Common stock |
Additional paid-in capital |
Retained earnings (deficit) |
Total stockholders equity |
|||||||||
Balance, December 31, 2008 |
$ | 743 | 1,000 | 18,584,285 | - | 18,586,028 | ||||||||
Net income |
- | - | - | 243,497 | 243,497 | |||||||||
Cash dividends |
||||||||||||||
Series A preferred securities at $0.45 per share |
- | - | - | (13,594 | ) | (13,594 | ) | |||||||
Series B preferred securities at $0.20 per share |
- | - | - | (8,163 | ) | (8,163 | ) | |||||||
Series C preferred securities at $5.71 per share |
- | - | - | (24,185 | ) | (24,185 | ) | |||||||
Common stock at $1.70 per share |
- | - | - | (170,000 | ) | (170,000 | ) | |||||||
Changes incident to business combinations |
- | - | (52,319 | ) | - | (52,319 | ) | |||||||
Balance, March 31, 2009 |
$ | 743 | 1,000 | 18,531,966 | 27,555 | 18,561,264 | ||||||||
Balance December 31, 2009 |
$ | 743 | 1,000 | 18,526,608 | (193,028 | ) | 18,335,323 | |||||||
Net income |
- | - | - | 131,467 | 131,467 | |||||||||
Cash dividends |
||||||||||||||
Series A preferred securities at $ 0.45 per share |
- | - | - | (13,594 | ) | (13,594 | ) | |||||||
Series B preferred securities at $ 0.13 per share |
- | - | - | (5,201 | ) | (5,201 | ) | |||||||
Series C preferred securities at $ 6.25 per share |
- | - | - | (26,468 | ) | (26,468 | ) | |||||||
Common stock at $ 1.92 per share |
- | - | - | (192,000 | ) | (192,000 | ) | |||||||
Balance, March 31, 2010 |
$ | 743 | 1,000 | 18,526,608 | (298,824 | ) | 18,229,527 |
The accompanying notes are an integral part of these statements.
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WACHOVIA PREFERRED FUNDING CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Quarter ended March 31, | |||||||
(in thousands) | 2010 | 2009 | |||||
Cash flows from operating activities: |
|||||||
Net income |
$ | 131,467 | 243,497 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities |
|||||||
Accretion of discount on loans |
(35,734 | ) | (17,598 | ) | |||
Provision for loan losses |
124,139 | 13,884 | |||||
Deferred income tax benefits |
(4,092 | ) | (3,306 | ) | |||
Interest rate swaps |
(1,206 | ) | (1,460 | ) | |||
Accounts receivable/payableaffiliates, net |
(4,912 | ) | 6,034 | ||||
Other assets and other liabilities, net |
1,977 | 2,130 | |||||
Net cash provided by operating activities |
211,639 | 243,181 | |||||
Cash flows from investing activities: |
|||||||
Increase (decrease) in cash realized from |
|||||||
Loans, net |
445,515 | (352,821 | ) | ||||
Net cash provided (used) by investing activities |
445,515 | (352,821 | ) | ||||
Cash flows from financing activities: |
|||||||
Increase (decrease) in cash realized from |
|||||||
Line of credit with affiliate |
- | 280,000 | |||||
Collateral held on interest rate swaps |
1,091 | 1,230 | |||||
Cash dividends paid |
(237,263 | ) | (215,942 | ) | |||
Net cash provided (used) by financing activities |
(236,172 | ) | 65,288 | ||||
Net change in cash and cash equivalents |
420,982 | (44,352 | ) | ||||
Cash and cash equivalents at beginning of period |
2,092,523 | 1,358,129 | |||||
Cash and cash equivalents at end of period |
$ | 2,513,505 | 1,313,777 | ||||
Supplemental cash flow disclosures: |
|||||||
Cash paid for interest |
$ | 58 | 275 | ||||
Cash paid for income taxes |
4,000 | 4,000 | |||||
Change in noncash items: |
|||||||
Loan payments, net, settled through affiliate |
8,669 | (102,472 | ) | ||||
Transfers from loans to foreclosed assets |
2,760 | 664 |
The accompanying notes are an integral part of these statements.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Wachovia Preferred Funding Corp. and its subsidiaries (Wachovia Funding) are a direct subsidiary of Wachovia Preferred Funding Holding Corp. (Wachovia Preferred Holding) and an indirect subsidiary of both Wells Fargo & Company (Wells Fargo) and Wells Fargo Bank, National Association (the Bank). Wells Fargo acquired Wachovia Corporation effective December 31, 2008. On March 20, 2010, Wachovia Bank, National Association, a wholly-owned subsidiary of Wells Fargo, merged with and into the Bank, with the Bank as the surviving entity. Wachovia Funding is a real estate investment trust (REIT) for income tax purposes.
The accounting and reporting policies of Wachovia Funding are in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of the financial statements in accordance with GAAP requires management to make estimates based on assumptions about future economic and market conditions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period and the related disclosures. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that in 2010 actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made significant estimates related to the allowance for credit losses (Note 2) and valuing financial instruments (Note 4). Actual results could differ from those estimates. Among other effects, such changes could result in increases to the allowance for loan losses.
The information furnished in these unaudited interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10- Q. The results of operations in the interim statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Form 10-K for the year ended December 31, 2009 (2009 Form 10-K). Certain amounts in the financial statements for prior years have been revised to conform with current financial statement presentation.
ACCOUNTING DEVELOPMENTS
In first quarter 2010, we adopted the following accounting updates to the Financial Accounting Standards Board (FASB) Accounting Standards Codification:
| Accounting Standards Update (ASU or Update) 2010-6, Improving Disclosures about Fair Value Measurements; |
| ASU 2009-16, Accounting for Transfers of Financial Assets (FAS 166, Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140); |
| ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (FAS 167, Amendments to FASB Interpretation No. 46(R)); and |
| ASU 2010-10, Amendments for Certain Investment Funds. |
Information about these accounting updates is further described in more detail below.
ASU 2010-6 amends the disclosure requirements for fair value measurements. Companies are now required to disclose significant transfers in and out of Levels 1 and 2 of the fair value hierarchy, whereas the previous rules only required the disclosure of transfers in and out of Level 3. Additionally, in the rollforward of Level 3 activity, companies must present information on purchases, sales, issuances, and settlements on a gross basis rather than on a net basis. The Update also clarifies that fair value measurement disclosures should be presented for each class of assets and liabilities. A class is typically a subset of a line item in the statement of financial position. Companies should also provide information about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring instruments classified as either Level 2 or Level 3. We adopted this guidance in first quarter 2010 with prospective application, except for the new requirement related to the Level 3 rollforward. Gross presentation in the Level 3 rollforward is effective for us in first quarter 2011 with prospective application. Our adoption of the Update did not affect our consolidated financial results since it amends only the disclosure requirements for fair value measurements.
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ASU 2009-16 (FAS 166) modifies certain guidance contained in ASC 860, Transfers and Servicing. This pronouncement eliminates the concept of qualifying special purpose entities (QSPEs) and provides additional criteria transferors must use to evaluate transfers of financial assets. The Update also requires that any assets or liabilities retained from a transfer accounted for as a sale must be initially recognized at fair value. We adopted this guidance in first quarter 2010 with prospective application for transfers that occurred on and after January 1, 2010. Our adoption of this standard did not have an impact on our financial statements.
ASU 2009-17 (FAS 167) amends several key consolidation provisions related to variable interest entities (VIEs), which are included in ASC 810, Consolidation. The scope of the new guidance includes entities that were previously designated as QSPEs. The Update also changes the approach companies must use to identify VIEs for which they are deemed to be the primary beneficiary and are required to consolidate. Under the new guidance, a VIEs primary beneficiary is the entity that has the power to direct the VIEs significant activities, and has an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The Update also requires companies to continually reassess whether they are the primary beneficiary of a VIE, whereas the previous rules only required reconsideration upon the occurrence of certain triggering events. Our adoption of FAS 167 did not have an impact on our financial statements.
ASU 2010-10 amends consolidation accounting guidance to defer indefinitely the application of ASU 2009-17 to certain investment funds. The amendment was effective for us in first quarter 2010. Our adoption of this standard did not have an impact on our financial statements.
SUBSEQUENT EVENTS
We have evaluated the effects of subsequent events that have occurred subsequent to period end March 31, 2010. During this period there have been no material events that would require recognition in our first quarter 2010 consolidated financial statements or disclosure in the Notes to Financial Statements.
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NOTE 2: LOANS AND ALLOWANCE FOR CREDIT LOSSES
From time to time Wachovia Funding acquires loans from the Bank at fair value. While these transfers represent legal sales by the Bank, they are not treated as sales under GAAP because of the Banks indirect ownership interest in Wachovia Funding. Accordingly, Wachovia Fundings assets represent non-recourse receivables from the Bank which are fully collateralized by the underlying loans. Wachovia Funding obtains from the Bank participation interests in loans originated or purchased by the Bank. By the nature of Wachovia Fundings status as a REIT, the composition of the loans underlying the participation interests are highly concentrated in real estate. Underlying loans are concentrated primarily in Florida, Pennsylvania, New Jersey, North Carolina, Virginia and Georgia. These markets include approximately 70% of Wachovia Fundings total loan balance at both March 31, 2010 and December 31, 2009.
The following table reflects the major categories of the loan portfolio at March 31, 2010 and December 31, 2009.
(in thousands) | March 31, 2010 |
December 31, 2009 | |||
Commercial and commercial real estate: |
|||||
Commercial |
$ | 225,331 | 287,578 | ||
Real estate mortgage |
1,550,426 | 1,617,576 | |||
Real estate construction |
82,323 | 86,579 | |||
Total commercial and commercial real estate |
1,858,080 | 1,991,733 | |||
Consumer: |
|||||
Real estate 1-4 family first mortgage |
9,088,773 | 9,133,283 | |||
Real estate 1-4 family junior lien mortgage |
4,973,842 | 5,276,588 | |||
Total consumer |
14,062,615 | 14,409,871 | |||
Total loans |
$ | 15,920,695 | 16,401,604 |
At March 31, 2010 and December 31, 2009, nonaccrual loans amounted to $251.2 million and $207.5 million, respectively; troubled debt restructurings (TDRs) were $132.8 million at March 31, 2010, and $116.0 million at December 31, 2009. At March 31, 2010 and December 31, 2009, nonaccruing TDRs were $14.5 million and $9.8 million, respectively. Impairment measurement for TDRs is based on the discounted cash flow method. Loans past due 90 days or more as to interest or principal and still accruing interest were $53.9 million at March 31, 2010, and $50.5 million at December 31, 2009.
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The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded credit commitments. Changes in the allowance for credit losses were:
Quarter ended March 31, | |||||||
(in thousands) | 2010 | 2009 | |||||
Balance, beginning of period |
$ | 337,871 | 269,913 | ||||
Provision for credit losses |
124,139 | 13,884 | |||||
Loan charge-offs: |
|||||||
Commercial and commercial real estate: |
|||||||
Commercial |
- | (2 | ) | ||||
Real estate mortgage |
- | - | |||||
Real estate construction |
- | - | |||||
Total commercial and commercial real estate |
- | (2 | ) | ||||
Consumer: |
|||||||
Real estate 1-4 family first mortgage |
(28,259 | ) | (9,145 | ) | |||
Real estate 1-4 family junior lien mortgage |
(52,987 | ) | (4,008 | ) | |||
Total consumer |
(81,246 | ) | (13,153 | ) | |||
Total loan charge-offs |
(81,246 | ) | (13,155 | ) | |||
Loan recoveries: |
|||||||
Commercial and commercial real estate: |
|||||||
Commercial |
157 | - | |||||
Real estate mortgage |
- | - | |||||
Real estate construction |
- | - | |||||
Total commercial and commercial real estate |
157 | - | |||||
Consumer: |
|||||||
Real estate 1-4 family first mortgage |
316 | 535 | |||||
Real estate 1-4 family junior lien mortgage |
1,068 | 709 | |||||
Total consumer |
1,384 | 1,244 | |||||
Total loan recoveries |
1,541 | 1,244 | |||||
Net loan charge-offs |
(79,705 | ) | (11,911 | ) | |||
Allowances related to business combinations/other |
- | 165 | |||||
Balance, end of period |
$ | 382,305 | 272,051 | ||||
Components: |
|||||||
Allowance for loan losses |
$ | 381,773 | 271,339 | ||||
Reserve for unfunded credit commitments |
532 | 712 | |||||
Allowance for credit losses |
$ | 382,305 | 272,051 | ||||
Net loan charge-offs (annualized) as a percentage of average total loans |
2.03 | % | 0.27 | ||||
Allowance for loan losses as a percentage of total loans |
2.40 | 1.53 | |||||
Allowance for credit losses as a percentage of total loans |
2.40 | 1.54 |
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We use derivative financial instruments as economic hedges and none are treated as accounting hedges. By using derivatives, we are exposed to credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is equal to the amount reported as a derivative asset in our balance sheet. The amounts reported as a derivative asset are derivative contracts in a gain position, and to the extent subject to master netting arrangements, net of derivatives in a loss position with the same counterparty and cash collateral received. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. Derivative 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.
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:
March 31, 2010 | December 31, 2009 | |||||||||||||||||||
Notional or Contractual Amount |
Fair Value | Notional or Contractual Amount |
Fair Value | |||||||||||||||||
(in thousands) | Asset Derivatives |
Liability Derivatives |
Asset Derivatives |
Liability Derivatives |
||||||||||||||||
Interest rate swaps |
$ | 8,200,000 | 638,760 | 462,967 | 8,200,000 | 578,790 | 404,203 | |||||||||||||
Netting (1) |
(637,669 | ) | (462,967 | ) | (577,814 | ) | (404,203 | ) | ||||||||||||
Total |
$ | 1,091 | - | 976 | - |
(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 statement of income related to derivatives not designated as hedging instruments for the first three months of 2010 were $1.1 million.
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NOTE 4: FAIR VALUES OF ASSETS AND LIABILITIES
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 1Valuation is based upon quoted prices for identical instruments traded in active markets. |
| Level 2Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
| Level 3Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. |
In the determination of the classification of financial instruments in Level 2 or Level 3 of the fair value hierarchy, we consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. For securities in inactive markets, we use a predetermined percentage to evaluate the impact of fair value adjustments derived from weighting both external and internal indications of value to determine if the instrument is classified as Level 2 or Level 3. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the significance of the Level 3 inputs to the instruments fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.
DETERMINATION OF FAIR VALUE
In determining fair value, Wachovia Funding uses market prices of the same or similar instruments whenever such prices are available. A fair value measurement assumes that an asset or liability is exchanged in an orderly transaction between market participants, and accordingly, fair value is not determined based upon a forced liquidation or distressed sale. Where necessary, Wachovia Funding estimates fair value using other market observable data such as prices for synthetic or derivative instruments, market indices, 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 Fundings derivatives are executed over the counter (OTC). As no quoted market prices exist for such instruments, OTC derivatives are valued using internal valuation techniques. Valuation techniques and inputs to internally-developed models depend on the type of derivative and the nature of the underlying rate, price or index upon which the derivatives value is based. Key inputs can include yield curves, credit curves, foreign-exchange rates, prepayment rates, volatility measurements and correlation of such inputs. Where model inputs can be observed in a liquid market and the model selection
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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 Fundings assets and liabilities that are measured at fair value on a recurring basis at March 31, 2010 and December 31, 2009, for each of the fair value hierarchy levels.
(in thousands) | Level 1 | Level 2 | Level 3 | Netting (1) | Total | |||||||
Balance at December 31, 2009 |
||||||||||||
Assets |
||||||||||||
Interest rate swaps |
$ | - | 578,790 | - | (577,814 | ) | 976 | |||||
Total assets at fair value |
$ | - | 578,790 | - | (577,814 | ) | 976 | |||||
Liabilities |
||||||||||||
Interest rate swaps |
$ | - | 404,203 | - | (404,203 | ) | - | |||||
Total liabilities at fair value |
$ | - | 404,203 | - | (404,203 | ) | - | |||||
Balance at March 31, 2010 |
||||||||||||
Assets |
||||||||||||
Interest rate swaps |
$ | - | 638,760 | - | (637,669 | ) | 1,091 | |||||
Total assets at fair value |
$ | - | 638,760 | - | (637,669 | ) | 1,091 | |||||
Liabilities |
||||||||||||
Interest rate swaps |
$ | - | 462,967 | - | (462,967 | ) | - | |||||
Total liabilities at fair value |
$ | - | 462,967 | - | (462,967 | ) | - |
(1) | Derivatives are reported net of cash collateral received and paid. Additionally, positions with the same counterparty are netted as a part of a legally enforceable master netting agreement between Wachovia Funding and the derivative counterparty 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 March 31, 2010, 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.
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CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about the fair value of on-balance sheet financial instruments at March 31, 2010 and December 31, 2009, is presented below.
March 31, 2010 | December 31, 2009 | ||||||||||
(in thousands) | Carrying amount |
Estimated fair value |
Carrying amount |
Estimated fair value | |||||||
Financial assets |
|||||||||||
Cash and cash equivalents |
$ | 2,513,505 | 2,513,505 | 2,092,523 | 2,092,523 | ||||||
Loans, net of unearned income and allowance for loan losses |
15,538,922 | 16,534,900 | 16,064,173 | 16,183,305 | |||||||
Interest rate swaps (1) |
1,091 | 1,091 | 976 | 976 | |||||||
Accounts receivable - affiliates, net |
162,631 | 162,631 | 166,388 | 166,388 | |||||||
Other financial assets |
79,860 | 79,860 | 82,621 | 82,621 | |||||||
Financial liabilities |
|||||||||||
Line of credit with affiliate |
$ | - | - | - | - | ||||||
Other financial liabilities |
19,354 | 19,354 | 19,259 | 19,259 |
(1) | Interest rate swaps are reported net of cash collateral received of $174.7 million and $173.6 million at March 31, 2010 and December 31, 2009, respectively, pursuant to the accounting requirements for net presentation as prescribed in FASB ASC 815. See Note 3 for additional information on derivatives. |
We have not included assets and liabilities that are not financial instruments in our disclosure, such as certain other assets, deferred income tax liabilities and certain other liabilities. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of Wachovia Funding.
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.
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 consumer loans, 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 Fundings interest rate swaps are recorded at fair value. The fair value of interest rate swaps is estimated using discounted cash flow analyses based on observable market data. 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.
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Wachovia Funding is not currently involved in nor, to our knowledge, currently threatened with any material litigation. From time to time we may become involved in routine litigation arising in the ordinary course of business. We do not believe that the eventual outcome of any such routine litigation will, in the aggregate, have a material adverse effect on our consolidated financial 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, could be material to our results of operations for any particular period.
Information in response to this item can be found under the Risk Factors section in this Report which information is incorporated by reference into this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information required by this Item 2 pursuant to Item 703 of Regulation S-K regarding issuer repurchases of equity securities is not applicable since we do not have a program providing for the repurchase of our securities.
Exhibit No. |
||
(12)(a) | Computation of Consolidated Ratios of Earnings to Fixed Charges. | |
(12)(b) | Computation of Consolidated Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. | |
(31)(a) | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
(31)(b) | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
(32)(a) | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
(32)(b) | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
(99) | Wells Fargo & Company Supplementary Consolidating Financial Information. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 12, 2010 | WACHOVIA PREFERRED FUNDING CORP. | |
By: /s/ RICHARD D. LEVY | ||
Richard D. Levy Executive Vice President and Controller (Principal Accounting Officer) |
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