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, 2011
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)
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Delaware |
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56-1986430 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
90 South 7th Street, 13th Floor
Minneapolis, Minnesota 55402
(Address of principal executive offices)
(Zip Code)
(855) 825-1437
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
¨ 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.
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Large accelerated filer ¨ |
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Accelerated filer ¨ |
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Non-accelerated filer x |
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Smaller reporting company ¨ |
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(Do not check if a smaller |
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reporting company.) |
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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 2011, there were 99,999,900 shares of the
registrants common stock outstanding.
FORM 10-Q
CROSS-REFERENCE INDEX
1
PART I FINANCIAL INFORMATION
Table 1: Summary Financial Data
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Quarter ended |
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%
Change March 31, 2011 from |
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(in thousands, except per share data) |
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Mar. 31,
2011 |
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Dec. 31,
2010 |
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Mar. 31, 2010 |
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Dec. 31, 2010 |
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Mar. 31, 2010 |
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For the period |
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Net income |
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$ |
210,867 |
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266,596 |
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131,467 |
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(21 |
)% |
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60 |
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Net income available to common stockholders |
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164,921 |
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220,779 |
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86,204 |
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(25 |
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91 |
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Diluted earnings per common share |
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1.65 |
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2.21 |
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0.86 |
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(25 |
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92 |
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Profitability ratios (annualized) |
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Return on average assets |
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5.19 |
% |
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5.78 |
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2.88 |
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(10 |
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80 |
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Return on average stockholders equity |
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5.26 |
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5.78 |
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2.89 |
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(9 |
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82 |
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Average stockholders equity to assets |
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98.71 |
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99.99 |
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99.50 |
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- |
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- |
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Dividend payout ratio (1) |
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128.02 |
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110.21 |
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180.47 |
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16 |
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(29 |
) |
Total revenue |
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$ |
280,800 |
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323,179 |
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273,518 |
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(13 |
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3 |
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Average loans |
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14,850,696 |
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15,746,796 |
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15,961,755 |
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(6 |
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(7 |
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Average assets |
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16,482,360 |
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18,301,606 |
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18,529,791 |
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(10 |
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(11 |
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Net interest margin |
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6.92 |
% |
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7.02 |
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5.97 |
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(1 |
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16 |
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Net loan charge-offs |
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$ |
65,322 |
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61,646 |
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79,705 |
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6 |
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(18 |
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As a percentage of average total loans (annualized) |
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1.78 |
% |
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1.55 |
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2.03 |
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15 |
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(12 |
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At period end |
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Loans, net of unearned |
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$ |
14,286,152 |
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15,506,564 |
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15,920,695 |
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(8 |
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(10 |
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Allowance for loan losses |
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389,310 |
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402,960 |
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381,773 |
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(3 |
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2 |
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As a percentage of total loans |
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2.73 |
% |
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2.60 |
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2.40 |
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5 |
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14 |
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Assets |
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$ |
15,656,496 |
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18,178,117 |
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18,299,311 |
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(14 |
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(14 |
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Total stockholders equity |
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15,562,794 |
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18,121,873 |
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18,229,527 |
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(14 |
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(15 |
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Total nonaccrual loans and other nonperforming assets |
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363,226 |
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372,717 |
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254,013 |
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(3 |
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43 |
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As a percentage of total loans |
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2.54 |
% |
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2.40 |
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1.60 |
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6 |
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59 |
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Loans 90 days or more past due and still accruing (2) |
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$ |
27,182 |
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40,384 |
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53,944 |
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(33 |
)% |
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(50 |
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(1) |
Excludes $2.5 billion common stock special capital distribution from additional paid-in capital declared and paid first quarter 2011. |
(2) |
The carrying value of PCI loans contractually 90 days or more past due is excluded. These PCI loans are considered to be accruing due to the existence of the accretable
yield and not based on consideration given to contractual interest payments. |
2
This Report on Form 10-Q for the quarter ended March 31, 2011, including the Financial
Statements and related Notes, has forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly
rely on forward-looking statements. Actual results might differ materially from our forecasts and expectations due to several factors, some of which are discussed in the Forward-Looking Statements section in this Report. Some of these
factors are also described in the Financial Statements and related Notes. For a discussion of other important factors, refer to the Risk Factors section in this Report and to the Risk Factors section in our Annual Report on
Form 10-K for the year ended December 31, 2010 (2010 Form 10-K), filed with the Securities and Exchange Commission (SEC) and available on the SECs website at www.sec.gov and on Wells Fargos website,
www.wellsfargo.com.
Wachovia Funding, we, our and us refer to Wachovia
Preferred Funding Corp. Wachovia Preferred Holding refers to Wachovia Preferred Funding Holding Corp., the Bank refers to Wells Fargo Bank, National Association including predecessor entities, Wachovia refers to
Wachovia Corporation, a North Carolina corporation, and Wells Fargo refers to Wells Fargo & Company.
Financial
Review
Overview
Wachovia Funding is engaged in acquiring, holding and managing domestic real estate-related assets, and
other authorized investments that generate net income for distribution to our shareholders. We are classified as a real estate investment trust (REIT) for income tax purposes. As of March 31, 2011, we had $15.7 billion in assets, which included
$14.3 billion in loans. One of our subsidiaries, Wachovia Real Estate Investment Corp. (WREIC), has operated as a REIT since its formation in 1996. Our other subsidiary, Wachovia Preferred Realty, LLC (WPR), provides us with additional flexibility
to hold assets that earn non-qualifying REIT income while we maintain our REIT status. Under the REIT Modernization Act, which became effective on January 1, 2001, a REIT is permitted to own taxable REIT subsidiaries which are
subject to taxation similar to corporations that do not qualify as REITs or for other special tax rules.
We are a direct
subsidiary of Wachovia Preferred Holding and an indirect subsidiary of Wells Fargo and the Bank. At March 31, 2011, the Bank was considered well-capitalized under risk-based capital guidelines issued by banking regulators.
Although we have the authority to acquire interests in an unlimited number of mortgage and other assets from unaffiliated
third parties, as of March 31, 2011, substantially all of our interests in mortgage and other assets were acquired from the Bank or an affiliate pursuant to loan participation agreements between the Bank or its affiliate and us. The Bank
originated the mortgage assets, purchased them from other financial institutions or acquired them as part of the acquisition of other financial institutions. We may also acquire from time to time mortgage-backed securities and a limited amount of
additional non-mortgage related securities from the Bank and its affiliates, as well as mortgage assets or other assets from unaffiliated third parties. The loans in our portfolio are serviced by the Bank pursuant to the terms of participation and
servicing agreements between the Bank and us. The Bank has delegated servicing responsibility for certain of the residential mortgage loans to third parties, which are not affiliated with the Bank or us.
For the tax year ending December 31, 2011, we expect to be taxed as 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, 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:
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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. |
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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. |
We earned $210.9 million in first quarter 2011, or $1.65 diluted earnings per common share, compared with $131.5 million, or $0.86, in
first quarter 2010. The increase in first quarter 2011 net income from a year ago was largely due to lower provision for credit losses recorded in 2011 and an increase in net interest income. The provision for credit losses was $52.5 million for the
first quarter 2011, compared with $124.1 million for the same period of 2010. Net charge-offs were $65.3 million (1.78% of average total loans outstanding, annualized) for the first quarter of 2011 compared with $79.7 million (2.03%) in the
same period a year ago.
3
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Distributions made to holders of our preferred securities totaled $45.9 million in first quarter 2011, which
included $13.6 million in dividends paid on our Series A preferred securities held by non-affiliated investors. Dividends on preferred stock were $45.3 million in first quarter 2010, which included $13.6 million in dividends on our Series A
preferred securities. Distributions made to holders of our common stock totaled $2.7 billion in first quarter 2011, which
included $224.0 million in dividends and a $2.5 billion special capital distribution. The $2.5 billion special capital distribution reduced relatively high levels of cash on our balance sheet resulting from loan pay-downs, in order to maintain real
estate assets greater than 80% of total assets to continue to qualify for the exemption from registration under the Investment Company Act. Based on our current expectations of loan pay-downs and anticipated reinvestment in assets REITs are
permitted to own during 2011, management expects to request our board of directors to consider return of up to an additional $3.0 billion of capital to holders of our common stock in 2011.
Loans, which include loans and loan participation interests, totaled $14.3 billion at March 31, 2011, down from $15.5 billion at
December 31, 2010, primarily due to pay-downs, charge-offs and loan sales. Loans represented approximately 91% and 85% of assets at March 31, 2011 and December 31, 2010, respectively. Our consumer loans include real estate 1-4 family
first mortgages and real estate 1-4 family junior lien mortgages, and our commercial loans include commercial and industrial and commercial real estate (CRE) loans. Certain loans acquired by Wells Fargo in the Wachovia acquisition completed on December 31, 2008, including loans held by Wachovia Funding, had evidence of credit deterioration since origination and
it was probable that we would not collect all contractual principal and interest. Such purchased credit-impaired (PCI) loans were recorded at fair value with no carryover of the related allowance for loan losses. PCI loans were less than 1 percent
of total loans at March 31, 2011 and December 31, 2010. Nonaccrual loans at March 31, 2011 were $354.5
million, down from $366.8 million at December 31, 2010. The decrease in nonaccrual loans largely reflected a decrease in loans entering nonaccrual status as well as increasing levels of nonaccrual loan resolutions.
We believe it is important to maintain a well controlled operating environment and manage risks inherent in our business. We manage
our credit risk by setting what we believe are sound credit policies for acquired loans, while monitoring and reviewing the performance of our loan portfolio. We manage interest rate and market risks inherent in our asset and liability balances
within established ranges, while ensuring adequate liquidity and funding. In the quarter ended March 31, 2011, we did
not purchase any loans from the Bank. In first quarter 2010 Wachovia Funding purchased $344.8 million of consumer loans. |
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4
Earnings Performance
Net income available to common stockholders
We earned net income available to common stockholders of $164.9 million and $86.2 million in first quarter 2011 and 2010, respectively. The increase in year over year first quarter net income
was primarily attributable to lower provision for credit losses and higher net interest income.
Interest Income
Interest income of $280.3 million in first quarter 2011 increased $7.9 million, or 3%, compared with first quarter 2010, due to a higher average
yield on total interest-earning assets, partially offset by lower average interest-earning assets. The average yield on total interest-earning assets was 6.92% in first quarter 2011 compared with 5.97% in first quarter 2010. The overall increase in
the average yield on the combined consumer and commercial loan portfolio was primarily attributable to an increase in the accretion of discounts on purchased consumer loans. In first quarter 2011 and 2010, interest income included discount accretion
of $67.5 million and $35.7 million, respectively. The increase in discount accretion was primarily driven by (i) an
acceleration of accretion due to loan pay-downs or loan pay-offs attributable to loan refinancing activity and (ii) an increase in amount of accretable discount resulting from consumer loan
purchases during fiscal 2010.
Average consumer loans decreased $768.7 million to $13.3 billion compared with the
first quarter of 2010 while average commercial loans decreased $342.4 million to $1.5 billion in the same period due to pay-downs, charge-offs and loan sales. To the extent we reinvest loan pay-downs or make purchases, we anticipate that
we will primarily acquire consumer real-estate secured loans and other REIT-eligible assets. The $1.0 billion decrease in average interest-bearing deposits in banks and other interest-earning assets to $1.5 billion was primarily attributable to the
$2.5 billion special capital distribution in first quarter 2011. See the interest rate risk management section under Risk Management for more information on interest rates and interest income.
The average balances, interest income and rates related to interest-earning assets for the quarters ended March 31, 2011 and
2010, are presented in the following table.
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Table 2: Net Interest Income |
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Quarter ended March 31, |
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2011 |
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2010 |
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(in thousands) |
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Average balance |
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Interest income |
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Yields |
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Average balance |
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Interest income |
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Yields |
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Commercial loans (1) |
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$ |
1,530,766 |
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8,973 |
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2.38 |
% |
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$ |
1,873,171 |
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10,428 |
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2.26 |
% |
Real estate 1-4 family |
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13,319,930 |
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271,180 |
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8.23 |
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14,088,584 |
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261,685 |
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7.52 |
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Interest-bearing deposits in banks and other interest-earning assets |
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1,513,799 |
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189 |
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0.05 |
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2,524,684 |
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315 |
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0.05 |
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Total interest-earning assets |
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$ |
16,364,495 |
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280,342 |
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6.92 |
% |
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$ |
18,486,439 |
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272,428 |
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5.97 |
% |
(1) |
Includes taxable-equivalent adjustments. |
Interest Expense
We did not have any borrowings on our line of credit in first quarter 2011 or 2010.
Provision
for Credit Losses
The provision for credit losses was $52.5 million in first quarter 2011 compared with $124.1 million in first
quarter 2010. The first quarter 2011 decrease in the provision for credit losses resulted from lower net charge-offs and a credit allowance release, while first quarter 2010 included an allowance build. The decrease in charge-offs and allowance was
primarily driven by improvement in consumer delinquency levels as well as lower loan balances, partially offset by a higher level of troubled debt restructurings (TDRs). Please refer to the Balance Sheet Analysis and Risk
ManagementAllowance for Credit Losses sections in this Report for further information on the allowance for loan losses.
Noninterest Income
Noninterest income totaled $460 thousand in first quarter 2011 compared with $1.1 million in first quarter 2010. First quarter 2011 included a gain on loan sales to affiliate of $113 thousand, compared
with a $256 thousand loss in first quarter 2010. Noninterest income also includes gains 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 $110 thousand in first quarter 2011 compared with a gain of $1.1 million in first quarter 2010. The lower gain in first quarter 2011 primarily reflects a lower magnitude of interest rate decreases compared with first quarter
2010. Included in gain on interest rate swaps was expense associated with derivative cash collateral received of $41 thousand and $58 thousand in the first quarter of 2011 and 2010, respectively.
5
Noninterest Expense
Noninterest expense totaled $17.4 million in first quarter 2011 compared with $17.5 million in the same period a year ago. Noninterest expense primarily consists of loan servicing costs, and to a lesser
extent, management fees and other expenses.
Loan servicing costs decreased $2.6 million to $13.0 million in first
quarter 2011, which reflected a decrease in the commercial and consumer loan portfolios. These costs are driven by the size and mix of our loan portfolio. Home equity loan products generally cost more to service than other loan products. All loans
are serviced by the Bank pursuant to our participation and servicing agreements. 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 based on the total
committed amount of each loan multiplied by a percentage per annum.
Management fees were $1.2 million in first quarter 2011 compared with $1.1 million
in first quarter 2010. Management fees represent reimbursements for general overhead expenses paid on our behalf. 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.
Other expense primarily consists of costs associated with foreclosures on residential properties.
Income Tax Expense
Income tax expense,
which is based on the pre-tax income of WPR, our taxable REIT subsidiary, was $92 thousand in first quarter 2011 compared with $437 thousand in first quarter 2010. WPR holds our interest rate swaps as well as certain cash investments. The decrease
in income tax expense for 2011 was primarily related to the reduction in pre-tax income for WPR.
Balance
Sheet Analysis
Total Assets
Our assets primarily consist of commercial and consumer loans, although we have the authority to hold assets other than loans. Total assets were $15.7 billion at March 31, 2011, compared with $18.2
billion at December 31, 2010. The decrease in total assets was primarily attributable to a $1.1 billon decrease in cash and cash equivalents and a $1.2 billion decrease in loans, net of unearned income. The corresponding decrease was primarily
a $2.5 billion reduction in additional paid-in capital, reflecting the $2.5 billion special capital distribution paid to common shareholders in January 2011. Loans, net of unearned income were 91% of total assets at March 31, 2011, compared
with 85% at December 31, 2010.
Cash and Cash Equivalents
Cash and cash equivalents decreased $1.1 billion to $1.7 billion at March 31, 2011, compared with $2.8 billion at December 31, 2010. The decrease in first quarter 2011 was attributable to the
$2.5 billion special capital distribution paid to common shareholders, partially offset by loan pay-downs and pay-offs.
Loans
Loans, net of unearned income decreased $1.2 billion to $14.3 billion at March 31, 2011, compared with December 31, 2010,
primarily reflecting pay-downs, charge-offs and loan sales across the entire portfolio. In first quarter 2011 we did not purchase any loans. In first quarter 2010 we purchased consumer loans from the Bank at estimated fair value of $344.8 million.
At both March 31, 2011 and December 31, 2010, consumer loans represented 90% of loans and commercial loans represented the balance of our loan portfolio.
Allowance for Loan Losses
The allowance for loan losses decreased $13.7 million from December 31, 2010, to $389.3 million at March 31, 2011. The allowance decrease from the end of 2010 was primarily driven by continued
improvement in consumer delinquency levels as well as lower loan balances, partially offset by a higher level of loan modifications accounted for as TDRs.
At March 31, 2011, the allowance for loan losses included $366.7 million for consumer loans and $22.6 million for commercial loans. The total allowance reflects managements estimate of credit
losses inherent in the loan portfolio at the balance sheet date. The Risk ManagementAllowance for Credit Losses section in this Report describes how management estimates the allowance for loan losses and the allowance for
unfunded credit commitments.
Interest Rate Swaps
Interest rate swaps, net were $1.2 million at March 31, 2011, and $1.0 million at December 31, 2010, which represents the fair value of our net position in interest rate swaps.
Accounts Receivable/PayableAffiliates, Net
The accounts payable and receivable from affiliates result from intercompany transactions related to net loan pay-downs, interest receipts, and other transactions with the Bank.
6
Risk Management
We use Wells Fargos risk management framework to manage our credit, interest rate, market and
liquidity risks. The following discussion highlights this framework as it relates to how we manage each of these risks.
Credit Risk
Management
Our credit risk management process is governed centrally, but provides for decentralized management and accountability by our
lines of business. Our overall credit process includes comprehensive credit policies, 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, banking regulatory examiners review and perform detailed tests of Wells Fargos credit underwriting, loan administration and allowance processes.
A key to our credit risk management is adhering to a well controlled underwriting process, which we believe is appropriate for the needs
of our customers as well as investors who purchase the loans or securities collateralized by the loans. We approve applications and make loans only if we believe the customer has the ability to repay the loan or line of credit according to all its
terms. Our underwriting of loans collateralized by residential real property includes appraisals or automated valuation models (AVMs) to support property values. AVMs are computer-based tools used to estimate the market value of homes. AVMs are a
lower-cost alternative to appraisals and support valuations of large numbers of properties in a short period of time. AVMs estimate property values based on processing large volumes of market data including market comparables and price trends for
local
market areas. The primary risk associated with the use of AVMs is that the value of an individual property may vary significantly from the average for the market area. We have processes to
periodically validate AVMs and specific risk management guidelines addressing the circumstances when AVMs may be used. Generally AVMs are used in underwriting to support property values on loan originations only where the loan amount is under
$250,000. For underwriting residential property loans of $250,000 or more, we generally require property visitation appraisals by qualified independent appraisers.
We continually evaluate and modify our credit policies to address appropriate levels of risk. Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values,
Fair Isaac Corporation (credit rating) (FICO) scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to
enable early identification of developing risk and to support our determination of an adequate allowance for credit losses. The following analysis reviews the relevant concentrations and certain credit metrics of our significant portfolios. See Note
2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.
By the nature of our status as a REIT, the composition of the loans underlying the participation interests are highly concentrated in real estate. The following table is a summary of the geographical
distribution of our loan portfolio for the top five states by loans outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 3: Loan Portfolio by Geography |
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
(in thousands) |
|
Commercial |
|
|
Real estate 1-4 family first mortgage |
|
|
Real estate 1-4 family junior lien mortgage |
|
|
Total |
|
|
% of total loans |
|
|
|
|
|
|
|
|
|
Florida |
|
$ |
386,338 |
|
|
|
1,116,572 |
|
|
|
537,495 |
|
|
|
2,040,405 |
|
|
|
14 |
% |
New Jersey |
|
|
252,488 |
|
|
|
824,082 |
|
|
|
779,383 |
|
|
|
1,855,953 |
|
|
|
13 |
|
Pennsylvania |
|
|
131,186 |
|
|
|
1,021,234 |
|
|
|
635,828 |
|
|
|
1,788,248 |
|
|
|
13 |
|
North Carolina |
|
|
264,949 |
|
|
|
813,260 |
|
|
|
308,275 |
|
|
|
1,386,484 |
|
|
|
10 |
|
California |
|
|
3,284 |
|
|
|
1,121,844 |
|
|
|
41,874 |
|
|
|
1,167,002 |
|
|
|
8 |
|
All other states |
|
|
461,272 |
|
|
|
4,088,668 |
|
|
|
1,498,120 |
|
|
|
6,048,060 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
1,499,517 |
|
|
|
8,985,660 |
|
|
|
3,800,975 |
|
|
|
14,286,152 |
|
|
|
100 |
% |
7
The following table is a summary of our commercial and industrial loans by industry.
|
|
|
|
|
|
|
|
|
Table 4: Commercial and Industrial Loans by Industry |
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
(in thousands) |
|
Total |
|
|
% of total loans |
|
|
|
|
|
|
Finance |
|
$ |
97,760 |
|
|
|
40 |
% |
Public administration |
|
|
26,279 |
|
|
|
11 |
|
Real estate-other (1) |
|
|
24,166 |
|
|
|
10 |
|
Investors |
|
|
22,976 |
|
|
|
9 |
|
Industrial equipment |
|
|
19,274 |
|
|
|
8 |
|
Food and beverage |
|
|
16,497 |
|
|
|
7 |
|
Crops |
|
|
13,712 |
|
|
|
6 |
|
Timber/Forestry |
|
|
8,633 |
|
|
|
3 |
|
Leasing |
|
|
5,635 |
|
|
|
2 |
|
Healthcare |
|
|
5,467 |
|
|
|
2 |
|
Other |
|
|
4,046 |
|
|
|
2 |
|
|
|
|
|
|
Total loans |
|
$ |
244,445 |
|
|
|
100 |
% |
(1) |
Includes lessors, building operators and real estate agents. |
The following table is a summary of CRE loans by state and property type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 5: CRE Loans by State and Property Type |
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
(in thousands) |
|
Real estate mortgage |
|
|
Real estate construction |
|
|
Total |
|
|
% of total loans |
|
|
|
|
|
|
|
|
By state: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida |
|
$ |
301,966 |
|
|
|
35,288 |
|
|
|
337,254 |
|
|
|
27 |
% |
North Carolina |
|
|
250,849 |
|
|
|
12,339 |
|
|
|
263,188 |
|
|
|
21 |
|
New Jersey |
|
|
202,408 |
|
|
|
2,267 |
|
|
|
204,675 |
|
|
|
16 |
|
Pennsylvania |
|
|
95,068 |
|
|
|
3,342 |
|
|
|
98,410 |
|
|
|
8 |
|
South Carolina |
|
|
77,111 |
|
|
|
1,600 |
|
|
|
78,711 |
|
|
|
6 |
|
All other states |
|
|
256,508 |
|
|
|
16,326 |
|
|
|
272,834 |
|
|
|
22 |
|
|
|
|
|
|
|
|
Total loans |
|
$ |
1,183,910 |
|
|
|
71,162 |
|
|
|
1,255,072 |
|
|
|
100 |
% |
|
|
|
|
|
By property: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office buildings |
|
$ |
317,117 |
|
|
|
769 |
|
|
|
317,886 |
|
|
|
25 |
% |
Industrial/warehouse |
|
|
236,090 |
|
|
|
2,487 |
|
|
|
238,577 |
|
|
|
19 |
|
Retail (excluding shopping center) |
|
|
181,292 |
|
|
|
8,685 |
|
|
|
189,977 |
|
|
|
15 |
|
Shopping center |
|
|
135,996 |
|
|
|
- |
|
|
|
135,996 |
|
|
|
11 |
|
Real estate - other |
|
|
97,117 |
|
|
|
12,058 |
|
|
|
109,175 |
|
|
|
9 |
|
Hotel/motel |
|
|
85,407 |
|
|
|
476 |
|
|
|
85,883 |
|
|
|
7 |
|
Apartments |
|
|
56,587 |
|
|
|
10,023 |
|
|
|
66,610 |
|
|
|
5 |
|
Institutional |
|
|
53,820 |
|
|
|
- |
|
|
|
53,820 |
|
|
|
4 |
|
Land (excluding 1-4 family) |
|
|
10,640 |
|
|
|
30,520 |
|
|
|
41,160 |
|
|
|
3 |
|
1-4 family structure |
|
|
6,769 |
|
|
|
1,228 |
|
|
|
7,997 |
|
|
|
1 |
|
Other |
|
|
3,075 |
|
|
|
4,916 |
|
|
|
7,991 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total loans |
|
$ |
1,183,910 |
|
|
|
71,162 |
|
|
|
1,255,072 |
|
|
|
100 |
% |
8
The following table is a summary of real estate 1-4 family mortgage loans by state and
combined loan-to-value (CLTV) ratio.
|
|
|
|
|
|
|
|
|
Table 6: Real Estate 1-4 Family Mortgage Loans by State and
CLTV |
|
|
|
|
|
March 31, 2011 |
|
(in thousands) |
|
Real estate 1-4 family mortgage |
|
|
Current CLTV ratio (1) |
|
|
|
Pennsylvania |
|
$ |
1,657,062 |
|
|
|
67 |
% |
Florida |
|
|
1,654,067 |
|
|
|
91 |
|
New Jersey |
|
|
1,603,465 |
|
|
|
71 |
|
California |
|
|
1,163,718 |
|
|
|
61 |
|
North Carolina |
|
|
1,121,535 |
|
|
|
74 |
|
All other states |
|
|
5,586,788 |
|
|
|
75 |
% |
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
12,786,635 |
|
|
|
|
|
(1) |
Collateral values are generally 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. |
The following table includes recent quarterly data, by geographical area, for our home equity portfolio, which reflected the largest portion of our credit losses in first quarter 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 7: Home Equity Portfolio (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of loans two payments |
|
|
Loss rate annualized |
|
|
|
Outstanding balance |
|
|
or more past due |
|
|
Quarter ended |
|
(in thousands) |
|
Mar. 31, 2011 |
|
|
Dec.31, 2010 |
|
|
Mar. 31, 2011 |
|
|
Dec.31, 2010 |
|
|
Mar. 31, 2011 |
|
|
Dec.31, 2010 |
|
|
|
New Jersey |
|
$ |
775,608 |
|
|
|
833,984 |
|
|
|
4.47 |
% |
|
|
4.73 |
|
|
|
4.57 |
|
|
|
3.15 |
|
Pennsylvania |
|
|
632,485 |
|
|
|
681,232 |
|
|
|
3.23 |
|
|
|
3.52 |
|
|
|
1.87 |
|
|
|
1.62 |
|
Florida |
|
|
535,831 |
|
|
|
568,037 |
|
|
|
5.60 |
|
|
|
6.72 |
|
|
|
9.04 |
|
|
|
9.83 |
|
Virginia |
|
|
384,391 |
|
|
|
410,781 |
|
|
|
3.39 |
|
|
|
3.72 |
|
|
|
3.20 |
|
|
|
2.77 |
|
North Carolina |
|
|
305,454 |
|
|
|
328,089 |
|
|
|
3.84 |
|
|
|
3.66 |
|
|
|
2.99 |
|
|
|
2.45 |
|
Other |
|
|
1,146,838 |
|
|
|
1,220,888 |
|
|
|
4.18 |
|
|
|
4.55 |
|
|
|
4.27 |
|
|
|
3.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,780,607 |
|
|
|
4,043,011 |
|
|
|
4.17 |
|
|
|
4.56 |
|
|
|
4.39 |
|
|
|
3.84 |
|
(1) |
Consists of real estate 1-4 family junior lien mortgages, excluding PCI loans of $20,368 at March 31, 2011 and $23,519 at December 31, 2010.
|
9
NONACCRUAL LOANS AND OTHER NONPERFORMING
ASSETS The following table shows the comparative data for nonaccrual loans and other nonperforming assets. We generally place loans on nonaccrual status when:
|
|
|
the full and timely collection of interest or principal becomes uncertain; |
|
|
|
they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages) past due for
|
|
|
interest or principal (unless both well-secured and in the process of collection); or |
|
|
|
part of the principal balance has been charged off and no restructuring has occurred. |
Note 1 (Summary of Significant Accounting Policies Loans) to Financial Statements in our 2010 Form 10-K describes our accounting
policy for nonaccrual and impaired loans.
Table 8: Nonaccrual Loans and
Other Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Mar. 31, 2011 |
|
|
Dec. 31, 2010 |
|
|
Sept. 30, 2010 |
|
|
June 30, 2010 |
|
|
Mar. 31, 2010 |
|
|
|
|
|
|
|
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
901 |
|
|
|
2,454 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate mortgage |
|
|
22,454 |
|
|
|
21,491 |
|
|
|
24,786 |
|
|
|
20,986 |
|
|
|
9,274 |
|
Real estate construction |
|
|
442 |
|
|
|
366 |
|
|
|
1,039 |
|
|
|
1,089 |
|
|
|
- |
|
|
|
|
|
|
|
Total commercial |
|
|
23,797 |
|
|
|
24,311 |
|
|
|
25,825 |
|
|
|
22,075 |
|
|
|
9,274 |
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
222,843 |
|
|
|
225,297 |
|
|
|
206,294 |
|
|
|
163,991 |
|
|
|
155,812 |
|
Real estate 1-4 family junior lien mortgage |
|
|
107,812 |
|
|
|
117,218 |
|
|
|
112,795 |
|
|
|
93,662 |
|
|
|
86,129 |
|
|
|
|
|
|
|
Total consumer |
|
|
330,655 |
|
|
|
342,515 |
|
|
|
319,089 |
|
|
|
257,653 |
|
|
|
241,941 |
|
|
|
|
|
|
|
Total nonaccrual loans |
|
|
354,452 |
|
|
|
366,826 |
|
|
|
344,914 |
|
|
|
279,728 |
|
|
|
251,215 |
|
|
|
|
|
|
|
Other nonperforming assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets |
|
|
8,774 |
|
|
|
5,891 |
|
|
|
6,861 |
|
|
|
4,208 |
|
|
|
2,798 |
|
|
|
|
|
|
|
Total nonaccrual loans and other nonperforming assets |
|
$ |
363,226 |
|
|
|
372,717 |
|
|
|
351,775 |
|
|
|
283,936 |
|
|
|
254,013 |
|
|
|
|
|
|
|
As a percentage of total loans
|
|
|
2.54 |
% |
|
|
2.40 |
|
|
|
2.24 |
|
|
|
1.81 |
|
|
|
1.60 |
|
Typically, changes to nonaccrual loans period-over-period represent the difference of
inflows for loans that reach a specified past due status or where we believe that the full collection of principal is in doubt, and outflows of loans that are charged off, sold, transferred to foreclosed properties, or are no longer classified as
nonaccrual because they return to accrual status.
Nonaccrual loans decreased to $354.5 million at March 31, 2011, from
$366.8 million at December 31, 2010. The decrease was primarily related to consumer real estate 1-4 family mortgage loans, largely reflecting a decrease in loans entering nonaccrual status as well as an increase in nonaccrual outflows. The
decrease in nonaccrual inflow is in part due to improvements in delinquency performance. The following table has details on the inflows and outflows related to nonaccrual loans.
10
Table 9: Analysis of Changes in Nonaccrual Loans
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
(in thousands) |
|
Mar. 31, 2011 |
|
|
Dec. 31, 2010 |
|
|
|
|
Commercial nonaccrual loans |
|
|
|
|
|
|
|
|
Balance, beginning of quarter |
|
$ |
24,311 |
|
|
|
25,825 |
|
Inflows |
|
|
1,409 |
|
|
|
1,300 |
|
Outflows |
|
|
(1,923 |
) |
|
|
(2,814 |
) |
|
|
|
Balance, end of quarter |
|
|
23,797 |
|
|
|
24,311 |
|
|
|
|
Consumer nonaccrual loans |
|
|
|
|
|
|
|
|
Balance, beginning of quarter |
|
|
342,515 |
|
|
|
319,089 |
|
Inflows |
|
|
54,822 |
|
|
|
75,572 |
|
Outflows |
|
|
(66,682 |
) |
|
|
(52,146 |
) |
|
|
|
Balance, end of quarter |
|
|
330,655 |
|
|
|
342,515 |
|
|
|
|
Total nonaccrual loans |
|
$ |
354,452 |
|
|
|
366,826 |
|
TROUBLED DEBT RESTRUCTURINGS (TDRs)
The
following table provides information regarding loans modified in TDRs.
Table 10: Troubled Debt Restructurings (TDRs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Mar. 31, 2011 |
|
|
Dec. 31, 2010 |
|
|
Sept. 30, 2010 |
|
|
June 30, 2010 |
|
|
Mar. 31, 2010 |
|
|
|
|
|
|
|
Consumer TDRs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
$ |
147,878 |
|
|
|
131,159 |
|
|
|
117,916 |
|
|
|
87,853 |
|
|
|
69,113 |
|
Real estate 1-4 family junior lien mortgage |
|
|
92,952 |
|
|
|
78,187 |
|
|
|
74,258 |
|
|
|
68,371 |
|
|
|
63,676 |
|
|
|
|
|
|
|
Total consumer TDRs |
|
|
240,830 |
|
|
|
209,346 |
|
|
|
192,174 |
|
|
|
156,224 |
|
|
|
132,789 |
|
Commercial TDRs |
|
|
2,439 |
|
|
|
2,454 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Total TDRs |
|
$ |
243,269 |
|
|
|
211,800 |
|
|
|
192,174 |
|
|
|
156,224 |
|
|
|
132,789 |
|
|
|
|
|
|
|
TDRs on nonaccrual status |
|
$ |
69,836 |
|
|
|
69,134 |
|
|
|
74,882 |
|
|
|
29,784 |
|
|
|
14,461 |
|
TDRs on accrual status |
|
|
173,433 |
|
|
|
142,666 |
|
|
|
117,292 |
|
|
|
126,440 |
|
|
|
118,328 |
|
|
|
|
|
|
|
Total TDRs |
|
$ |
243,269 |
|
|
|
211,800 |
|
|
|
192,174 |
|
|
|
156,224 |
|
|
|
132,789 |
|
We establish an allowance for loan losses when a loan is modified in a TDR, which for
consumer loans was $69.9 million at March 31, 2011, and $51.9 million at December 31, 2010. Total charge-offs related to loans modified in a TDR were $3.6 million in first quarter 2011 and $418 thousand in first quarter 2010.
Our nonaccrual policies are generally the same for all loan types when a restructuring is involved. We underwrite loans at the time of
restructuring to determine whether there is sufficient evidence of sustained repayment capacity based on the borrowers documented income, debt to income ratios, and other factors. Any loans lacking sufficient evidence of sustained repayment
capacity at the time of modification are charged down to the fair value of the collateral, if applicable. If the borrower has demonstrated performance under the previous terms and the underwriting process shows the capacity to continue to perform
under the restructured terms, the loan will remain in accruing status. Otherwise, the loan will be placed in nonaccrual status generally until the borrower demonstrates a sustained period of performance, generally six consecutive months of payments,
or equivalent, inclusive of consecutive payments made prior to modification. Loans will also be placed on nonaccrual, and a corresponding charge-off is recorded to the
loan balance, if we believe that principal and interest contractually due under the modified agreement will not be collectible.
We do not forgive principal for a majority of our TDRs, but in those situations where principal is forgiven, the entire amount of such
principal forgiveness is immediately charged off to the extent not done so prior to the modification. We sometimes delay the required timing of a portion of principal (principal forbearance) and charge off the amount of forbearance if that amount is
not considered fully collectible.
11
LOANS 90 DAYS OR MORE PAST DUE AND STILL
ACCRUING Loans included in this category are 90 days or more past due as to interest or principal and still accruing, because they are (1) well-secured and in the process of
collection or (2) real estate 1-4 family mortgage loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans of $10.0 million at March 31, 2011, and $10.9
million at December 31, 2010, are excluded from this disclosure even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing due to the existence of the accretable yield and not based on
consideration given to contractual interest payments. We do not
hold 1-4 family mortgage loans that are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs that would be considered for this table.
The decrease from December 31, 2010 to March 31, 2011 was primarily related to a decrease in loans entering 90 days past due
and still accruing status coupled with the migration of loans from 90 days or more past due and still accruing to a nonaccrual status.
Table 11 reflects loans 90 days or more past due and still accruing.
Table 11: Loans 90 Days or More
Past Due and Still Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Mar. 31, 2011 |
|
|
Dec. 31, 2010 |
|
|
Sept. 30, 2010 |
|
|
June 30, 2010 |
|
|
Mar. 31, 2010 |
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
6 |
|
|
|
1 |
|
|
|
2 |
|
|
|
12 |
|
|
|
5 |
|
Real estate mortgage |
|
|
- |
|
|
|
3,419 |
|
|
|
2,419 |
|
|
|
1,610 |
|
|
|
14,044 |
|
Real estate construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Total commercial |
|
|
6 |
|
|
|
3,420 |
|
|
|
2,421 |
|
|
|
1,622 |
|
|
|
14,049 |
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
13,476 |
|
|
|
22,319 |
|
|
|
23,716 |
|
|
|
26,165 |
|
|
|
20,422 |
|
Real estate 1-4 family junior lien mortgage |
|
|
13,700 |
|
|
|
14,645 |
|
|
|
18,274 |
|
|
|
19,370 |
|
|
|
19,473 |
|
|
|
|
|
|
|
Total consumer |
|
|
27,176 |
|
|
|
36,964 |
|
|
|
41,990 |
|
|
|
45,535 |
|
|
|
39,895 |
|
|
|
|
|
|
|
Total |
|
$ |
27,182 |
|
|
|
40,384 |
|
|
|
44,411 |
|
|
|
47,157 |
|
|
|
53,944 |
|
NET CHARGE-OFFS
Table 12: Net
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
September 30, 2010 |
|
|
June 30, 2010 |
|
|
March 31, 2010 |
|
($ in thousands) |
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
Net loan charge- offs |
|
|
% of avg. loans (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
$ |
(42) |
|
|
|
(0.01 |
)% |
|
$ |
446 |
|
|
|
0.11 |
% |
|
$ |
1,508 |
|
|
|
0.33 |
% |
|
$ |
1,147 |
|
|
|
0.25 |
% |
|
$ |
(157) |
|
|
|
(0.03) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
65,364 |
|
|
|
1.99 |
|
|
|
61,200 |
|
|
|
1.72 |
|
|
|
69,529 |
|
|
|
1.96 |
|
|
|
71,369 |
|
|
|
2.07 |
|
|
|
79,862 |
|
|
|
2.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
65,322 |
|
|
|
1.78 |
% |
|
$ |
61,646 |
|
|
|
1.55 |
% |
|
$ |
71,037 |
|
|
|
1.77 |
% |
|
$ |
72,516 |
|
|
|
1.85 |
% |
|
$ |
79,705 |
|
|
|
2.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Quarterly net charge-offs as a percentage of average loans are annualized. |
12
Net charge-offs in first quarter 2011 were $65.3 million (1.78% of average total loans outstanding,
annualized) compared with $79.7 million (2.03%) a year ago. The decrease in charge-offs was in part due to modest improvement in economic conditions as well as aggressive loss mitigation activities. The majority of losses were in consumer real
estate, which has a higher concentration of home equity loans located in the eastern United States. Collateral value stabilization and delinquency improvements are materializing in this portfolio, and we expect continued gradual improvement from the
still-elevated level of current losses.
Net charge-offs in the 1-4 family first mortgage portfolio totaled $23.0 million in
first quarter 2011 compared with $27.9 million a year ago. Net charge-offs in the real estate 1-4 family junior lien portfolio were $42.4 million in first quarter 2011 compared with $51.9 million a year ago. Real estate 1-4 family mortgage portfolio
continued to reflect relatively low loss rates compared with industry trends.
Commercial and industrial and CRE net
charge-offs in first quarter 2011 and first quarter 2010 were not significant. Although economic stress and decreased CRE values have resulted in the deterioration of our commercial and industrial and CRE credit portfolios, there have been
relatively small losses. Due to the larger dollar amounts associated with individual commercial and industrial and CRE loans, loss recognition tends to be irregular and exhibits more variation than consumer loan portfolios.
Allowance for Credit Losses The allowance for credit losses, which consists of the allowance for loan losses and the allowance
for unfunded credit commitments, is managements estimate of credit losses inherent in the loan portfolio and unfunded credit commitments at the balance sheet date, excluding loans carried at fair value. The detail of the changes in the
allowance for credit losses by portfolio segment (including charge-offs and recoveries by loan class) is in Note 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. The process involves subjective as well as complex judgments. In addition, we review a variety of
credit metrics and trends. However, these trends do not solely determine the adequacy of the allowance as we use several analytical tools in determining its adequacy.
At March 31, 2011, the allowance for loan losses totaled $389.3 million (2.73% of
total loans), compared with $403.0 million (2.60%), at December 31, 2010.
The ratio of the allowance for credit losses
to total nonaccrual loans was 110% at both March 31, 2011 and December 31, 2010. In general, this ratio may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, the amount of
nonaccrual loans that have been written down to current collateral value, borrower credit strength and the value and marketability of collateral.
Total provision for credit losses was $52.5 million in first quarter 2011, compared with $124.1 million a year ago. The first quarter 2011 provision was $12.9 million less than credit losses, compared
with a provision that exceeded net charge-offs by $44.4 million in first quarter 2010. Absent significant deterioration in the economy, we expect future reductions in the allowance for credit losses.
In determining the appropriate allowance attributable to our residential real estate portfolios, the loss rates used in our analysis
include the impact of our established loan modification programs. When modifications occur or are probable to occur, our allowance considers the impact of these modifications, taking into consideration the associated credit cost, including
re-defaults of modified loans and projected loss severity. The loss content associated with existing and probable loan modifications has been considered in our allowance methodology.
Changes in the allowance reflect changes in statistically derived loss estimates, historical loss experience, current trends in borrower
risk and/or general economic activity on portfolio performance, and managements estimate for imprecision and uncertainty.
We believe the allowance for credit losses of $389.6 million was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31, 2011. 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 2010 Form 10-K.
13
Asset/Liability Management
Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk and liquidity and funding.
INTEREST RATE RISK Interest
rate risk is the sensitivity of earnings to changes in interest rates. Approximately 17% of our loan portfolio consisted of variable rate loans at March 31, 2011. 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, 2011, approximately 83% of the balance of our loans had fixed interest rates. Such loans tend to increase our interest rate risk. We monitor the rate sensitivity of assets acquired. Our
methods for evaluating interest rate risk include an analysis of interest-rate sensitivity gap, which is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds interest
rate-sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect
net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income
positively or negatively even if an institution is perfectly matched in each maturity category.
At March 31, 2011, $4.2
billion, or 27% of our assets, had variable interest rates and could be expected to reprice with changes in interest rates. At March 31, 2011, our liabilities were $93.7 million, or less than 1% of our assets, while stockholders equity
was $15.6 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 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, 2011, our position in interest
rate swaps was an asset of $431.0 million, a liability of $324.6 million, and a cash collateral payable of $105.2 million. The position in the interest rate swap is recorded as a net amount on our consolidated balance sheet at fair value, as
positions with the same counterparty are netted as part of a legally enforceable master netting agreement between Wachovia Funding and the derivative counterparty, and is reported net of the cash collateral received and paid.
At March 31, 2011, our receive-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of
1.22 years, weighted average receive rate of 7.45% and weighted average pay rate of 0.31%. Our pay-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 1.22 years, weighted average receive rate of 0.31%
and weighted average pay rate of 5.72% at March 31, 2011. 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, 2011.
MARKET RISK Market risk is the
risk of loss from adverse changes in market prices and interest rates. Market risk arises primarily from interest rate risk inherent in lending, investment in derivative financial instruments and borrowing activities.
Due to the difference in fixed rates in our interest rate swaps, volatility is expected given certain interest rate fluctuations. If
market rates were to decrease 100 basis points or 200 basis points, we would recognize short-term net gains on our interest rate swaps of $800 thousand or $1.6 million, respectively. If interest rates were to increase 100 basis points or 200 basis
points, we would recognize short-term net losses on our interest rate swaps of $800 thousand or $1.5 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
FUNDING The objective of effective liquidity management is to ensure that we can meet customer loan requests and other cash commitments efficiently under both normal operating conditions
and under unpredictable circumstances of industry or market stress. To achieve this objective, Wells Fargos Corporate Asset/Liability Management Committee establishes and monitors liquidity guidelines that require sufficient asset-based
liquidity to cover potential funding
14
requirements and to avoid over-dependence on volatile, less reliable funding markets.
Proceeds received from pay-downs of loans are typically sufficient to fund existing lending commitments and loan purchases. Depending upon the timing of the loan purchases, we may draw on the line of
credit we have with the Bank as a short-term liquidity source. Wachovia Funding has a $1.0 billion line of credit with the Bank, and our subsidiaries WREIC 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 March 31, 2011, there
were no borrowings outstanding 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.
Wachovia Fundings primary liquidity needs are to pay operating expenses, fund our lending commitments, purchase loans as the underlying loans mature or repay, and pay dividends. Operating expenses
and dividends are expected to be funded through cash generated by operations or paid-in capital, while funding commitments and the acquisition of additional participation interests in loans are intended to be funded with the proceeds obtained from
repayment of principal balances by individual borrowers. During first quarter 2011, we did not purchase any loan participations from the Bank. Based on our current expectations of loan pay-downs and anticipated reinvestment in assets REITs are
permitted to own during 2011, we expect our board of directors to consider return of up to an additional $3.0 billion of capital to holders of our common stock by the end of 2011, in addition to the $2.5 billion special capital distribution paid in
January 2011. In addition to the special capital distributions, we expect to distribute annually an aggregate amount of dividends with respect to outstanding capital stock equal to approximately 100 percent of our REIT taxable income for federal tax
purposes. Such distributions may in some periods exceed net income determined under U.S. generally accepted accounting principles (GAAP).
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 credit with the Bank.
At March 31, 2011, our liabilities principally consist of accounts payable to affiliates, net and 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.
15
Critical Accounting Policy
Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial
Statements in our 2010 Form 10-K) are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial
results. One of these policies is critical because it requires management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially
different amounts would be reported under different conditions or using different assumptions. We have identified the allowance for credit losses policy as being particularly sensitive in terms
of judgments and the extent to which estimates are used.
Management has reviewed and approved this critical accounting
policy and has discussed this policy with the Audit Committee of Wachovia Fundings board of directors. This policy is described in the Critical Accounting Policy section in our 2010 Form 10-K.
Current
Accounting Developments
The following accounting pronouncement has been issued by the Financial Accounting Standards Board (FASB)
but is not yet effective:
|
|
Accounting Standards Update (ASU or Update) 2011-02, A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring.
|
ASU 2011-02 provides guidance clarifying under what circumstances a creditor should classify a restructured
receivable as a TDR. A receivable is a TDR if both of the following exist: 1) a creditor has granted a concession to the debtor, and 2) the debtor is experiencing financial difficulties. The Update clarifies that a creditor should consider all
aspects of a restructuring when evaluating whether it has granted a concession, which include determining whether a debtor can obtain funds from another source at market rates and assessing the value of additional collateral and guarantees obtained
at the time of restructuring. The Update also provides factors a creditor should consider when determining if a debtor is experiencing financial difficulties, such as probability of payment default and bankruptcy declarations. The Update is
effective for us in third quarter 2011 with retrospective application to January 1, 2011. Early adoption is permitted. We are evaluating the impact these accounting changes may have on our consolidated financial statements.
16
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as anticipates, intends, plans, seeks, believes, estimates, expects,
projects, outlook, forecast, will, may, could, should, can and similar references to future periods. Examples of forward-looking statements include, but
are not limited to, statements we make about: future results of Wachovia Funding; expectations for consumer and commercial credit losses, life-of-loan losses, and the sufficiency of our credit loss allowance to cover future credit losses; possible
capital distributions; the expected outcome and impact of legal, regulatory and legislative developments, including regulatory capital standards; and Wachovia Fundings plans, objectives and strategies.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future
conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by
the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance
that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
|
|
|
the effect of political and economic conditions and geopolitical events; |
|
|
|
economic conditions that affect the general economy, housing prices, the job market, consumer confidence and spending habits, including our borrowers
repayment of our loan participations; |
|
|
|
the level and volatility of the capital markets, interest rates, currency values and other market indices that affect the value of our assets and
liabilities; |
|
|
|
the availability and cost of both credit and capital as well as the credit ratings assigned to our debt instruments; |
|
|
|
investor sentiment and confidence in the financial markets; |
|
|
|
the impact of current, pending and future legislation, regulation and legal actions, including capital standards applicable to the Bank or Wells Fargo;
|
|
|
|
changes in accounting standards, rules and interpretations; |
|
|
|
mergers and acquisitions, and our ability to integrate them; |
|
|
|
various monetary and fiscal policies and regulations of the U.S. and foreign governments; |
|
|
|
financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and
businesses, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and legislation; and |
|
|
|
the other factors described in Risk Factors in our 2010 Form 10-K and in this Report.
|
In addition to the above factors, we also caution that there is no assurance that our
allowance for credit losses will be adequate to cover future credit losses, especially if credit markets, housing prices and unemployment do not continue to stabilize or improve. Increases in loan charge-offs or in the allowance for credit losses
and related provision expense could materially adversely affect our financial results and condition.
Any forward-looking
statement made by us in this Report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no
obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
17
Risk Factors
An investment in Wachovia Funding involves risk, including the possibility that the value of the investment
could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. We discuss previously under Forward-Looking Statements and elsewhere in this Report, as well as in other documents we
file with the SEC, risk factors that could adversely affect our financial results and condition and the value of, and return on, an investment in Wachovia Funding. We refer you to the Financial Review section and Financial Statements (and related
Notes) in this Report for more information about credit, interest rate, market, and litigation risks and to the Risk Factors section in our 2010 Form 10-K for more information about risks. Any factor described below or elsewhere in this
Report or in our 2010 Form 10-K could by itself, or together with other factors, adversely affect our financial results and condition, or the value of an investment in Wachovia Funding. There are factors not discussed below or elsewhere in this
Report that could adversely affect our financial results and condition.
The following risk factor supplements the risk
factors set forth in our 2010 Form 10-K and should be read in conjunction with the other risk factors described in that report.
Proposed
capital standards, if adopted, may cause our Series A preferred securities to be redeemed early.
Except in certain circumstances, our
Series A preferred securities may not be redeemed prior to December 31, 2022. Prior to that date, among other things, if regulators adopt capital standards that do not permit Wells Fargo or the Bank to treat
our Series A preferred securities as Tier 1 capital, we may determine to redeem the Series A preferred securities, as provided in our certificate of incorporation. Regulatory authorities have yet
to propose final regulations to implement certain capital standards required in the Dodd-Frank Act. It is possible that such capital standards, when proposed and adopted, will affect Wells Fargos or the Banks ability to treat our Series
A preferred securities as Tier 1 capital. We will continue to monitor the proposed capital standards and whether such capital standards would result in our determination that a Regulatory Capital Event, as defined, has occurred and therefore cause
the Series A preferred securities to become redeemable under their terms. Although any such redemption must be in whole for a redemption price of $25.00 per Series A security, plus all authorized, declared but unpaid dividends to the date of
redemption, such event may have an adverse effect on the trading price for the Series A preferred securities.
18
Controls and Procedures
Disclosure Controls and Procedures
As required by SEC rules, Wachovia Fundings
management evaluated the effectiveness, as of March 31, 2011, 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, 2011.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or
under the supervision of, Wachovia Fundings principal executive and principal financial officers and effected by Wachovia Fundings board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of Wachovia
Funding; |
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of Wachovia Funding are being made only in accordance with authorizations of management and directors of Wachovia Funding; and |
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Wachovia Fundings assets
that could have a material effect on the financial statements. |
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. No change occurred during first quarter 2011 that has materially affected, or is reasonably likely to materially affect, Wachovia Fundings internal control over financial
reporting.
19
Financial Statements
Wachovia Preferred Funding Corp. and Subsidiaries
Consolidated
Statement of Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
(in thousands, except per share amounts) |
|
2011 |
|
|
2010 |
|
|
|
|
Interest income |
|
$ |
280,340 |
|
|
|
272,428 |
|
Interest expense |
|
|
- |
|
|
|
- |
|
|
|
|
Net interest income |
|
|
280,340 |
|
|
|
272,428 |
|
Provision for credit losses |
|
|
52,466 |
|
|
|
124,139 |
|
|
|
|
Net interest income after provision for credit losses |
|
|
227,874 |
|
|
|
148,289 |
|
|
|
|
Noninterest income |
|
|
|
|
|
|
|
|
Gain on interest rate swaps |
|
|
110 |
|
|
|
1,148 |
|
Gain (loss) on loan sales to affiliate |
|
|
113 |
|
|
|
(256 |
) |
Other |
|
|
237 |
|
|
|
198 |
|
|
|
|
Total noninterest income |
|
|
460 |
|
|
|
1,090 |
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
Loan servicing costs |
|
|
12,983 |
|
|
|
15,625 |
|
Management fees |
|
|
1,150 |
|
|
|
1,100 |
|
Other |
|
|
3,242 |
|
|
|
750 |
|
|
|
|
Total noninterest expense |
|
|
17,375 |
|
|
|
17,475 |
|
|
|
|
Income before income tax expense |
|
|
210,959 |
|
|
|
131,904 |
|
Income tax expense |
|
|
92 |
|
|
|
437 |
|
|
|
|
Net income |
|
|
210,867 |
|
|
|
131,467 |
|
Dividends on preferred stock |
|
|
45,946 |
|
|
|
45,263 |
|
|
|
|
Net income applicable to common stock |
|
$ |
164,921 |
|
|
|
86,204 |
|
|
|
|
Per common share information |
|
|
|
|
|
|
|
|
Earnings per common share |
|
$ |
1.65 |
|
|
|
0.86 |
|
Diluted earnings per common share |
|
|
1.65 |
|
|
|
0.86 |
|
Dividends declared per common share |
|
$ |
2.24 |
|
|
|
1.92 |
|
Average common shares outstanding |
|
|
99,999.9 |
|
|
|
99,999.9 |
|
Diluted average common shares outstanding |
|
|
99,999.9 |
|
|
|
99,999.9 |
|
The accompanying notes are an integral part of
these statements.
20
Financial Statements
Wachovia Preferred Funding Corp. and Subsidiaries
Consolidated
Balance Sheet (Unaudited)
|
|
|
|
|
|
|
|
|
(in thousands, except shares) |
|
Mar. 31,
2011 |
|
|
Dec. 31,
2010 |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,694,996 |
|
|
|
2,774,299 |
|
Loans, net of unearned |
|
|
14,286,152 |
|
|
|
15,506,564 |
|
Allowance for loan losses |
|
|
(389,310 |
) |
|
|
(402,960 |
) |
|
|
|
Net loans |
|
|
13,896,842 |
|
|
|
15,103,604 |
|
|
|
|
Interest rate swaps, net |
|
|
1,163 |
|
|
|
1,013 |
|
Accounts receivable - affiliates, net |
|
|
- |
|
|
|
218,394 |
|
Other assets |
|
|
63,495 |
|
|
|
80,807 |
|
|
|
|
Total assets |
|
$ |
15,656,496 |
|
|
|
18,178,117 |
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - affiliates, net |
|
$ |
44,591 |
|
|
|
- |
|
Deferred income tax liabilities |
|
|
25,331 |
|
|
|
30,255 |
|
Other liabilities |
|
|
23,780 |
|
|
|
25,989 |
|
|
|
|
Total liabilities |
|
|
93,702 |
|
|
|
56,244 |
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
743 |
|
|
|
743 |
|
Common stock $0.01 par value, authorized 100,000,000 shares; issued and outstanding 99,999,900 shares |
|
|
1,000 |
|
|
|
1,000 |
|
Additional paid-in capital |
|
|
16,026,608 |
|
|
|
18,526,608 |
|
Retained earnings (deficit) |
|
|
(465,557 |
) |
|
|
(406,478 |
) |
|
|
|
Total stockholders equity |
|
|
15,562,794 |
|
|
|
18,121,873 |
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
15,656,496 |
|
|
|
18,178,117 |
|
The
accompanying notes are an integral part of these statements.
21
Financial Statements
Wachovia Preferred Funding Corp. and Subsidiaries
Consolidated
Statement of Changes in Stockholders Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
Preferred stock |
|
|
Common
stock |
|
|
Additional
paid-in
capital |
|
|
Retained earnings (deficit) |
|
|
Total stockholders equity |
|
|
|
|
|
|
|
Balance, December 31, 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 |
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
$ |
743 |
|
|
|
1,000 |
|
|
|
18,526,608 |
|
|
|
(406,478 |
) |
|
|
18,121,873 |
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
210,867 |
|
|
|
210,867 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred securities at $0.45 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13,594 |
) |
|
|
(13,594 |
) |
Series B preferred securities at $0.13 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,332 |
) |
|
|
(5,332 |
) |
Series C preferred securities at $6.38 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27,020 |
) |
|
|
(27,020 |
) |
Common stock at $2.24 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(224,000 |
) |
|
|
(224,000 |
) |
Common stock special capital distribution |
|
|
- |
|
|
|
- |
|
|
|
(2,500,000 |
) |
|
|
- |
|
|
|
(2,500,000 |
) |
|
|
|
|
|
|
Balance, March 31, 2011 |
|
$ |
743 |
|
|
|
1,000 |
|
|
|
16,026,608 |
|
|
|
(465,557 |
) |
|
|
15,562,794 |
|
The accompanying notes are an integral part of these statements.
22
Financial Statements
Wachovia Preferred Funding Corp. and Subsidiaries
Consolidated
Statement of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
210,867 |
|
|
|
131,467 |
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Accretion of discounts on loans |
|
|
(67,937 |
) |
|
|
(36,428 |
) |
Provision for credit losses |
|
|
52,466 |
|
|
|
124,139 |
|
Deferred income tax benefits |
|
|
(4,924 |
) |
|
|
(4,092 |
) |
Interest rate swaps |
|
|
(151 |
) |
|
|
(1,206 |
) |
Accounts receivable/payable - affiliates, net |
|
|
(16,535 |
) |
|
|
(4,912 |
) |
Other assets and other liabilities, net |
|
|
15,104 |
|
|
|
1,977 |
|
|
|
|
Net cash provided by operating activities |
|
|
188,890 |
|
|
|
210,945 |
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Increase in cash realized from |
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
Purchases |
|
|
- |
|
|
|
(344,821 |
) |
Proceeds from payments and sales |
|
|
1,501,753 |
|
|
|
791,030 |
|
|
|
|
Net cash provided by investing activities |
|
|
1,501,753 |
|
|
|
446,209 |
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in cash realized from |
|
|
|
|
|
|
|
|
Collateral held on interest rate swaps |
|
|
- |
|
|
|
1,091 |
|
Special capital distribution |
|
|
(2,500,000 |
) |
|
|
- |
|
Cash dividends paid |
|
|
(269,946 |
) |
|
|
(237,263 |
) |
|
|
|
Net cash used by financing activities |
|
|
(2,769,946 |
) |
|
|
(236,172 |
) |
|
|
|
Net change in cash and cash equivalents |
|
|
(1,079,303 |
) |
|
|
420,982 |
|
Cash and cash equivalents at beginning of period |
|
|
2,774,299 |
|
|
|
2,092,523 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,694,996 |
|
|
|
2,513,505 |
|
|
|
|
Supplemental cash flow disclosures: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
41 |
|
|
|
58 |
|
Cash paid for income taxes |
|
|
4,000 |
|
|
|
4,000 |
|
Change in non cash items: |
|
|
|
|
|
|
|
|
Loan payments, net, settled through affiliate |
|
|
279,520 |
|
|
|
8,669 |
|
Transfers from loans to foreclosed assets |
|
|
4,482 |
|
|
|
2,760 |
|
The accompanying notes are an integral part of
these statements.
23
Note 1: Summary of Significant Accounting Policies
Wachovia Preferred Funding Corp. (Wachovia Funding) is a direct subsidiary of Wachovia Preferred Funding
Holding Corp. (Wachovia Preferred Holding) and an indirect subsidiary of both Wells Fargo & Company (Wells Fargo) and Wells Fargo Bank, National Association (the Bank). Wells Fargo acquired Wachovia Corporation, a North Carolina corporation
(Wachovia), 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 actual future conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made
significant estimates related to the allowance for credit losses (Note 2) and valuing financial instruments (Note 4). Actual results could differ from those estimates.
The information furnished in these unaudited interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented.
These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements do not necessarily indicate the results that may be expected for the full year. The interim
financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).
Subsequent Events
We have evaluated the effects of subsequent events that have occurred
subsequent to period end March 31, 2011. During this period there have been no material events that would require recognition in our first quarter 2011 consolidated financial statements or disclosure in the Notes to Financial Statements.
24
Note 2: Loans and Allowance for Credit Losses
Wachovia Funding obtains participation interests in loans originated or purchased by the Bank. By the
nature of Wachovia Fundings status as a REIT, the composition of the loans underlying the participation interests are highly concentrated in real estate. Underlying loans are concentrated primarily in Florida, New Jersey, Pennsylvania, North
Carolina and California. These markets include approximately 58% of
Wachovia Fundings total loan balance at both March 31, 2011 and December 31, 2010.
The following table reflects loans net of unearned discounts and deferred fees of $719.2 million and $785.2 million in the major categories of the loan portfolio at March 31, 2011 and
December 31, 2010, respectively.
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Mar. 31,
2011 |
|
|
Dec. 31,
2010 |
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
244,445 |
|
|
|
209,818 |
|
Real estate mortgage |
|
|
1,183,910 |
|
|
|
1,267,350 |
|
Real estate construction |
|
|
71,162 |
|
|
|
76,033 |
|
|
|
|
Total commercial |
|
|
1,499,517 |
|
|
|
1,553,201 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
8,985,660 |
|
|
|
9,886,833 |
|
Real estate 1-4 family junior lien mortgage |
|
|
3,800,975 |
|
|
|
4,066,530 |
|
|
|
|
Total consumer |
|
|
12,786,635 |
|
|
|
13,953,363 |
|
|
|
|
Total loans |
|
$ |
14,286,152 |
|
|
|
15,506,564 |
|
The following table summarizes the proceeds paid (excluding accrued interest receivable
of $1.6 million in first quarter 2010) or received from the Bank for purchases and sales of loans,
respectively. Wachovia Funding did not purchase loans in first quarter 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
(in thousands) |
|
Commercial |
|
|
Consumer |
|
|
Total |
|
|
Commercial |
|
|
Consumer |
|
|
Total |
|
|
|
|
|
|
|
|
Purchases |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
343,234 |
|
|
|
343,234 |
|
Sales |
|
|
(5 |
) |
|
|
(31,248 |
) |
|
|
(31,253 |
) |
|
|
(1,148 |
) |
|
|
(22,056 |
) |
|
|
(23,204 |
) |
Commitments to Lend
The contract or notional amount of commercial loan commitments to extend credit at March 31, 2011 was $462.9 million.
25
Allowance for Credit Losses (ACL)
The ACL is managements estimate of credit losses inherent in the loan portfolio, including unfunded credit commitments, at the balance sheet date. We have an established process to determine the
adequacy of the allowance for credit losses that assesses the losses inherent in our portfolio and related unfunded credit commitments. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to
absorb credit losses inherent in the total loan portfolio and unfunded credit commitments.
Our process involves procedures
to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured collectively for groups of smaller loans with similar characteristics, individually
for larger impaired loans.
Our allowance levels are influenced by loan volumes, loan grade migration or delinquency status,
historic loss experience influencing loss factors, and other conditions influencing loss expectations, such as economic conditions.
COMMERCIAL PORTFOLIO SEGMENT ACL METHODOLOGY Generally, commercial loans are
assessed for estimated losses by grading each loan using various risk factors as identified through periodic reviews. We apply historic grade-specific loss factors to the aggregation of each funded grade pool. These historic loss factors are also
used to estimate losses for unfunded credit commitments. In the development of our statistically derived loan grade loss factors, we observe historical losses over a relevant period for each loan grade. These loss estimates are adjusted as
appropriate based on additional analysis of long-term average loss experience compared to previously forecasted losses, external loss data or other risks identified from current economic conditions and credit quality trends.
The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a
troubled debt restructuring (TDR), whether on accrual or nonaccrual status.
CONSUMER PORTFOLIO SEGMENT ACL METHODOLOGY For consumer loans, not identified as a TDR, we determine the allowance on a collective basis utilizing forecasted losses to represent our
best estimate of inherent loss. We pool loans, generally by product types with similar risk characteristics, such as residential real estate mortgages. As appropriate, to achieve greater accuracy, we may further stratify selected portfolios by
sub-product, origination channel, vintage, loss type, geographic location and other predictive characteristics. Models designed for each pool are utilized to develop the loss estimates. We use assumptions for these pools in our forecast models, such
as historic delinquency and default, loss severity, home price trends, unemployment trends, and other key economic variables that may influence the frequency and severity of losses in the pool.
In addition, we establish an allowance for consumer loans that have been modified in a TDR, whether on accrual or nonaccrual status.
OTHER ACL MATTERS The allowance for credit losses for both portfolio segments includes an amount for imprecision or uncertainty that may change from period to period. This amount represents managements judgment of
risks inherent in the processes and assumptions used in establishing the allowance. This imprecision considers economic environmental factors, modeling assumptions and performance, process risk, and other subjective factors, including industry
trends.
26
The allowance for credit losses consists of the allowance for loan losses and the allowance
for unfunded credit commitments. Changes in the allowance for credit losses were:
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
|
|
Balance, beginning of quarter |
|
$ |
403,555 |
|
|
|
337,871 |
|
Provision for credit losses |
|
|
52,466 |
|
|
|
124,139 |
|
Interest income on certain impaired loans (1) |
|
|
(1,081 |
) |
|
|
- |
|
Loan charge-offs: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
- |
|
|
|
- |
|
Real estate mortgage |
|
|
(43 |
) |
|
|
- |
|
|
|
|
Total commercial |
|
|
(43 |
) |
|
|
- |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
(23,400 |
) |
|
|
(28,259 |
) |
Real estate 1-4 family junior lien mortgage |
|
|
(44,747 |
) |
|
|
(52,987 |
) |
|
|
|
Total consumer |
|
|
(68,147 |
) |
|
|
(81,246 |
) |
|
|
|
Total loan charge-offs |
|
|
(68,190 |
) |
|
|
(81,246 |
) |
|
|
|
Loan recoveries: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
- |
|
|
|
157 |
|
Real estate mortgage |
|
|
85 |
|
|
|
- |
|
|
|
|
Total commercial |
|
|
85 |
|
|
|
157 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
431 |
|
|
|
316 |
|
Real estate 1-4 family junior lien mortgage |
|
|
2,352 |
|
|
|
1,068 |
|
|
|
|
Total consumer |
|
|
2,783 |
|
|
|
1,384 |
|
|
|
|
Total loan recoveries |
|
|
2,868 |
|
|
|
1,541 |
|
|
|
|
Net loan charge-offs |
|
|
(65,322 |
) |
|
|
(79,705 |
) |
|
|
|
Balance, end of quarter |
|
$ |
389,618 |
|
|
|
382,305 |
|
Components: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
389,310 |
|
|
|
381,773 |
|
Allowance for unfunded credit commitments |
|
|
308 |
|
|
|
532 |
|
|
|
|
Allowance for credit losses |
|
$ |
389,618 |
|
|
|
382,305 |
|
|
|
|
Net loan charge-offs as a percentage of average total loans |
|
|
1.78 |
% |
|
|
2.03 |
|
Allowance for loan losses as a percentage of total loans |
|
|
2.73 |
|
|
|
2.40 |
|
Allowance for credit losses as a percentage of total loans |
|
|
2.73 |
|
|
|
2.40 |
|
(1) |
Effective second quarter 2010, certain impaired loans with an allowance calculated by discounting expected cash flows using the loans effective interest rate over
the remaining life of the loan recognize reductions in allowance as interest income. |
27
The following table summarizes the activity in the allowance for credit losses by our commercial and
consumer portfolio segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
(in thousands) |
|
Commercial |
|
|
Consumer |
|
|
Total |
|
|
Commercial |
|
|
Consumer |
|
|
Total |
|
Balance, beginning of quarter |
|
$ |
26,413 |
|
|
|
377,142 |
|
|
|
403,555 |
|
|
|
18,973 |
|
|
|
318,898 |
|
|
|
337,871 |
|
Provision for credit losses |
|
|
(3,505 |
) |
|
|
55,971 |
|
|
|
52,466 |
|
|
|
6,843 |
|
|
|
117,296 |
|
|
|
124,139 |
|
Interest income on certain impaired loans |
|
|
- |
|
|
|
(1,081 |
) |
|
|
(1,081 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
Loan charge-offs |
|
|
(43 |
) |
|
|
(68,147 |
) |
|
|
(68,190 |
) |
|
|
- |
|
|
|
(81,246 |
) |
|
|
(81,246 |
) |
Loan recoveries |
|
|
85 |
|
|
|
2,783 |
|
|
|
2,868 |
|
|
|
157 |
|
|
|
1,384 |
|
|
|
1,541 |
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
|
42 |
|
|
|
(65,364 |
) |
|
|
(65,322 |
) |
|
|
157 |
|
|
|
(79,862 |
) |
|
|
(79,705 |
) |
|
|
|
|
|
|
|
Balance, end of quarter |
|
$ |
22,950 |
|
|
|
366,668 |
|
|
|
389,618 |
|
|
|
25,973 |
|
|
|
356,332 |
|
|
|
382,305 |
|
The
following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
Recorded investment in loans |
|
(in thousands) |
|
Commercial |
|
|
Consumer |
|
|
Total |
|
|
Commercial |
|
|
Consumer |
|
|
Total |
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated (1) |
|
$ |
13,694 |
|
|
|
296,737 |
|
|
|
310,431 |
|
|
|
1,469,294 |
|
|
|
12,483,396 |
|
|
|
13,952,690 |
|
Individually evaluated (2) |
|
|
9,256 |
|
|
|
69,931 |
|
|
|
79,187 |
|
|
|
21,470 |
|
|
|
240,830 |
|
|
|
262,300 |
|
Purchased credit-impaired (PCI) (3) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,753 |
|
|
|
62,409 |
|
|
|
71,162 |
|
|
|
|
|
|
|
|
Total |
|
$ |
22,950 |
|
|
|
366,668 |
|
|
|
389,618 |
|
|
|
1,499,517 |
|
|
|
12,786,635 |
|
|
|
14,286,152 |
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated (1) |
|
$ |
15,852 |
|
|
|
325,261 |
|
|
|
341,113 |
|
|
|
1,521,028 |
|
|
|
13,678,399 |
|
|
|
15,199,427 |
|
Individually evaluated (2) |
|
|
10,561 |
|
|
|
51,881 |
|
|
|
62,442 |
|
|
|
23,263 |
|
|
|
209,346 |
|
|
|
232,609 |
|
PCI (3) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,910 |
|
|
|
65,618 |
|
|
|
74,528 |
|
|
|
|
|
|
|
|
Total |
|
$ |
26,413 |
|
|
|
377,142 |
|
|
|
403,555 |
|
|
|
1,553,201 |
|
|
|
13,953,363 |
|
|
|
15,506,564 |
|
(1) |
Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU
2010-20 regarding allowance for unimpaired loans. |
(2) |
Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20
regarding allowance for impaired loans. |
(3) |
Represents the allowance and related loan carrying value determined in accordance with ASC 310-30, Receivables Loans and Debt Securities Acquired with
Deteriorated Credit Quality (formerly SOP 03-3) and pursuant to amendments by ASU 2010-20 regarding allowance for PCI loans. |
28
Credit Quality
We monitor credit quality as indicated by evaluating various attributes and utilize such information in our evaluation of the adequacy of the allowance for credit losses. The following sections provide
the credit quality indicators we most closely monitor. The majority of credit quality indicators are based on March 31, 2011, information, with the exception of updated FICO and updated loan-to-value (LTV)/combined LTV (CLTV), which are
obtained at least quarterly. Generally, these indicators are updated in the last month of each quarter.
COMMERCIAL CREDIT QUALITY INDICATORS In addition to monitoring commercial loan concentration risk, we manage a consistent process for assessing commercial loan credit quality.
Commercial loans are subject to individual risk assessment using our internal borrower and collateral quality ratings. Our ratings are aligned to Pass and Criticized categories. The Criticized category includes Special Mention, Substandard, and
Doubtful categories which are defined by banking regulatory agencies.
The table below provides a breakdown of
outstanding commercial loans by risk category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Commercial
and
industrial |
|
|
Real
estate
mortgage |
|
|
Real
estate
construction |
|
|
Total |
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By risk category: |
|
|
|
|
Pass |
|
$ |
242,557 |
|
|
|
1,022,166 |
|
|
|
55,527 |
|
|
|
1,320,250 |
|
Criticized |
|
|
1,888 |
|
|
|
161,744 |
|
|
|
15,635 |
|
|
|
179,267 |
|
|
|
|
|
|
Total commercial loans |
|
$ |
244,445 |
|
|
|
1,183,910 |
|
|
|
71,162 |
|
|
|
1,499,517 |
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By risk category: |
|
|
|
|
Pass |
|
$ |
206,362 |
|
|
|
1,087,574 |
|
|
|
68,838 |
|
|
|
1,362,774 |
|
Criticized |
|
|
3,456 |
|
|
|
179,776 |
|
|
|
7,195 |
|
|
|
190,427 |
|
|
|
|
|
|
Total commercial loans |
|
$ |
209,818 |
|
|
|
1,267,350 |
|
|
|
76,033 |
|
|
|
1,553,201 |
|
In addition, while we monitor past due status, we do not consider it a key driver of our credit risk management practices for commercial loans. The following table provides past due information for
commercial loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Commercial
and
industrial |
|
|
Real
estate
mortgage |
|
|
Real
estate
construction |
|
|
Total |
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By delinquency status: |
|
|
|
|
Current-29 days past due (DPD) |
|
$ |
243,482 |
|
|
|
1,150,463 |
|
|
|
70,509 |
|
|
|
1,464,454 |
|
30-89 DPD |
|
|
56 |
|
|
|
10,993 |
|
|
|
211 |
|
|
|
11,260 |
|
90+ DPD and still accruing |
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
Nonaccrual loans |
|
|
901 |
|
|
|
22,454 |
|
|
|
442 |
|
|
|
23,797 |
|
|
|
|
|
|
Total commercial loans |
|
$ |
244,445 |
|
|
|
1,183,910 |
|
|
|
71,162 |
|
|
|
1,499,517 |
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By delinquency status: |
|
|
|
|
Current-29 DPD |
|
$ |
207,363 |
|
|
|
1,238,311 |
|
|
|
74,440 |
|
|
|
1,520,114 |
|
30-89 DPD |
|
|
- |
|
|
|
4,129 |
|
|
|
1,227 |
|
|
|
5,356 |
|
90+ DPD and still accruing |
|
|
1 |
|
|
|
3,419 |
|
|
|
- |
|
|
|
3,420 |
|
Nonaccrual loans |
|
|
2,454 |
|
|
|
21,491 |
|
|
|
366 |
|
|
|
24,311 |
|
|
|
|
|
|
Total commercial loans |
|
$ |
209,818 |
|
|
|
1,267,350 |
|
|
|
76,033 |
|
|
|
1,553,201 |
|
29
CONSUMER CREDIT QUALITY INDICATORS We have various classes of consumer loans that present respective unique risks. Loan delinquency, FICO credit scores and LTV for loan types
are common credit quality indicators that we monitor and utilize in our evaluation of the adequacy of the allowance for credit losses for the consumer portfolio segment.
The majority of our loss estimation techniques used for the allowance for credit losses
rely on delinquency matrix models or delinquency roll rate models. Therefore, delinquency is an important indicator of credit quality and the establishment of our allowance for credit losses.
The following table
provides the outstanding balances of our consumer portfolio by delinquency status.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Real estate
1-4 family
first
mortgage |
|
|
Real estate
1-4 family junior
lien mortgage |
|
|
Total |
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By delinquency status: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
8,440,341 |
|
|
|
3,440,231 |
|
|
|
11,880,572 |
|
1-29 DPD |
|
|
239,859 |
|
|
|
205,070 |
|
|
|
444,929 |
|
30-59 DPD |
|
|
92,802 |
|
|
|
49,875 |
|
|
|
142,677 |
|
60-89 DPD |
|
|
45,551 |
|
|
|
28,934 |
|
|
|
74,485 |
|
90-119 DPD |
|
|
23,399 |
|
|
|
20,326 |
|
|
|
43,725 |
|
120-179 DPD |
|
|
51,884 |
|
|
|
32,012 |
|
|
|
83,896 |
|
180+ DPD |
|
|
111,443 |
|
|
|
30,086 |
|
|
|
141,529 |
|
Remaining PCI accounting adjustments |
|
|
(19,619 |
) |
|
|
(5,559 |
) |
|
|
(25,178 |
) |
|
|
|
|
Total consumer loans |
|
$ |
8,985,660 |
|
|
|
3,800,975 |
|
|
|
12,786,635 |
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By delinquency status: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
9,329,130 |
|
|
|
3,653,515 |
|
|
|
12,982,645 |
|
1-29 DPD |
|
|
240,362 |
|
|
|
227,877 |
|
|
|
468,239 |
|
30-59 DPD |
|
|
90,734 |
|
|
|
57,608 |
|
|
|
148,342 |
|
60-89 DPD |
|
|
49,688 |
|
|
|
34,843 |
|
|
|
84,531 |
|
90-119 DPD |
|
|
35,593 |
|
|
|
21,674 |
|
|
|
57,267 |
|
120-179 DPD |
|
|
54,874 |
|
|
|
41,498 |
|
|
|
96,372 |
|
180+ DPD |
|
|
110,100 |
|
|
|
33,986 |
|
|
|
144,086 |
|
Remaining PCI accounting adjustments |
|
|
(23,648 |
) |
|
|
(4,471 |
) |
|
|
(28,119 |
) |
|
|
|
|
Total consumer loans |
|
$ |
9,886,833 |
|
|
|
4,066,530 |
|
|
|
13,953,363 |
|
30
The following table provides a breakdown of our consumer portfolio by updated FICO. We
obtain FICO scores at loan origination and the scores are updated at least quarterly. FICO is
not available for certain loan types and may not be obtained if we deem it unnecessary due to strong collateral and other borrower attributes.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Real estate
1-4 family
first
mortgage |
|
|
Real estate
1-4 family junior
lien mortgage |
|
|
Total |
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By updated FICO: |
|
|
|
|
|
|
|
|
|
|
|
|
< 600 |
|
$ |
571,489 |
|
|
|
458,289 |
|
|
|
1,029,778 |
|
600-639 |
|
|
305,584 |
|
|
|
205,997 |
|
|
|
511,581 |
|
640-679 |
|
|
584,022 |
|
|
|
365,908 |
|
|
|
949,930 |
|
680-719 |
|
|
1,223,479 |
|
|
|
562,257 |
|
|
|
1,785,736 |
|
720-759 |
|
|
1,772,652 |
|
|
|
764,096 |
|
|
|
2,536,748 |
|
760-799 |
|
|
2,868,897 |
|
|
|
899,870 |
|
|
|
3,768,767 |
|
800+ |
|
|
1,490,852 |
|
|
|
465,611 |
|
|
|
1,956,463 |
|
No FICO available |
|
|
188,304 |
|
|
|
84,506 |
|
|
|
272,810 |
|
Remaining PCI accounting adjustments |
|
|
(19,619 |
) |
|
|
(5,559 |
) |
|
|
(25,178 |
) |
|
|
|
|
Total consumer loans |
|
$ |
8,985,660 |
|
|
|
3,800,975 |
|
|
|
12,786,635 |
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By updated FICO: |
|
|
|
|
|
|
|
|
|
|
|
|
< 600 |
|
$ |
592,306 |
|
|
|
478,837 |
|
|
|
1,071,143 |
|
600-639 |
|
|
308,528 |
|
|
|
219,499 |
|
|
|
528,027 |
|
640-679 |
|
|
594,252 |
|
|
|
363,377 |
|
|
|
957,629 |
|
680-719 |
|
|
1,240,345 |
|
|
|
583,981 |
|
|
|
1,824,326 |
|
720-759 |
|
|
1,882,147 |
|
|
|
811,697 |
|
|
|
2,693,844 |
|
760-799 |
|
|
3,136,616 |
|
|
|
932,872 |
|
|
|
4,069,488 |
|
800+ |
|
|
1,608,139 |
|
|
|
492,220 |
|
|
|
2,100,359 |
|
No FICO available |
|
|
548,148 |
|
|
|
188,518 |
|
|
|
736,666 |
|
Remaining PCI accounting adjustments |
|
|
(23,648 |
) |
|
|
(4,471 |
) |
|
|
(28,119 |
) |
|
|
|
|
Total consumer loans |
|
$ |
9,886,833 |
|
|
|
4,066,530 |
|
|
|
13,953,363 |
|
31
LTV refers to the ratio comparing the loans unpaid principal balance to the
propertys collateral value. CLTV refers to the combination of first mortgage and junior lien mortgage ratios. LTVs and CLTVs are updated quarterly using a cascade approach which first uses values provided by automated valuation models (AVMs)
for the property. If an AVM is not available, then the value is estimated using the original appraised value adjusted by the change in Home Price Index (HPI) for the property location. If an HPI is not available, the original appraised value is
used. The HPI value is normally the only method considered for high value properties as the AVM values have proven less accurate for these properties.
The following table shows the most updated LTV and CLTV distribution of the real estate 1-4 family first and junior lien
mortgage loan portfolios excluding PCI loans. In recent years, the residential real estate markets have experienced significant declines in property values and several markets, particularly
California and Florida have experienced declines that turned out to be more significant than the national decline. These trends are considered in the way that we monitor credit risk and establish our allowance for credit losses. LTV does not
necessarily reflect the likelihood of performance of a given loan, but does provide an indication of collateral value. In the event of a default, any loss should be limited to the portion of the loan amount in excess of the net realizable value of
the underlying real estate collateral value. Certain loans do not have an LTV or CLTV primarily due to industry data availability and portfolios acquired from or serviced by other institutions.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Real estate 1-4 family first mortgage by LTV |
|
|
Real estate 1-4 family junior lien mortgage by CLTV |
|
|
Total |
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By LTV/CLTV: |
|
|
|
|
|
|
|
|
|
|
|
|
0-60% |
|
$ |
3,749,122 |
|
|
|
721,581 |
|
|
|
4,470,703 |
|
60.01-80% |
|
|
2,877,948 |
|
|
|
740,736 |
|
|
|
3,618,684 |
|
80.01-100% |
|
|
1,409,785 |
|
|
|
982,009 |
|
|
|
2,391,794 |
|
100.01-120% (1) |
|
|
546,866 |
|
|
|
731,713 |
|
|
|
1,278,579 |
|
> 120% (1) |
|
|
343,109 |
|
|
|
613,488 |
|
|
|
956,597 |
|
No LTV/CLTV available |
|
|
78,449 |
|
|
|
17,007 |
|
|
|
95,456 |
|
Remaining PCI accounting adjustments |
|
|
(19,619 |
) |
|
|
(5,559 |
) |
|
|
(25,178 |
) |
|
|
|
|
Total |
|
$ |
8,985,660 |
|
|
|
3,800,975 |
|
|
|
12,786,635 |
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
By LTV/CLTV: |
|
|
|
|
|
|
|
|
|
|
|
|
0-60% |
|
$ |
4,196,364 |
|
|
|
963,813 |
|
|
|
5,160,177 |
|
60.01-80% |
|
|
3,276,565 |
|
|
|
799,961 |
|
|
|
4,076,526 |
|
80.01-100% |
|
|
1,457,583 |
|
|
|
1,010,522 |
|
|
|
2,468,105 |
|
100.01-120% (1) |
|
|
538,686 |
|
|
|
698,335 |
|
|
|
1,237,021 |
|
> 120% (1) |
|
|
316,528 |
|
|
|
546,039 |
|
|
|
862,567 |
|
No LTV/CLTV available |
|
|
124,755 |
|
|
|
52,331 |
|
|
|
177,086 |
|
Remaining PCI accounting adjustments |
|
|
(23,648 |
) |
|
|
(4,471 |
) |
|
|
(28,119 |
) |
|
|
|
|
Total |
|
$ |
9,886,833 |
|
|
|
4,066,530 |
|
|
|
13,953,363 |
|
(1) |
Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess
of 100% LTV/CLTV. |
32
NONACCRUAL LOANS The following table provides loans on nonaccrual status. PCI loans are excluded from this table due to the existence of the accretable yield.
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Mar. 31, 2011 |
|
|
Dec. 31, 2010 |
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
901 |
|
|
|
2,454 |
|
Real estate mortgage |
|
|
22,454 |
|
|
|
21,491 |
|
Real estate construction |
|
|
442 |
|
|
|
366 |
|
|
|
|
Total commercial |
|
|
23,797 |
|
|
|
24,311 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
222,843 |
|
|
|
225,297 |
|
Real estate 1-4 family junior lien mortgage |
|
|
107,812 |
|
|
|
117,218 |
|
|
|
|
Total consumer |
|
|
330,655 |
|
|
|
342,515 |
|
|
|
|
Total nonaccrual loans (excluding PCI) |
|
$ |
354,452 |
|
|
|
366,826 |
|
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Certain loans 90 days or more past due as to interest or principal are still accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1-4 family
mortgage loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans of $10.0 million at March 31, 2011, and $10.9 million at December 31, 2010, are excluded from
this disclosure even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments. We do not
hold 1-4 family mortgage loans that are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs that would be considered for this table.
Non-PCI loans 90 days or more past due and still accruing were $27.2 million at March 31, 2011, and $40.4 million at
December 31, 2010. The following table shows non-PCI loans 90 days or more past due and still accruing.
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Mar. 31, 2011 |
|
|
Dec. 31, 2010 |
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
6 |
|
|
|
1 |
|
Real estate mortgage |
|
|
- |
|
|
|
3,419 |
|
Real estate construction |
|
|
- |
|
|
|
- |
|
|
|
|
Total commercial |
|
|
6 |
|
|
|
3,420 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
13,476 |
|
|
|
22,319 |
|
Real estate 1-4 family junior lien mortgage |
|
|
13,700 |
|
|
|
14,645 |
|
|
|
|
Total consumer |
|
|
27,176 |
|
|
|
36,964 |
|
|
|
|
Total past due (excluding PCI) |
|
$ |
27,182 |
|
|
|
40,384 |
|
33
IMPAIRED LOANS The table below summarizes key information for impaired loans. Our impaired loans include loans on nonaccrual status in the commercial
portfolio segment and loans modified in a TDR, whether on accrual or nonaccrual status.
These impaired loans may have estimated impairment which is included in the allowance for credit losses. Impaired loans exclude PCI loans. See the Loans section in Note 1 in our 2010
Form 10-K for our policies on impaired loans and PCI loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment |
|
|
|
|
(in thousands) |
|
Unpaid principal balance |
|
|
Impaired loans |
|
|
Impaired loans with related allowance for credit losses |
|
|
Related allowance for credit losses |
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
917 |
|
|
|
901 |
|
|
|
901 |
|
|
|
413 |
|
Real estate mortgage |
|
|
25,665 |
|
|
|
20,209 |
|
|
|
19,948 |
|
|
|
8,676 |
|
Real estate construction |
|
|
467 |
|
|
|
360 |
|
|
|
360 |
|
|
|
167 |
|
|
|
|
|
|
Total commercial |
|
|
27,049 |
|
|
|
21,470 |
|
|
|
21,209 |
|
|
|
9,256 |
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
156,072 |
|
|
|
147,878 |
|
|
|
147,878 |
|
|
|
32,500 |
|
Real estate 1-4 family junior lien mortgage |
|
|
98,206 |
|
|
|
92,952 |
|
|
|
92,952 |
|
|
|
37,431 |
|
|
|
|
|
|
Total consumer |
|
|
254,278 |
|
|
|
240,830 |
|
|
|
240,830 |
|
|
|
69,931 |
|
|
|
|
|
|
Total (excluding PCI) |
|
$ |
281,327 |
|
|
|
262,300 |
|
|
|
262,039 |
|
|
|
79,187 |
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
4,537 |
|
|
|
3,151 |
|
|
|
3,151 |
|
|
|
1,102 |
|
Real estate mortgage |
|
|
22,506 |
|
|
|
19,746 |
|
|
|
19,746 |
|
|
|
9,337 |
|
Real estate construction |
|
|
389 |
|
|
|
366 |
|
|
|
366 |
|
|
|
122 |
|
|
|
|
|
|
Total commercial |
|
|
27,432 |
|
|
|
23,263 |
|
|
|
23,263 |
|
|
|
10,561 |
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
137,296 |
|
|
|
131,159 |
|
|
|
131,159 |
|
|
|
19,205 |
|
Real estate 1-4 family junior lien mortgage |
|
|
82,335 |
|
|
|
78,187 |
|
|
|
78,187 |
|
|
|
32,676 |
|
|
|
|
|
|
Total consumer |
|
|
219,631 |
|
|
|
209,346 |
|
|
|
209,346 |
|
|
|
51,881 |
|
|
|
|
|
|
Total (excluding PCI) |
|
$ |
247,063 |
|
|
|
232,609 |
|
|
|
232,609 |
|
|
|
62,442 |
|
34
The following table provides the average recorded investment in impaired loans and the
amount of interest income recognized on impaired loans after impairment by portfolio segment and class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
(in thousands) |
|
Average recorded investment |
|
|
Recognized interest income |
|
|
Average recorded investment |
|
|
Recognized interest income |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
1,957 |
|
|
|
- |
|
|
|
333 |
|
|
|
- |
|
Real estate mortgage |
|
|
19,996 |
|
|
|
4 |
|
|
|
6,778 |
|
|
|
14 |
|
Real estate construction |
|
|
366 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Total commercial |
|
|
22,319 |
|
|
|
4 |
|
|
|
7,111 |
|
|
|
14 |
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
143,031 |
|
|
|
1,483 |
|
|
|
59,053 |
|
|
|
1,019 |
|
Real estate 1-4 family junior lien mortgage |
|
|
84,850 |
|
|
|
1,023 |
|
|
|
64,998 |
|
|
|
772 |
|
|
|
|
|
|
Total consumer |
|
|
227,881 |
|
|
|
2,506 |
|
|
|
124,051 |
|
|
|
1,791 |
|
|
|
|
|
|
Total impaired loans |
|
$ |
250,200 |
|
|
|
2,510 |
|
|
|
131,162 |
|
|
|
1,805 |
|
The following table presents interest income on impaired loans by method.
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
Cash basis of accounting |
|
$ |
16 |
|
|
|
57 |
|
Other (1) |
|
|
2,494 |
|
|
|
1,748 |
|
|
|
|
Total interest income |
|
$ |
2,510 |
|
|
|
1,805 |
|
(1) |
Includes interest recognized on accruing TDRs and interest recognized related to the passage of time on certain impaired loans. See footnote 1 to the table of changes
in the allowance for credit losses. |
35
Note 3: Derivatives
We use derivative financial instruments as economic hedges and none are treated as accounting hedges. By
using derivatives, we are exposed to credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is equal to the amount reported as a derivative asset in our
balance sheet. The amounts reported as a derivative asset are derivative contracts in a gain position, and to the extent subject to master netting arrangements, net of derivatives in a loss position with the same counterparty and cash collateral
received. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and executing master netting arrangements and obtaining collateral, where appropriate. Derivative balances and related cash collateral amounts
are shown net in the balance sheet as long as they are subject to
master netting agreements and meet the criteria for net presentation. Counterparty credit risk related to derivatives is considered and, if material, accounted for separately.
At March 31, 2011, receive-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 1.22
years, weighted average receive rate of 7.45% and weighted average pay rate of 0.31%. Pay-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 1.22 years, weighted average receive rate of 0.31% and
weighted average pay rate of 5.72% at March 31, 2011. All of the interest rate swaps have variable pay or receive rates based on three- or six-month LIBOR.
The total notional amounts and fair values for derivatives of which none of the derivatives are designated as hedging instruments were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
(in thousands) |
|
Notional or contractual amount |
|
|
Fair value |
|
|
Notional or contractual amount |
|
|
Fair value |
|
|
|
Asset derivatives |
|
|
Liability derivatives |
|
|
|
Asset derivatives |
|
|
Liability derivatives |
|
Interest rate swaps |
|
$ |
8,200,000 |
|
|
|
430,989 |
|
|
|
324,569 |
|
|
|
8,200,000 |
|
|
|
422,597 |
|
|
|
316,327 |
|
Netting (1) |
|
|
|
|
|
|
(429,826 |
) |
|
|
(324,569 |
) |
|
|
|
|
|
|
(421,584 |
) |
|
|
(316,327 |
) |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
1,163 |
|
|
|
- |
|
|
|
|
|
|
|
1,013 |
|
|
|
- |
|
(1) |
Derivatives are reported net of cash collateral received and paid. Additionally, positions with the same counterparty are netted as part of a legally enforceable master
netting agreement between Wachovia Funding and the derivative counterparty. |
At March 31, 2011, our position in interest rate swaps, which is recorded as a net
amount on our consolidated balance sheet at fair value, was an asset of $431.0 million, a liability of $324.6 million, and a cash collateral payable of $105.2 million.
Gains recognized in the consolidated statement of income related to derivatives not designated as hedging instruments in first quarter 2011 and 2010 were $110 thousand and $1.1 million, respectively.
36
Note 4: Fair Values of Assets and Liabilities
Under our fair value framework, fair value measurements must reflect assumptions market participants would
use in pricing an asset or liability.
Fair value represents the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in the principal market. If there is no principal market, an entity should use the most advantageous market for the specific asset or liability at the measurement date
(referred to as an exit price). We group our assets and liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These
levels are:
|
|
|
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets. |
|
|
|
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
|
|
|
Level 3 Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable
assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. |
In the determination of the classification of financial instruments in Level 2 or Level 3 of the fair value hierarchy, we consider all available information, including observable market data, indications
of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. For securities in inactive markets, we use a predetermined percentage to evaluate the impact of fair value adjustments derived from
weighting both external and internal indications of value to determine if the instrument is classified as Level 2 or Level 3. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the
significance of the Level 3 inputs to the instruments fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.
Determination of Fair Value In determining fair value, Wachovia Funding uses market prices of the same or similar instruments whenever such prices are available. A fair value measurement assumes
that an asset or liability is exchanged in an orderly transaction between market participants, and accordingly, fair value is not determined based upon a forced liquidation or distressed sale. Where necessary, Wachovia Funding estimates fair value
using other market observable data such as prices for synthetic or derivative instruments, market indices, and industry ratings of underlying collateral or models employing techniques such as discounted cash flow analyses. The assumptions used in
the models, which typically include
assumptions for interest rates, credit losses and prepayments, are verified against market observable data where possible. Market observable real estate data is used in valuing instruments where
the underlying collateral is real estate or where the fair value of an instrument being valued highly correlates to real estate prices. Where appropriate, Wachovia Funding may use a combination of these valuation approaches.
Where the market price of the same or similar instruments is not available, the valuation of financial instruments becomes more
subjective and involves a high degree of judgment. Where modeling techniques are used, the models are subject to validation procedures by our internal valuation model validation group in accordance with risk management policies and procedures.
Further, pricing data is subject to verification.
Derivatives Wachovia Fundings derivatives are executed over the counter (OTC).
As no quoted market prices exist for such instruments, OTC derivatives are valued using internal valuation techniques. Valuation techniques and inputs to internally-developed models depend on the type of derivative and the nature of the underlying
rate, price or index upon which the derivatives value is based. Key inputs can include yield curves, credit curves, foreign-exchange rates, prepayment rates, volatility measurements and correlation of such inputs. Where model inputs can be
observed in a liquid market and the model selection does not require significant judgment, such derivatives are typically classified within Level 2 of the fair value hierarchy. Examples of derivatives within Level 2 include generic interest rate
swaps.
Wachovia Fundings interest rate swaps are recorded at fair value. The fair value of interest rate swaps is
estimated using discounted cash flow analyses based on observable market data.
Loans Wachovia Funding does not record loans at fair
value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for disclosing estimated fair values. However, from time to time, we record nonrecurring fair value adjustments to loans to primarily reflect partial
write-downs that are based on the current appraised value of the collateral.
The fair value estimates for disclosure
purposes differentiate loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment and credit loss estimates are evaluated by product and loan rate.
The fair value of commercial and industrial and commercial real estate loans is calculated by discounting contractual cash flows,
adjusted for credit loss estimates, using discount rates that reflect our current pricing for loans with similar characteristics and remaining maturity.
For real estate 1-4 family first and junior lien mortgages, fair value is calculated by discounting contractual cash flows, adjusted for prepayment and credit loss estimates, using discount rates based on
current industry pricing (where readily available) or our own estimate of an appropriate risk-adjusted
37
discount rate for loans of similar size, type, remaining maturity and repricing characteristics.
Items Measured at Fair Value on a Recurring Basis
The following table presents Wachovia Fundings assets and liabilities that are measured at fair value on a recurring basis at March 31, 2011
and December 31, 2010, for each of the fair value hierarchy levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Netting (1) |
|
|
Total |
|
|
|
|
|
|
|
Balance at March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
- |
|
|
|
430,989 |
|
|
|
- |
|
|
|
(429,826 |
) |
|
|
1,163 |
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
- |
|
|
|
430,989 |
|
|
|
- |
|
|
|
(429,826 |
) |
|
|
1,163 |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
- |
|
|
|
324,569 |
|
|
|
- |
|
|
|
(324,569 |
) |
|
|
- |
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
- |
|
|
|
324,569 |
|
|
|
- |
|
|
|
(324,569 |
) |
|
|
- |
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
- |
|
|
|
422,597 |
|
|
|
- |
|
|
|
(421,584 |
) |
|
|
1,013 |
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
- |
|
|
|
422,597 |
|
|
|
- |
|
|
|
(421,584 |
) |
|
|
1,013 |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
- |
|
|
|
316,327 |
|
|
|
- |
|
|
|
(316,327 |
) |
|
|
- |
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
- |
|
|
|
316,327 |
|
|
|
- |
|
|
|
(316,327 |
) |
|
|
- |
|
(1) |
Derivatives are reported net of cash collateral received and paid. Additionally, positions with the same counterparty are netted as a part of a legally enforceable
master netting agreement between Wachovia Funding and the derivative counterparty. See Note 3 for additional information on the treatment of master netting arrangements related to derivative contracts. |
As of March 31, 2011, 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.
38
Disclosures about Fair Value of Financial Instruments Information about the fair value of on-balance
sheet financial
instruments at March 31, 2011 and December 31, 2010 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
(in thousands) |
|
Carrying amount |
|
|
Estimated fair value |
|
|
Carrying amount |
|
|
Estimated fair value |
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,694,996 |
|
|
|
1,694,996 |
|
|
|
2,774,299 |
|
|
|
2,774,299 |
|
Loans, net of unearned income and allowance for loan losses (1) |
|
|
13,896,842 |
|
|
|
15,080,809 |
|
|
|
15,103,604 |
|
|
|
16,354,121 |
|
Interest rate swaps (2) |
|
|
1,163 |
|
|
|
1,163 |
|
|
|
1,013 |
|
|
|
1,013 |
|
Accounts receivable - affiliates, net |
|
|
- |
|
|
|
- |
|
|
|
218,394 |
|
|
|
218,394 |
|
Other financial assets |
|
|
55,413 |
|
|
|
55,413 |
|
|
|
77,131 |
|
|
|
77,131 |
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - affiliates, net |
|
|
44,591 |
|
|
|
44,591 |
|
|
|
- |
|
|
|
- |
|
Other financial liabilities |
|
|
18,448 |
|
|
|
18,448 |
|
|
|
19,389 |
|
|
|
19,389 |
|
(1) |
Unearned income and deferred fees were $719.2 million and $785.2 million at March 31, 2011 and December 31, 2010, respectively. Allowance for loan losses was
$389.3 million at March 31, 2011 and $403.0 million at December 31, 2010. |
(2) |
Interest rate swaps are reported net of cash collateral payable of $105.2 million and $105.3 million at March 31, 2011 and December 31, 2010, respectively,
pursuant to the accounting requirements for net presentation. See Note 3 for additional information on derivatives. |
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.
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.
39
Note 5: Common and Preferred Stock
Wachovia Funding has authorized preferred and
common stock. In order to remain qualified as a REIT, Wachovia Funding must distribute annually at least 90% of taxable earnings. The following table provides detail of preferred stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 and December 31, 2010 |
|
(in thousands, except shares and liquidation preference per share) |
|
Liquidation preference per share |
|
|
Shares authorized |
|
|
Shares issued and outstanding |
|
|
Par value |
|
|
Carrying value |
|
|
|
|
|
|
|
Series A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.25% Non-Cumulative Exchangeable, Perpetual Series A Preferred Securities |
|
$ |
25 |
|
|
|
30,000,000 |
|
|
|
30,000,000 |
|
|
$ |
300 |
|
|
|
300 |
|
|
|
|
|
|
|
Series B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate (three-month LIBOR plus 1.83%) Non-Cumulative Exchangeable, Perpetual Series B Preferred Securities |
|
|
25 |
|
|
|
40,000,000 |
|
|
|
40,000,000 |
|
|
|
400 |
|
|
|
400 |
|
|
|
|
|
|
|
Series C |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate (three-month LIBOR plus 2.25%) Cumulative, Perpetual Series C Preferred Securities |
|
|
1,000 |
|
|
|
5,000,000 |
|
|
|
4,233,754 |
|
|
|
43 |
|
|
|
43 |
|
|
|
|
|
|
|
Series D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.50% Non-Cumulative, Perpetual Series D Preferred Securities |
|
|
1,000 |
|
|
|
913 |
|
|
|
913 |
|
|
|
- |
|
|
|
- |
|
Total |
|
|
|
|
|
|
75,000,913 |
|
|
|
74,234,667 |
|
|
$ |
743 |
|
|
|
743 |
|
In the event that Wachovia Funding is liquidated or dissolved, the holders of the
preferred securities will be entitled to a liquidation preference for each security plus any authorized, declared and unpaid dividends that will be paid prior to any payments to common stockholders or general unsecured creditors. With respect to the
payment of dividends and liquidation preference, the Series A preferred securities rank on parity with Series B and Series D preferred securities and senior to the common stock and Series C preferred securities. In the event that a supervisory event
occurs in which the Bank is placed into conservatorship or receivership, the Series A and Series B preferred securities are convertible into certain preferred stock of Wells Fargo.
Except upon the occurrence of a Special Event (as defined below), the Series A preferred securities are not redeemable prior to
December 31, 2022. On or after such date, we may redeem these securities for cash, in whole or in part, with the prior approval of the Office of the Comptroller of the Currency (OCC), at the redemption price of $25 per security, plus
authorized, declared, but unpaid dividends to the date of redemption. The Series B and Series C preferred securities may be redeemed for cash, in whole or in part, with the prior approval of the OCC, at redemption prices of $25 and $1,000 per
security, respectively, plus authorized, declared, but unpaid dividends to the date of redemption, including any accumulation of any unpaid dividends for the Series C preferred securities. We can redeem the Series D preferred securities in whole or
in part at any time at $1,000 per security plus authorized, declared and unpaid dividends.
A Special Event means: a Tax
Event; an Investment Company Act Event; or a Regulatory Capital Event.
Tax Event means our determination, based on the
receipt by us of a legal opinion, that there is a significant risk that dividends paid or to be paid by us with respect to our capital
stock are not or will not be fully deductible by us for United States Federal income tax purposes or that we are or will be subject to additional taxes, duties, or other governmental charges, in
an amount we reasonably determine to be significant as a result of:
|
|
|
any amendment to, clarification of, or change in, the laws, treaties, or related regulations of the United States or any of its political subdivisions
or their taxing authorities affecting taxation; or |
|
|
|
any judicial decision, official administrative pronouncement, published or private ruling, technical advice memorandum, Chief Counsel Advice, as such
term is defined in the Code, regulatory procedure, notice, or official announcement. |
Investment Company
Act Event means our determination, based on the receipt by us of a legal opinion, that there is a significant risk that we are or will be considered an investment company that is required to be registered under the Investment Company
Act, as a result of the occurrence of a change in law or regulation or a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency, or regulatory authority.
Regulatory Capital Event means our determination, based on the receipt by us of a legal opinion, that there is a significant risk that
the Series A preferred securities will no longer constitute Tier 1 capital of the Bank or Wells Fargo for purposes of the capital adequacy guidelines or policies of the OCC or the Federal Reserve Board, or their respective successor as the
Banks and Wells Fargos, respectively, primary Federal banking regulator, as a result of any amendments to, clarification of, or change in applicable laws or related regulations or official interpretations or policies; or any official
administrative pronouncement or
40
judicial decision interpreting or applying such laws or regulations.
We continue to monitor and evaluate the potential impact on regulatory capital and liquidity management of regulatory
proposals, including Basel III and those required under the Dodd-Frank Act, throughout the rule-making process.
Note 6:
Transactions With Related Parties
Wachovia Funding, as a subsidiary, is 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 principal items related to transactions with affiliated parties included in the accompanying consolidated
balance sheets and consolidated statements of income are described below. Due to the nature of common ownership of Wachovia Funding and the affiliated parties by Wells Fargo, the following transactions could differ from those conducted with
unaffiliated parties.
As part of its investment activities, Wachovia Funding obtains loans and/or 100% interests in loan
participations (which are both reflected as loans in the accompanying consolidated financial statements). As of March 31, 2011 and December 31, 2010, substantially all of our loans are in the form of loan participation interests. Although
we may purchase loans from third parties, we have historically purchased loan participation interests from the Bank in loans it originated or purchased. In first quarter 2011, we did not purchase loan participation interests from the Bank.
In addition, we sell loan participations to the Bank that are in the foreclosure process or determined to be unsecured. We
sold to the Bank $31.3 million and $23.2 million of loan participations during first quarter 2011 and 2010, respectively. Gain on loan sales to affiliate was $113 thousand in first quarter 2011. Loss on loan sales to affiliate was $256 thousand in
first quarter 2010.
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 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. Included in loan servicing costs are fees paid to affiliates of $13.0 million in first quarter 2011, and $15.4 million in first quarter
2010.
Management fees represent reimbursements for general overhead expenses paid on our behalf. Management fees were
calculated based on Wells Fargos total monthly allocated costs multiplied by a formula. The formula is based on our proportion of Wells Fargos consolidated: 1) full-time equivalent employees (FTEs), 2) total average assets and 3) total
revenue. These expenses amounted to $1.2 million in first quarter 2011 and $1.1 million in first quarter 2010.
Eurodollar
deposits with the Bank are our primary cash management vehicle. At March 31, 2011 and December 31, 2010, Eurodollar deposit investments due from the Bank included in cash and cash equivalents were $1.7 billion and $2.8 billion,
respectively. Interest income earned on Eurodollar deposit
investments included in interest income was $189 thousand in first quarter 2011 and $315 thousand in first quarter 2010.
Wachovia Funding has a swap servicing and fee agreement with the Bank whereby the Bank provides operational, back office, book entry, record keeping and valuation services related to our interest rate
swaps. In consideration of these services, we pay the Bank 0.015% multiplied by the net amount actually paid under the interest rate swaps on the swaps payment date. Amounts paid under this agreement were $3 thousand in both first quarter 2011
and 2010, and were included in loan servicing costs.
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 equal to the sum of 0.05% multiplied by the fair value of noncash collateral and 0.05% multiplied by the amount of cash collateral. Amounts paid under this
agreement were $13 thousand in first quarter 2011 and $22 thousand in first quarter 2010. 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 equal to the
sum of 0.05% multiplied by the fair value of the noncash collateral it holds as custodian and the amount of cash collateral held multiplied by a market rate of interest. The collateral agreement with the counterparty allows us to repledge the
collateral free of any right of redemption or other right of the counterparty in such collateral without any obligation on our part to maintain possession or control of equivalent collateral. Pursuant to the rehypothecation agreement, we had
invested $105.2 million and $105.3 million of cash collateral in interest-bearing investments with the Bank or other Wells Fargo subsidiaries at March 31, 2011 and December 31, 2010, respectively. We did not receive any income amounts
under this agreement in first quarter 2011 or first quarter 2010.
The Bank also provides a guaranty of our obligations under
the interest rate swaps when the swaps are in a net payable position. In consideration, we pay the Bank a monthly fee in arrears equal to 0.03% multiplied by the absolute value of the net notional amount of the interest rate swaps. No amount was
paid under this agreement in first quarter 2011 and 2010.
Wachovia Funding has a line of credit with the Bank. Under the
terms of that facility, we can borrow up to $2.2 billion under revolving demand notes at a rate of interest equal to the average federal funds rate. At March 31, 2011 and December 31, 2010, we had no outstandings under this facility.
41
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Wachovia Funding
is not currently involved in nor, to our knowledge, currently threatened with any material litigation. From time to time we may become involved in routine litigation arising in the ordinary course of business. We do not believe that the eventual
outcome of any such routine litigation will, in the aggregate, have a material adverse effect on our consolidated financial statements. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those
matters, if unfavorable, could be material to our consolidated financial statements for any particular period.
Item 1A. Risk Factors
Information in response to this item can be found under the Risk Factors section in this Report which information is incorporated by reference into this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information required by this Item 2 pursuant to Item 703 of Regulation S-K regarding issuer repurchases of equity securities is not applicable
since we do not have a program providing for the repurchase of our securities.
Item 6. Exhibits
(a) Exhibits
Exhibit No.
|
|
|
(12)(a) |
|
Computation of Consolidated Ratios of Earnings to Fixed Charges. |
|
|
(12)(b) |
|
Computation of Consolidated Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. |
|
|
(31)(a) |
|
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
(31)(b) |
|
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
(32)(a) |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
(32)(b) |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
(99) |
|
Wells Fargo & Company Supplementary Consolidating Financial Information. |
42
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
Dated: May 11, 2011 |
|
|
|
WACHOVIA PREFERRED FUNDING CORP. |
|
|
|
|
|
|
|
By: /s/ RICHARD D. LEVY |
|
|
|
|
Richard D. Levy |
|
|
|
|
Executive Vice President and Controller |
|
|
|
|
(Principal Accounting Officer) |
43