e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
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41-0449260 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: 1-866-249-3302
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Shares Outstanding |
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October 31, 2006 |
Common stock, $1-2/3 par value
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3,375,964,759 |
FORM 10-Q
CROSS-REFERENCE INDEX
1
PART I FINANCIAL INFORMATION
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
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% Change |
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Quarter ended |
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Sept. 30, 2006 from |
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Nine months ended |
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Sept. 30 |
, |
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June 30 |
, |
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Sept. 30 |
, |
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June 30 |
, |
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Sept. 30 |
, |
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Sept. 30 |
, |
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Sept. 30 |
, |
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% |
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($ in millions, except per share amounts) |
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2006 |
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2006 |
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2005 |
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2006 |
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2005 |
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2006 |
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2005 |
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Change |
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For the Period |
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Net income |
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$ |
2,194 |
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$ |
2,089 |
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$ |
1,975 |
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5 |
% |
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11 |
% |
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$ |
6,301 |
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$ |
5,741 |
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10 |
% |
Diluted earnings per common share |
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0.64 |
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0.61 |
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0.58 |
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5 |
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10 |
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1.85 |
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1.68 |
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10 |
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Profitability ratios (annualized) |
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Net income to average total assets (ROA) |
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1.76 |
% |
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1.71 |
% |
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1.75 |
% |
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3 |
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1 |
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1.73 |
% |
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1.75 |
% |
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(1 |
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Net income to average stockholders equity (ROE) |
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20.00 |
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19.76 |
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19.72 |
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1 |
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1 |
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19.89 |
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19.70 |
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1 |
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Efficiency ratio (1) |
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56.9 |
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58.9 |
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57.5 |
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(3 |
) |
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(1 |
) |
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58.3 |
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57.8 |
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1 |
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Total revenue |
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$ |
8,934 |
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$ |
8,789 |
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$ |
8,503 |
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2 |
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5 |
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$ |
26,278 |
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$ |
24,457 |
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7 |
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Dividends declared per common share |
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0.54 |
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0.26 |
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(100 |
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(100 |
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0.80 |
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0.74 |
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8 |
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Average common shares outstanding |
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3,371.9 |
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3,363.8 |
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3,373.5 |
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3,364.6 |
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3,379.8 |
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Diluted average common shares outstanding |
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3,416.0 |
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3,404.4 |
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3,410.6 |
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3,405.5 |
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3,418.7 |
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Average loans |
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$ |
303,980 |
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$ |
300,388 |
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$ |
295,611 |
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1 |
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3 |
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$ |
305,141 |
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$ |
292,874 |
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4 |
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Average assets |
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494,679 |
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491,456 |
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448,159 |
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1 |
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10 |
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487,182 |
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438,143 |
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11 |
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Average core deposits (2) |
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260,430 |
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257,695 |
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247,187 |
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1 |
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5 |
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257,402 |
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239,171 |
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8 |
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Average retail core deposits (3) |
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212,440 |
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213,588 |
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205,078 |
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(1 |
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4 |
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212,980 |
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198,881 |
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7 |
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Net interest margin |
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4.79 |
% |
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4.76 |
% |
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4.86 |
% |
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1 |
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(1 |
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4.80 |
% |
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4.87 |
% |
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(1 |
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At Period End |
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Securities available for sale |
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$ |
52,635 |
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$ |
71,420 |
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$ |
34,480 |
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(26 |
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53 |
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$ |
52,635 |
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$ |
34,480 |
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53 |
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Loans |
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307,491 |
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300,622 |
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296,189 |
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2 |
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4 |
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307,491 |
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296,189 |
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4 |
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Allowance for loan losses |
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3,799 |
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3,851 |
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3,886 |
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(1 |
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(2 |
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3,799 |
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3,886 |
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(2 |
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Goodwill |
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11,192 |
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11,091 |
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10,776 |
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1 |
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4 |
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11,192 |
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10,776 |
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4 |
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Assets |
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483,441 |
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499,516 |
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453,494 |
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(3 |
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7 |
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483,441 |
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453,494 |
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7 |
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Core deposits (2) |
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260,793 |
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260,427 |
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248,384 |
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5 |
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260,793 |
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248,384 |
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5 |
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Stockholders equity |
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44,862 |
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41,894 |
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39,835 |
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7 |
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13 |
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44,862 |
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39,835 |
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13 |
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Tier 1 capital (4) |
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35,551 |
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33,344 |
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30,996 |
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7 |
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15 |
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35,551 |
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30,996 |
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15 |
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Total capital (4) |
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50,197 |
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47,202 |
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43,925 |
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6 |
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14 |
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50,197 |
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43,925 |
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14 |
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Capital ratios |
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Stockholders equity to assets |
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9.28 |
% |
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8.39 |
% |
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8.78 |
% |
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11 |
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6 |
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9.28 |
% |
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8.78 |
% |
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6 |
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Risk-based capital (4) |
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Tier 1 capital |
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8.74 |
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8.35 |
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8.35 |
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5 |
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5 |
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8.74 |
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8.35 |
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5 |
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Total capital |
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12.34 |
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11.82 |
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11.84 |
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4 |
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4 |
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12.34 |
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11.84 |
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4 |
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Tier 1 leverage (4) |
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7.41 |
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6.99 |
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7.16 |
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6 |
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3 |
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7.41 |
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7.16 |
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3 |
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Book value per common share |
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$ |
13.30 |
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$ |
12.46 |
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$ |
11.86 |
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7 |
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12 |
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$ |
13.30 |
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$ |
11.86 |
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12 |
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Team members (active, full-time equivalent) |
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156,400 |
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154,300 |
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151,300 |
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1 |
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3 |
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156,400 |
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151,300 |
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3 |
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Common Stock Price |
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High |
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$ |
36.89 |
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$ |
34.86 |
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$ |
31.44 |
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6 |
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17 |
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$ |
36.89 |
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$ |
31.44 |
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17 |
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Low |
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33.36 |
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31.90 |
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29.00 |
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5 |
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15 |
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30.31 |
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28.89 |
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5 |
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Period end |
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36.18 |
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33.54 |
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29.29 |
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8 |
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24 |
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36.18 |
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29.29 |
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24 |
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(1) |
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The efficiency ratio is noninterest expense divided by total revenue (net interest income
and noninterest income). |
(2) |
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Core deposits are noninterest-bearing deposits, interest-bearing checking, savings
certificates and market rate and other savings. |
(3) |
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Retail core deposits are total core deposits excluding Wholesale Banking core deposits and
retail mortgage escrow deposits. |
(4) |
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See Note 18 (Regulatory and Agency Capital Requirements) to Financial Statements for
additional information. |
2
This Report on Form 10-Q for the quarter ended September 30, 2006, including the Financial
Review and 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. We identify some of the
forward-looking statements contained in this Report in the Risk Factors section. Do not unduly
rely on forward-looking statements. Actual results might differ significantly from our forecasts
and expectations due to several factors. Some of these factors are described in the Financial
Review and in the Financial Statements and related Notes. For a discussion of other factors, refer
to the Risk Factors section in this Report and to the Risk Factors and Regulation and
Supervision sections of our Annual Report on Form 10-K for the year ended December 31, 2005 (2005
Form 10-K), filed with the Securities and Exchange Commission (SEC) and available on the SECs
website at www.sec.gov.
OVERVIEW
Wells Fargo & Company is a $483 billion diversified financial services company providing banking,
insurance, investments, mortgage banking and consumer finance through banking stores, the internet
and other distribution channels to consumers, businesses and institutions in all 50 states of the
U.S. and in other countries. We ranked fifth in assets and fourth in market value of our common
stock among U.S. bank holding companies at September 30, 2006. When we refer to the Company,
we, our and us in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated).
When we refer to the Parent, we mean Wells Fargo & Company.
In third quarter 2006, we achieved record diluted earnings per share of $0.64, up 10% from a year
ago, and record net income of $2.19 billion, up 11% from a year ago. All common share and per share
disclosures in this Report reflect the two-for-one stock split in the form of a 100% stock dividend
distributed August 11, 2006. Our results were driven by solid revenue growth, with revenue in
businesses other than Wells Fargo Home Mortgage (Home Mortgage) up a combined 13% from last year,
and positive operating leverage, and once again demonstrated the advantage of our diversified
business model. Despite the uncertain economic and interest rate environment, our diverse group of
more than 80 businesses once again produced double-digit earnings growth, led by particular
strength in regional banking and wholesale/commercial banking. We continued to have strong
performance on numerous financial measures, including a wider net interest margin, improved
operating efficiency and, at 20%, the highest return on equity since first quarter 2004. We
continued to have the widest net interest margin among large bank holding companies. The relative
stability of our margin, despite the persistently challenging yield curve, reflected our discipline
around managing our loan and securities portfolios for high long-term yield, as well as continued
growth in our large base of core deposits while maintaining disciplined deposit pricing.
Our vision is to satisfy all the financial needs of our customers, help them succeed financially,
be recognized as the premier financial services company in our markets and be one of Americas
great companies. Our primary strategy to achieve this vision is to increase the number of products
our customers buy from us and to give them all of the financial products that fulfill their needs.
Our cross-sell strategy and diversified business model facilitate growth in strong and weak
economic cycles, as we can grow by expanding the number of products our current customers have with
us. Our average retail banking household now has a record 5.1 products with us and our average
Wholesale Banking customer has 5.9 products. Our goal is eight
3
products per customer, which is currently half of our estimate of potential demand. Our core
products in third quarter 2006 grew from a year ago, with average loans up 3%, even with
the sales of lower-yielding adjustable rate mortgages (ARMs) through second quarter 2006, average
core deposits up 5% and assets managed and administered up 17%. Our owned mortgage loan servicing
portfolio was a record $1.33 trillion at September 30, 2006, including the $140 billion mortgage
servicing portfolio acquired from Washington Mutual, Inc. in July 2006.
We believe it is important to maintain a well-controlled environment as we continue to grow our
businesses. We manage our credit risk by maintaining prudent credit policies for underwriting and
effective procedures for monitoring and review. We manage the interest rate and market risks
inherent in our asset and liability balances within prudent ranges, while ensuring adequate
liquidity and funding. Our stockholder value has increased over time due to customer satisfaction,
strong financial results, investment in our businesses and the prudent way we attempt to manage our
business risks.
Our financial results included the following:
Net income for third quarter 2006 increased 11% to $2.19 billion from $1.98 billion for third
quarter 2005. Diluted earnings per share for third quarter 2006 increased 10% to $0.64 from $0.58
for third quarter 2005. Return on average assets (ROA) was 1.76% and return on average common
equity (ROE) was 20.00% for third quarter 2006, and 1.75% and 19.72%, respectively, for third
quarter 2005.
Net income for the first nine months of 2006 was $6.30 billion, or $1.85 per share, compared with
$5.74 billion, or $1.68 per share, for the first nine months of 2005. ROA was 1.73% in the first
nine months of 2006, compared with 1.75% for the first nine months of 2005. ROE was 19.89% in the
first nine months of 2006, compared with 19.70% for the first nine months of 2005.
Net interest income on a taxable-equivalent basis increased 8% to $5.08 billion for third quarter
2006 on 9% earning assets growth from $4.70 billion for third quarter 2005. Solid growth in net
interest income again was driven by continued growth in high-quality earning assets and solid core
deposit growth. With short-term interest rates now above 5%, our cumulative sales of lower-yielding
ARMs and debt securities over the last two years continued to add to net interest income.
Noninterest income increased $60 million, or 2%, to $3.89 billion in third quarter 2006 from $3.83
billion in third quarter 2005. Excluding mortgage banking, noninterest income for third quarter
2006 increased 10% from third quarter 2005, reflecting strong growth in deposit service charges (up
8%), trust and investment fees (up 8%), debit and credit card fees (up 23%) and insurance fees (up
26%).
Mortgage banking noninterest income declined $259 million in third quarter 2006 from a year ago,
largely due to the change in mortgage servicing rights (MSRs)
valuation. In third quarter 2005 a
quarter in which long-term mortgage interest rates increased 51 basis
points the difference
between MSRs impairment reserve release (income) and hedging losses was a net gain of $296 million.
In third quarter 2006 a quarter in which mortgage rates
declined 48 basis points the
reduction in the value of MSRs net of hedging gains was a net loss of $86 million.
4
Revenue, the sum of net interest income and noninterest income, grew $431 million, or 5%, to $8.93
billion in third quarter 2006 from $8.50 billion in third quarter 2005. Home Mortgage revenue
declined $502 million to $923 million from $1.4 billion in third quarter 2005, largely due to the
$356 million mortgage servicing rights valuation reserve release (income) partly offset by $60
million of hedging losses recorded in third quarter 2005. Combined revenue of businesses other than
Home Mortgage grew 13% from third quarter 2005. Businesses with double-digit, year-over-year
revenue growth included business direct, regional banking, merchant card services, credit cards,
debit cards, corporate trust, asset-based lending, Eastdil Secured, commercial banking, insurance,
international, commercial real estate, specialized financial services and consumer finance.
Noninterest expense was $5.08 billion for third quarter 2006, up 4% from $4.89 billion for the same
period of 2005. Noninterest expense included $28 million in stock option expense. We continued to
invest in our businesses during the quarter. In the last 12 months, we opened 119 new regional
banking stores, including 27 stores this quarter. We grew our sales and service force by adding
5,100 team members (full-time equivalents), including 667 retail bankers in third quarter 2006. As
a result of continued positive operating leverage, our efficiency ratio improved to 56.9%, the
lowest since first quarter 2004.
Net charge-offs for third quarter 2006 were $663 million (0.86% of average total loans,
annualized), compared with $541 million (0.73%) during third quarter 2005. During the first nine
months of 2006, net charge-offs were $1,528 million (0.67%), compared with $1,580 million (0.72%),
for the first nine months of 2005, which included $163 million (0.11%) related to changes in loss
recognition rules at Wells Fargo Financial to conform to Federal Financial Institutions Examination
Council (FFIEC) bank standards for recognizing credit losses. Our wholesale businesses continued to
show little or no loss and historically low levels of nonperforming assets. However, we saw an
increase in loss rates in consumer loans to 1.17% in third quarter 2006 from 0.91% in third quarter
2005 due primarily to higher losses in other revolving credit and installment loans. Third quarter
2006 loan losses in other consumer loan categories were comparable to, or better than, loss rates
in third quarter 2005, and were well within a range of acceptable expected losses.
Consumer auto loan losses increased $150 million from second quarter 2006, accounting for 65% of
the total increase in consolidated net charge-offs of $231 million for the same period. The
increase in consumer auto loan losses in part was due to growth and expected seasoning in the
portfolio. In addition, loss rates in this portfolio increased in third quarter 2006 in large part
due to collection capacity constraints experienced by Wells Fargo Financial and restrictive payment
extension practices in the spring of 2006 while Wells Fargo Financial began integrating the prime
and non-prime auto loan businesses. During third quarter 2006, Wells Fargo Financial adopted
collection practices and standards appropriate for the combined portfolio, began reducing higher
risk new auto loans and hired additional collectors and managers, which have now been increased by
almost 1,000, or 60%, since the beginning of the year. We believe we will see improvement in
collections by early 2007, but losses will remain above normal through at least the fourth quarter
given the limits to how fast the increased collection capability produces effective results. Loans
90 days or more past due and still accruing for other revolving credit and installment consumer
loans increased $85 million to $516 million at September 30, 2006, from June 30, 2006, with
approximately half of the increase due to the auto portfolio.
5
The allowance for credit losses, which consists of the allowance for loan losses and the reserve
for unfunded credit commitments, was $3.98 billion (1.29% of total loans) at September 30, 2006,
compared with $4.06 billion (1.31%) at December 31, 2005, and $4.06 billion (1.37%) at September
30, 2005. In third quarter 2005, we provided $100 million for estimated credit losses related to
Hurricane Katrina. Since that time, we have identified and recorded approximately $50 million of
Katrina-related losses. Because we do not anticipate any further credit losses attributable to
Katrina, we released the remaining $50 million balance in third quarter 2006. We consider the
allowance for credit losses of $3.98 billion adequate to cover losses inherent in the loan
portfolio at September 30, 2006.
Total nonaccrual loans were $1.49 billion (0.48% of total loans) at September 30, 2006, compared
with $1.34 billion (0.43%) at December 31, 2005, and $1.30 billion (0.44%) at September 30, 2005.
Total nonperforming assets were $2.10 billion (0.68% of total loans) at September 30, 2006,
compared with $1.53 billion (0.49%) at December 31, 2005, and $1.49 billion (0.50%) at September
30, 2005. Foreclosed assets were $608 million at September 30, 2006, compared with $191 million at
December 31, 2005, and $187 million at September 30, 2005. Foreclosed assets, a component of total
nonperforming assets, included an additional $266 million of foreclosed real estate securing
Government National Mortgage Association (GNMA) loans at September 30, 2006, due to a change in
regulatory reporting requirements effective January 1, 2006. The GNMA foreclosed real estate of
$266 million represented 9 basis points of the ratio of nonperforming assets to loans at September
30, 2006. These assets are fully collectible because the corresponding GNMA loans are insured by
the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs.
The ratio of stockholders equity to total assets was 9.28% at September 30, 2006, 8.44% at
December 31, 2005, and 8.78% at September 30, 2005. Our total risk-based capital (RBC) ratio at
September 30, 2006, was 12.34% and our Tier 1 RBC ratio was 8.74%, exceeding the minimum
regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our RBC ratios at
September 30, 2005, were 11.84% and 8.35%, respectively. Our Tier 1 leverage ratios were 7.41%
and 7.16% at September 30, 2006 and 2005, respectively, exceeding the minimum regulatory guideline
of 3% for bank holding companies.
Current Accounting Developments
On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
No. 48, Accounting for Income Tax Uncertainties (FIN 48). FIN 48 supplements Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109), by defining the threshold for
recognizing tax benefits in the financial statements as more-likely-than-not to be sustained by
the applicable taxing authority. The benefit recognized for a tax position that meets the
more-likely-than-not criterion is measured based on the largest benefit that is more than 50%
likely to be realized, taking into consideration the amounts and probabilities of the outcomes upon
settlement. We will adopt FIN 48 on January 1, 2007, as required. Any necessary adjustment must be
recorded directly to the beginning balance of retained earnings in the period of adoption and
reported as a change in accounting principle. We are currently in the process of identifying the
impact of this guidance on our consolidated financial statements.
Also on July 13, 2006, the FASB issued Staff Position 13-2, Accounting for a Change or Projected
Change in the Timing of Cash Flows Related to Income Taxes Generated by a
6
Leveraged Lease Transaction (FSP 13-2). FSP 13-2 relates to the accounting for leveraged lease
transactions for which there have been cash flow estimate changes based on when income tax benefits
are recognized. Certain of our leveraged lease transactions have been challenged by the Internal
Revenue Service (IRS). While we have not made investments in a broad class of transactions that the
IRS commonly refers as Lease-In, Lease-Out (LILO) transactions, we have previously invested in
certain leveraged lease transactions that the IRS labels as Sale-In Lease-Out (SILO)
transactions. We have paid the IRS the income tax associated with our SILO transactions. However,
we are continuing to vigorously defend our initial filing position as to the timing of the tax
benefits associated with these transactions. We will adopt FSP 13-2 on January 1, 2007, as
required. We estimate that the cumulative effect of change in accounting principle upon adoption of
the FSP will require a reduction of the beginning balance of retained earnings by approximately $75
million after tax ($115 million pre tax). This amount will be recognized back into income over the
remaining terms of the affected leases.
On February 16, 2006, the FASB issued FAS 155, Accounting for Certain Hybrid Financial Instruments,
which amends FAS 133, Accounting for Derivatives and Hedging Activities, and FAS 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Hybrid
financial instruments are single financial instruments that contain an embedded derivative. Under
FAS 155, entities can elect to record certain hybrid financial instruments at fair value as
individual financial instruments. Prior to this amendment, certain hybrid financial instruments
were required to be separated into two instruments a
derivative and host and generally only
the derivative was recorded at fair value. FAS 155 also requires that beneficial interests in
securitized assets be evaluated for either freestanding or embedded derivatives. FAS 155 is
effective for all financial instruments acquired or issued after January 1, 2007. FAS 155 will have
no effect on our consolidated financial statements on the date of adoption.
On September 15, 2006, the FASB issued FAS 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. FAS 157 applies under other
accounting pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute. FAS 157 is effective for the year beginning January 1, 2008, with early adoption
permitted on January 1, 2007. We are currently evaluating if we will choose to adopt FAS 157 early,
on January 1, 2007. We do not expect that the adoption of FAS 157 will have a material effect on
our consolidated financial statements.
On September 29, 2006, the FASB issued FAS 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans An Amendment of FASB Statements No. 87, 88, 106, and 132R,
requiring an employer to recognize on its balance sheet the funded status of pension and other
postretirement plans, measure a plans assets and its obligations that determine its funded status
as of the end of the employers fiscal year and recognize changes in a plans funded status in the
year in which the changes occur in comprehensive income. The requirement to recognize the funded
status of our plans is effective December 31, 2006. The funded status will be determined by
comparing the fair value of plan assets and the projected benefit obligation or accumulated
postretirement benefit obligation, as applicable, including actuarial gains and losses, prior
service cost, and any remaining transition amounts. To the extent the fair value of plan assets is
larger, the plan is considered overfunded and an asset is recorded. Any previously recorded prepaid
pension asset would be adjusted to reflect the funded status of the plan with the
7
offset to accumulated other comprehensive income. Conversely, if a plan is underfunded, a liability
would be reported. The requirement to measure plan assets and benefit obligations as of the date of
the employers fiscal year-end statement of financial position is effective for fiscal years ending
after December 15, 2008. We do not expect adoption of FAS 158 to have a material impact on our
consolidated balance sheet.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are fundamental to understanding our results of operations and
financial condition, because some accounting policies require that we use estimates and assumptions
that may affect the value of our assets or liabilities and financial results. Three of these
policies are critical because they require management to make difficult, subjective and complex
judgments about matters that are inherently uncertain and because it is likely that materially
different amounts would be reported under different conditions or using different assumptions.
These policies govern the allowance for credit losses, the valuation of residential MSRs and
pension accounting. Management has reviewed and approved these critical accounting policies and has
discussed these policies with the Audit and Examination Committee. Policies covering the allowance
for credit losses and pension accounting are described in
Financial Review Critical Accounting
Policies and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our
2005 Form 10-K. Due to adoption of FAS 156, Accounting for
Servicing of Financial Assets an
amendment of FASB Statement No. 140, our accounting policy covering the valuation of residential
mortgage servicing rights has been updated and is described below.
VALUATION OF RESIDENTIAL MORTGAGE SERVICING RIGHTS
We recognize as assets the rights to service mortgage loans for others, or mortgage servicing
rights (MSRs), whether we purchase the servicing rights, or the servicing rights result from the
sale or securitization of loans we originate (asset transfers). Effective January 1, 2006, under
FAS 156, we elected to initially measure and carry our MSRs related to residential mortgage loans
(residential MSRs) using the fair value measurement method. Under this method, purchased MSRs and
MSRs from asset transfers are capitalized and carried at fair value. Prior to the adoption of FAS
156, we capitalized purchased residential MSRs at cost, and MSRs from asset transfers based on the
relative fair value of the servicing right and the residential mortgage loan at the time of sale,
and carried both purchased MSRs and MSRs from asset transfers at the lower of cost or market.
Effective January 1, 2006, upon the remeasurement of our residential MSRs at fair value, we
recorded a cumulative-effect adjustment to the 2006 beginning balance of retained earnings of $101
million after tax ($158 million pre tax) in our Statement of Changes in Stockholders Equity.
At the end of each quarter, we determine the fair value of MSRs using a valuation model that
calculates the present value of estimated future net servicing income. The model incorporates
assumptions that market participants use in estimating future net servicing income, including
estimates of prepayment speeds, discount rate, cost to service, escrow account earnings,
contractual servicing fee income, ancillary income and late fees. The valuation of MSRs is
discussed further in this section and in Note 1 (Summary of Significant Accounting Policies) and
Note 15 (Mortgage Banking Activities) to Financial Statements in this Report and in Note 20
(Securitizations and Variable Interest Entities) and Note 21 (Mortgage Banking Activities) to
Financial Statements in our 2005 Form 10-K.
8
To reduce the sensitivity of earnings to interest rate and market value fluctuations, we may use
securities available for sale and free-standing derivatives (economic hedges) to hedge the risk of
changes in the fair value of MSRs, with the resulting gains or losses reflected in income. Changes
in the fair value of the MSRs from changing mortgage interest rates are generally offset by gains
or losses in the fair value of the derivatives depending on the amount of MSRs we hedge. We may
choose not to fully hedge MSRs, partly because origination volume tends to act as a natural
hedge. For example, as interest rates decline, servicing values decrease and fees from origination
volume tend to increase. Conversely, as interest rates increase, the fair value of the MSRs
increases, while fees from origination volume tend to decline. See
Risk Management
Asset/Liability and Market Risk Management Mortgage Banking Interest Rate Risk in this Report
for discussion of the timing of the effect of changes in mortgage interest rates.
Net servicing income, a component of mortgage banking noninterest income, includes the changes from
period to period in fair value of both our residential MSRs and the free-standing derivatives
(economic hedges) used to hedge our residential MSRs. Changes in the fair value of residential MSRs
from period to period result from (1) changes in the valuation model inputs or assumptions
(principally reflecting changes in discount rates and prepayment speed assumptions, mostly due to
changes in interest rates) and (2) other changes, representing changes due to
collection/realization of expected cash flows over time. Prior to the adoption of FAS 156, we
carried residential MSRs at the lower of cost or market, with amortization of MSRs and changes in
the MSRs valuation allowance recognized in net servicing income.
We use a dynamic and sophisticated model to estimate the value of our MSRs. The model is validated
by an independent internal model validation group operating in accordance with Company policies.
Senior management reviews all significant assumptions quarterly.
Mortgage loan prepayment speed
a key assumption in the model is the annual rate at which borrowers are forecasted to repay
their mortgage loan principal and is based on historical experience. The discount rate used to
determine the present value of estimated future net servicing income
another key assumption in
the model is the required rate of return investors in the market would expect for an asset with
similar risk. To determine the discount rate, we consider the risk premium for uncertainties from
servicing operations (e.g., possible changes in future servicing costs, ancillary income and
earnings on escrow accounts). Both assumptions can, and generally will, change quarterly valuations
as market conditions and interest rates change. For example, an increase in either the prepayment
speed or discount rate assumption results in a decrease in the fair value of the MSRs, while a
decrease in either assumption would result in an increase in the fair value of the MSRs. In recent
years, there have been significant market-driven fluctuations in loan prepayment speeds and the
discount rate. These fluctuations can be rapid and may be significant in the future. Therefore,
estimating prepayment speeds within a range that market participants would use in determining the
fair value of MSRs requires significant management judgment.
These key economic assumptions and the sensitivity of the fair value of MSRs to an immediate
adverse change in those assumptions are shown in Note 20 (Securitizations and Variable Interest
Entities) to Financial Statements in our 2005 Form 10-K.
9
EARNINGS PERFORMANCE
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30 |
, |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
Average |
|
|
Yields/ |
|
|
income/ |
|
|
Average |
|
|
Yields/ |
|
|
income/ |
|
(in millions) |
|
balance |
|
|
rates |
|
|
expense |
|
|
balance |
|
|
rates |
|
|
expense |
|
|
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold, securities purchased under
resale agreements and other short-term investments |
|
$ |
4,247 |
|
|
|
5.00 |
% |
|
$ |
53 |
|
|
$ |
5,647 |
|
|
|
3.17 |
% |
|
$ |
45 |
|
Trading assets |
|
|
3,880 |
|
|
|
5.19 |
|
|
|
51 |
|
|
|
4,782 |
|
|
|
3.68 |
|
|
|
44 |
|
Debt securities available for sale (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal agencies |
|
|
912 |
|
|
|
4.42 |
|
|
|
10 |
|
|
|
1,042 |
|
|
|
3.70 |
|
|
|
10 |
|
Securities of U.S. states and political subdivisions |
|
|
3,240 |
|
|
|
7.99 |
|
|
|
63 |
|
|
|
3,321 |
|
|
|
8.12 |
|
|
|
63 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
47,009 |
|
|
|
6.09 |
|
|
|
716 |
|
|
|
17,815 |
|
|
|
6.08 |
|
|
|
264 |
|
Private collateralized mortgage obligations |
|
|
7,696 |
|
|
|
6.78 |
|
|
|
129 |
|
|
|
4,245 |
|
|
|
5.63 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
54,705 |
|
|
|
6.19 |
|
|
|
845 |
|
|
|
22,060 |
|
|
|
5.99 |
|
|
|
323 |
|
Other debt securities (4) |
|
|
6,865 |
|
|
|
6.80 |
|
|
|
116 |
|
|
|
3,888 |
|
|
|
7.21 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities available for sale (4) |
|
|
65,722 |
|
|
|
6.31 |
|
|
|
1,034 |
|
|
|
30,311 |
|
|
|
6.29 |
|
|
|
464 |
|
Mortgages held for sale (3) |
|
|
42,369 |
|
|
|
6.63 |
|
|
|
702 |
|
|
|
47,510 |
|
|
|
5.68 |
|
|
|
674 |
|
Loans held for sale (3) |
|
|
622 |
|
|
|
7.73 |
|
|
|
12 |
|
|
|
626 |
|
|
|
5.86 |
|
|
|
9 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
66,216 |
|
|
|
8.36 |
|
|
|
1,395 |
|
|
|
59,434 |
|
|
|
6.83 |
|
|
|
1,023 |
|
Other real estate mortgage |
|
|
29,851 |
|
|
|
7.47 |
|
|
|
562 |
|
|
|
28,614 |
|
|
|
6.42 |
|
|
|
464 |
|
Real estate construction |
|
|
15,073 |
|
|
|
8.13 |
|
|
|
309 |
|
|
|
12,259 |
|
|
|
6.64 |
|
|
|
204 |
|
Lease financing |
|
|
5,385 |
|
|
|
5.65 |
|
|
|
76 |
|
|
|
5,252 |
|
|
|
5.74 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
116,525 |
|
|
|
7.98 |
|
|
|
2,342 |
|
|
|
105,559 |
|
|
|
6.64 |
|
|
|
1,766 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
50,138 |
|
|
|
7.54 |
|
|
|
951 |
|
|
|
72,479 |
|
|
|
6.60 |
|
|
|
1,201 |
|
Real estate 1-4 family junior lien mortgage |
|
|
65,991 |
|
|
|
8.14 |
|
|
|
1,353 |
|
|
|
56,412 |
|
|
|
6.71 |
|
|
|
954 |
|
Credit card |
|
|
12,810 |
|
|
|
13.45 |
|
|
|
431 |
|
|
|
10,867 |
|
|
|
12.38 |
|
|
|
336 |
|
Other revolving credit and installment |
|
|
51,988 |
|
|
|
9.75 |
|
|
|
1,278 |
|
|
|
45,380 |
|
|
|
8.72 |
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
180,927 |
|
|
|
8.81 |
|
|
|
4,013 |
|
|
|
185,138 |
|
|
|
7.49 |
|
|
|
3,489 |
|
Foreign |
|
|
6,528 |
|
|
|
12.42 |
|
|
|
204 |
|
|
|
4,914 |
|
|
|
13.35 |
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (5) |
|
|
303,980 |
|
|
|
8.57 |
|
|
|
6,559 |
|
|
|
295,611 |
|
|
|
7.29 |
|
|
|
5,419 |
|
Other |
|
|
1,348 |
|
|
|
5.12 |
|
|
|
18 |
|
|
|
1,511 |
|
|
|
3.83 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
$ |
422,168 |
|
|
|
7.95 |
|
|
|
8,429 |
|
|
$ |
385,998 |
|
|
|
6.89 |
|
|
|
6,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUNDING SOURCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
|
$ |
4,370 |
|
|
|
3.24 |
|
|
|
36 |
|
|
$ |
3,698 |
|
|
|
1.50 |
|
|
|
13 |
|
Market rate and other savings |
|
|
132,906 |
|
|
|
2.55 |
|
|
|
854 |
|
|
|
129,390 |
|
|
|
1.57 |
|
|
|
513 |
|
Savings certificates |
|
|
33,909 |
|
|
|
4.03 |
|
|
|
344 |
|
|
|
23,434 |
|
|
|
2.98 |
|
|
|
176 |
|
Other time deposits |
|
|
36,920 |
|
|
|
5.27 |
|
|
|
491 |
|
|
|
22,204 |
|
|
|
3.48 |
|
|
|
196 |
|
Deposits in foreign offices |
|
|
22,303 |
|
|
|
4.84 |
|
|
|
272 |
|
|
|
12,359 |
|
|
|
3.28 |
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
230,408 |
|
|
|
3.44 |
|
|
|
1,997 |
|
|
|
191,085 |
|
|
|
2.08 |
|
|
|
1,000 |
|
Short-term borrowings |
|
|
21,539 |
|
|
|
4.99 |
|
|
|
271 |
|
|
|
22,797 |
|
|
|
3.28 |
|
|
|
189 |
|
Long-term debt |
|
|
84,112 |
|
|
|
5.13 |
|
|
|
1,084 |
|
|
|
82,840 |
|
|
|
3.75 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
336,059 |
|
|
|
3.96 |
|
|
|
3,352 |
|
|
|
296,722 |
|
|
|
2.64 |
|
|
|
1,969 |
|
Portion of noninterest-bearing funding sources |
|
|
86,109 |
|
|
|
|
|
|
|
|
|
|
|
89,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources |
|
$ |
422,168 |
|
|
|
3.16 |
|
|
|
3,352 |
|
|
|
$385,998 |
|
|
|
2.03 |
|
|
|
1,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin and net interest income on
a taxable-equivalent basis(6) |
|
|
|
|
|
|
4.79 |
% |
|
$ |
5,077 |
|
|
|
|
|
|
|
4.86 |
% |
|
$ |
4,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
12,159 |
|
|
|
|
|
|
|
|
|
|
$ |
13,100 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
11,156 |
|
|
|
|
|
|
|
|
|
|
|
10,736 |
|
|
|
|
|
|
|
|
|
Other |
|
|
49,196 |
|
|
|
|
|
|
|
|
|
|
|
38,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets |
|
$ |
72,511 |
|
|
|
|
|
|
|
|
|
|
$ |
62,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING FUNDING SOURCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
89,245 |
|
|
|
|
|
|
|
|
|
|
$ |
90,665 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
25,839 |
|
|
|
|
|
|
|
|
|
|
|
21,074 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
43,536 |
|
|
|
|
|
|
|
|
|
|
|
39,698 |
|
|
|
|
|
|
|
|
|
Noninterest-bearing funding sources used to
fund earning assets |
|
|
(86,109 |
) |
|
|
|
|
|
|
|
|
|
|
(89,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noninterest-bearing funding sources |
|
$ |
72,511 |
|
|
|
|
|
|
|
|
|
|
$ |
62,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
494,679 |
|
|
|
|
|
|
|
|
|
|
$ |
448,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our average prime rate was 8.25% and 6.42% for the quarters ended September 30, 2006 and
2005, respectively, and 7.86% and 5.93% for the nine months ended September 30, 2006 and
2005, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.43%
and 3.77% for the quarters ended September 30, 2006 and 2005, respectively, and 5.14% and
3.30% for the nine months ended September 30, 2006 and 2005, respectively. |
(2) |
|
Interest rates and amounts include the effects of hedge and risk management activities
associated with the respective asset and liability categories. |
(3) |
|
Yields are based on amortized cost balances computed on a settlement date basis. |
(4) |
|
Includes certain preferred securities. |
(5) |
|
Nonaccrual loans and related income are included in their respective loan categories. |
(6) |
|
Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain
loans and securities. The federal statutory tax rate was 35% for the periods presented. |
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 |
, |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
Average |
|
|
Yields/ |
|
|
income/ |
|
|
Average |
|
|
Yields / |
|
|
income/ |
|
(in millions) |
|
balance |
|
|
rates |
|
|
expense |
|
|
balance |
|
|
rates |
|
|
expense |
|
|
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold, securities purchased under
resale agreements and other short-term investments |
|
$ |
4,761 |
|
|
|
4.58 |
% |
|
$ |
163 |
|
|
$ |
5,546 |
|
|
|
2.81 |
% |
|
$ |
117 |
|
Trading assets |
|
|
5,298 |
|
|
|
4.91 |
|
|
|
195 |
|
|
|
5,529 |
|
|
|
3.43 |
|
|
|
142 |
|
Debt securities available for sale (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal agencies |
|
|
905 |
|
|
|
4.38 |
|
|
|
30 |
|
|
|
979 |
|
|
|
3.78 |
|
|
|
28 |
|
Securities of U.S. states and political subdivisions |
|
|
3,120 |
|
|
|
8.11 |
|
|
|
183 |
|
|
|
3,441 |
|
|
|
8.28 |
|
|
|
202 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
38,366 |
|
|
|
5.99 |
|
|
|
1,723 |
|
|
|
18,495 |
|
|
|
6.06 |
|
|
|
815 |
|
Private collateralized mortgage obligations |
|
|
7,149 |
|
|
|
6.65 |
|
|
|
352 |
|
|
|
4,140 |
|
|
|
5.55 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
45,515 |
|
|
|
6.10 |
|
|
|
2,075 |
|
|
|
22,635 |
|
|
|
5.97 |
|
|
|
984 |
|
Other debt securities (4) |
|
|
6,136 |
|
|
|
7.06 |
|
|
|
324 |
|
|
|
3,511 |
|
|
|
7.25 |
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities available for sale (4) |
|
|
55,676 |
|
|
|
6.28 |
|
|
|
2,612 |
|
|
|
30,566 |
|
|
|
6.30 |
|
|
|
1,398 |
|
Mortgages held for sale (3) |
|
|
44,533 |
|
|
|
6.34 |
|
|
|
2,119 |
|
|
|
37,958 |
|
|
|
5.57 |
|
|
|
1,585 |
|
Loans held for sale (3) |
|
|
619 |
|
|
|
7.33 |
|
|
|
34 |
|
|
|
3,617 |
|
|
|
5.02 |
|
|
|
136 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
64,816 |
|
|
|
8.07 |
|
|
|
3,914 |
|
|
|
57,469 |
|
|
|
6.55 |
|
|
|
2,816 |
|
Other real estate mortgage |
|
|
29,162 |
|
|
|
7.26 |
|
|
|
1,585 |
|
|
|
29,325 |
|
|
|
6.14 |
|
|
|
1,347 |
|
Real estate construction |
|
|
14,485 |
|
|
|
7.89 |
|
|
|
854 |
|
|
|
10,428 |
|
|
|
6.43 |
|
|
|
501 |
|
Lease financing |
|
|
5,416 |
|
|
|
5.74 |
|
|
|
233 |
|
|
|
5,185 |
|
|
|
5.97 |
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
113,879 |
|
|
|
7.73 |
|
|
|
6,586 |
|
|
|
102,407 |
|
|
|
6.39 |
|
|
|
4,896 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
59,758 |
|
|
|
7.20 |
|
|
|
3,221 |
|
|
|
78,822 |
|
|
|
6.31 |
|
|
|
3,725 |
|
Real estate 1-4 family junior lien mortgage |
|
|
62,923 |
|
|
|
7.91 |
|
|
|
3,723 |
|
|
|
54,760 |
|
|
|
6.38 |
|
|
|
2,612 |
|
Credit card |
|
|
12,178 |
|
|
|
13.29 |
|
|
|
1,213 |
|
|
|
10,439 |
|
|
|
12.16 |
|
|
|
952 |
|
Other revolving credit and installment |
|
|
50,152 |
|
|
|
9.57 |
|
|
|
3,592 |
|
|
|
41,926 |
|
|
|
8.68 |
|
|
|
2,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
185,011 |
|
|
|
8.49 |
|
|
|
11,749 |
|
|
|
185,947 |
|
|
|
7.19 |
|
|
|
10,012 |
|
Foreign |
|
|
6,251 |
|
|
|
12.53 |
|
|
|
587 |
|
|
|
4,520 |
|
|
|
13.66 |
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (5) |
|
|
305,141 |
|
|
|
8.29 |
|
|
|
18,922 |
|
|
|
292,874 |
|
|
|
7.01 |
|
|
|
15,370 |
|
Other |
|
|
1,366 |
|
|
|
4.90 |
|
|
|
50 |
|
|
|
1,637 |
|
|
|
4.30 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
$ |
417,394 |
|
|
|
7.72 |
|
|
|
24,095 |
|
|
$ |
377,727 |
|
|
|
6.66 |
|
|
|
18,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUNDING SOURCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
|
$ |
4,243 |
|
|
|
2.77 |
|
|
|
88 |
|
|
$ |
3,543 |
|
|
|
1.29 |
|
|
|
34 |
|
Market rate and other savings |
|
|
133,767 |
|
|
|
2.31 |
|
|
|
2,307 |
|
|
|
128,364 |
|
|
|
1.31 |
|
|
|
1,255 |
|
Savings certificates |
|
|
30,997 |
|
|
|
3.75 |
|
|
|
868 |
|
|
|
21,299 |
|
|
|
2.74 |
|
|
|
437 |
|
Other time deposits |
|
|
36,324 |
|
|
|
4.94 |
|
|
|
1,343 |
|
|
|
25,775 |
|
|
|
2.95 |
|
|
|
569 |
|
Deposits in foreign offices |
|
|
19,477 |
|
|
|
4.58 |
|
|
|
667 |
|
|
|
10,450 |
|
|
|
2.85 |
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
224,808 |
|
|
|
3.14 |
|
|
|
5,273 |
|
|
|
189,431 |
|
|
|
1.78 |
|
|
|
2,517 |
|
Short-term borrowings |
|
|
24,168 |
|
|
|
4.59 |
|
|
|
830 |
|
|
|
23,629 |
|
|
|
2.84 |
|
|
|
502 |
|
Long-term debt |
|
|
83,437 |
|
|
|
4.81 |
|
|
|
3,004 |
|
|
|
79,126 |
|
|
|
3.43 |
|
|
|
2,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
332,413 |
|
|
|
3.66 |
|
|
|
9,107 |
|
|
|
292,186 |
|
|
|
2.31 |
|
|
|
5,053 |
|
Portion of noninterest-bearing funding sources |
|
|
84,981 |
|
|
|
|
|
|
|
|
|
|
|
85,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources |
|
$ |
417,394 |
|
|
|
2.92 |
|
|
|
9,107 |
|
|
$ |
377,727 |
|
|
|
1.79 |
|
|
|
5,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin and net interest income on
a taxable-equivalent basis(6) |
|
|
|
|
|
|
4.80 |
% |
|
$ |
14,988 |
|
|
|
|
|
|
|
4.87 |
% |
|
$ |
13,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
12,495 |
|
|
|
|
|
|
|
|
|
|
$ |
13,060 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
11,066 |
|
|
|
|
|
|
|
|
|
|
|
10,680 |
|
|
|
|
|
|
|
|
|
Other |
|
|
46,227 |
|
|
|
|
|
|
|
|
|
|
|
36,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets |
|
$ |
69,788 |
|
|
|
|
|
|
|
|
|
|
$ |
60,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING FUNDING SOURCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
88,395 |
|
|
|
|
|
|
|
|
|
|
$ |
85,965 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
24,007 |
|
|
|
|
|
|
|
|
|
|
|
21,055 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
42,367 |
|
|
|
|
|
|
|
|
|
|
|
38,937 |
|
|
|
|
|
|
|
|
|
Noninterest-bearing funding sources used to
fund earning assets |
|
|
(84,981 |
) |
|
|
|
|
|
|
|
|
|
|
(85,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noninterest-bearing funding sources |
|
$ |
69,788 |
|
|
|
|
|
|
|
|
|
|
$ |
60,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
487,182 |
|
|
|
|
|
|
|
|
|
|
$ |
438,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our average prime rate was 8.25% and 6.42% for the quarters ended September 30, 2006 and
2005, respectively, and 7.86% and 5.93% for the nine months ended September 30, 2006 and
2005, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.43%
and 3.77% for the quarters ended September 30, 2006 and 2005, respectively, and 5.14% and
3.30% for the nine months ended September 30, 2006 and 2005, respectively. |
|
(2) |
|
Interest rates and amounts include the effects of hedge and risk management activities
associated with the respective asset and liability categories. |
|
(3) |
|
Yields are based on amortized cost balances computed on a settlement date basis. |
|
(4) |
|
Includes certain preferred securities. |
|
(5) |
|
Nonaccrual loans and related income are included in their respective loan categories. |
|
(6) |
|
Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain
loans and securities. The federal statutory tax rate was 35% for the periods presented. |
11
NET INTEREST INCOME
Net interest income is the interest earned on debt securities, loans (including yield-related loan
fees) and other interest-earning assets minus the interest paid for deposits and long-term and
short-term debt. The net interest margin is the average yield on earning assets minus the average
interest rate paid for deposits and our other sources of funding. Net interest income and the net
interest margin are presented in the table on pages 10 and 11 on a taxable-equivalent basis to
consistently reflect income from taxable and tax-exempt loans and securities based on a 35%
marginal tax rate.
Net interest income on a taxable-equivalent basis increased 8% to $5.08 billion in third quarter
2006 from $4.70 billion in third quarter 2005, primarily driven by a 9% growth in average earning
assets and purchases of securities in the last year.
Our net interest margin has remained relatively stable since the Federal Reserve began raising
short-term interest rates in mid 2004, increasing 3 basis points from second quarter 2006 to 4.79%
in third quarter 2006, and down only 7 basis points from third quarter 2005. The relative stability
of our net interest margin in the face of a 4.25 percentage point increase in the federal funds
rate and flattening of the yield curve since June 2004 is the result of our continued growth in
low-cost transaction and savings deposits as well as the cumulative effect of selling our
lower-yielding ARMs and debt securities during the past two years.
Average earning assets increased $36.2 billion to $422.2 billion in third quarter 2006 from $386.0
billion in third quarter 2005, due to an increase in average loans and mortgage-backed securities.
Loans averaged $304.0 billion in third quarter 2006, compared with $295.6 billion in third quarter
2005. The increase was primarily due to an increase in commercial and commercial real estate loans,
real estate 1-4 family junior lien mortgages, and other revolving credit and installment loans,
partly offset by the sale of lower-yielding ARMs through second quarter 2006.
Average mortgages held for sale decreased to $42.4 billion in third quarter 2006 from $47.5 billion
in third quarter 2005, due to the sale of lower-yielding ARMs completed in second quarter 2006,
partly offset by an increase in loan originations. Debt securities available for sale averaged
$65.7 billion during third quarter 2006 and $30.3 billion in third quarter 2005.
Average core deposits are an important contributor to growth in net interest income and the net
interest margin. This low-cost source of funding rose 5% from a year ago. Average core deposits
were $260.4 billion and $247.2 billion in third quarter 2006 and 2005, respectively. Total average
retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow
deposits, for third quarter 2006 grew $7.4 billion, or 4%, from a year ago. Average mortgage escrow
deposits were $19.4 billion for third quarter 2006, up $367 million from a year ago. Savings
certificates of deposits increased on average to $33.9 billion in third quarter 2006 from $23.4
billion in third quarter 2005 and noninterest-bearing checking accounts and other core deposit
categories increased on average to $226.5 billion in third quarter 2006 from $223.8 billion in
third quarter 2005. Total average interest-bearing deposits increased to $230.4 billion in third
quarter 2006 from $191.1 billion in third quarter 2005.
12
NONINTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
ended Sept. 30 |
, |
|
% |
|
|
ended Sept. 30 |
, |
|
% |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Service charges on deposit accounts |
|
$ |
707 |
|
|
$ |
654 |
|
|
|
8 |
% |
|
$ |
1,995 |
|
|
$ |
1,857 |
|
|
|
7 |
% |
Trust and investment fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust, investment and IRA fees |
|
|
508 |
|
|
|
473 |
|
|
|
7 |
|
|
|
1,508 |
|
|
|
1,374 |
|
|
|
10 |
|
Commissions and all other fees |
|
|
156 |
|
|
|
141 |
|
|
|
11 |
|
|
|
494 |
|
|
|
439 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trust and investment fees |
|
|
664 |
|
|
|
614 |
|
|
|
8 |
|
|
|
2,002 |
|
|
|
1,813 |
|
|
|
10 |
|
Card fees |
|
|
464 |
|
|
|
377 |
|
|
|
23 |
|
|
|
1,266 |
|
|
|
1,064 |
|
|
|
19 |
|
Other fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash network fees |
|
|
48 |
|
|
|
45 |
|
|
|
7 |
|
|
|
140 |
|
|
|
135 |
|
|
|
4 |
|
Charges and fees on loans |
|
|
244 |
|
|
|
280 |
|
|
|
(13 |
) |
|
|
735 |
|
|
|
785 |
|
|
|
(6 |
) |
All other |
|
|
217 |
|
|
|
195 |
|
|
|
11 |
|
|
|
632 |
|
|
|
531 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other fees |
|
|
509 |
|
|
|
520 |
|
|
|
(2 |
) |
|
|
1,507 |
|
|
|
1,451 |
|
|
|
4 |
|
Mortgage banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing income, net |
|
|
188 |
|
|
|
373 |
|
|
|
(50 |
) |
|
|
579 |
|
|
|
730 |
|
|
|
(21 |
) |
Net gains on mortgage loan origination/
sales activities |
|
|
179 |
|
|
|
273 |
|
|
|
(34 |
) |
|
|
811 |
|
|
|
816 |
|
|
|
(1 |
) |
All other |
|
|
117 |
|
|
|
97 |
|
|
|
21 |
|
|
|
244 |
|
|
|
248 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking |
|
|
484 |
|
|
|
743 |
|
|
|
(35 |
) |
|
|
1,634 |
|
|
|
1,794 |
|
|
|
(9 |
) |
Operating leases |
|
|
192 |
|
|
|
202 |
|
|
|
(5 |
) |
|
|
593 |
|
|
|
612 |
|
|
|
(3 |
) |
Insurance |
|
|
313 |
|
|
|
248 |
|
|
|
26 |
|
|
|
1,041 |
|
|
|
943 |
|
|
|
10 |
|
Trading assets |
|
|
106 |
|
|
|
184 |
|
|
|
(42 |
) |
|
|
331 |
|
|
|
391 |
|
|
|
(15 |
) |
Net gains (losses) on debt securities available for sale |
|
|
121 |
|
|
|
(31 |
) |
|
|
|
|
|
|
(70 |
) |
|
|
4 |
|
|
|
-- |
|
Net gains from equity investments |
|
|
159 |
|
|
|
146 |
|
|
|
9 |
|
|
|
482 |
|
|
|
418 |
|
|
|
15 |
|
Net gains on sales of loans |
|
|
2 |
|
|
|
3 |
|
|
|
(33 |
) |
|
|
7 |
|
|
|
3 |
|
|
|
133 |
|
All other |
|
|
166 |
|
|
|
167 |
|
|
|
(1 |
) |
|
|
589 |
|
|
|
442 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,887 |
|
|
$ |
3,827 |
|
|
|
2 |
|
|
$ |
11,377 |
|
|
$ |
10,792 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We earn trust, investment and IRA fees from managing and administering assets, including
mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At
September 30, 2006, these assets totaled $868 billion, up 17% from $744 billion at September 30,
2005. Generally, trust, investment and IRA fees are based on the market value of the assets that
are managed, administered, or both. The increase from third quarter 2005 was due to continued
strong momentum in growth of managed investment accounts for institutional customers and our
successful efforts to grow the business.
Also, we receive commissions and other fees for providing services to full-service and discount
brokerage customers. At September 30, 2006 and 2005, brokerage balances were $110 billion and $94
billion, respectively. Generally, these fees include transactional commissions, which are based on
the number of transactions executed at the customers direction, or asset-based fees, which are
based on the market value of the customers assets. The increase from third quarter 2005 was
primarily due to continued growth in asset-based fees.
13
Card fees increased 23% from third quarter 2005, due to growth in distribution of debit and credit
cards to our customers and increased usage. Purchase volume on debit and credit cards was up 21%
from a year ago and average card balances were up 18%.
Mortgage banking noninterest income was $484 million and $1,634 million in the third quarter and
first nine months of 2006, respectively, compared with $743 million and $1,794 million in the same
periods of 2005. The decrease of $259 million from third quarter 2005 to third quarter 2006 was
largely due to the change in MSRs valuation. With the adoption of FAS 156 in first quarter 2006 and
measuring our residential MSRs at fair value, net servicing income includes both changes in the
fair value of MSRs during the period as well as changes in derivatives (economic hedges) used to
hedge the MSRs. Prior to adoption of FAS 156, servicing income included net derivative gains and
losses (primarily the ineffective portion of the change in value of derivatives used to hedge MSRs
under FAS 133), amortization and MSRs impairment, which are all influenced by both the level and
direction of mortgage interest rates.
Net gains on mortgage loan origination/sales activities decreased $94 million to $179 million for
third quarter 2006, from $273 million for third quarter 2005, largely due to lower investor demand
for ARMs loans. Third quarter 2006 results included a $48 million loss due to the impact of
interest rate volatility on ARMs spreads, reflecting changes in the value of ARMs production held
for sale not fully offset by Treasury and LIBOR-indexed economic hedging activity. Net gains on
mortgage loan origination/sales activities of $811 million for the first nine months of 2006 were
comparable to the same period a year ago. Mortgage originations in third quarter 2006 totaled $104
billion, compared with $103 billion a year ago. Mortgage originations included $27 billion and $11
billion of co-issue volume in third quarter 2006 and 2005, respectively. Under co-issue
arrangements, we become the servicer when the correspondent securitizes the related loans. The
application pipeline at quarter end was $55 billion, down from $66 billion a year ago.
Servicing fees grew to $947 million in third quarter 2006 from $619 million in third quarter 2005
largely due to a 52% increase in the portfolio of mortgage loans serviced for others, which was
$1.24 trillion at September 30, 2006, up from $815 billion a year ago. In July 2006, we acquired a
$140 billion mortgage servicing portfolio from Washington Mutual, Inc. The change in the value of
MSRs net of economic hedging results in third quarter 2006 a quarter in which interest rates
declined was a loss of $86 million. The interest rate-related effect (impairment reserve release
net of hedging results) in third quarter 2005 a quarter in
which interest rates increased was
a gain of $296 million.
Insurance income increased 26% from third quarter 2005 primarily due to an increase in premium
volume.
Net gains (losses) on debt securities available for sale were $121 million and $(70) million in the
third quarter and first nine months of 2006, respectively, compared with $(31) million and $4
million in the same periods of 2005. Gains in third quarter 2006 included $106 million related to
securities previously held on the balance sheet as economic hedges of mortgage banking activities.
Third quarter 2006 other noninterest income includes a $38 million loss on certain forward sales
contracts related to these securities. Net gains from equity investments were $159 million and $482
million in the third quarter and first nine months of 2006, respectively, and $146 million and $418
million in the same periods of 2005.
14
We routinely review our investment portfolios and recognize impairment write-downs based primarily
on issuer-specific factors and results, and our intent to hold such securities. We also consider
general economic and market conditions, including industries in which venture capital investments
are made, and adverse changes affecting the availability of venture capital. We determine
impairment based on all of the information available at the time of the assessment, but new
information or economic developments in the future could result in recognition of additional
impairment.
NONINTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
ended Sept. 30 |
, |
|
% |
|
|
ended Sept. 30 |
, |
|
% |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Salaries |
|
$ |
1,769 |
|
|
$ |
1,571 |
|
|
|
13 |
% |
|
$ |
5,195 |
|
|
$ |
4,602 |
|
|
|
13 |
% |
Incentive compensation |
|
|
710 |
|
|
|
676 |
|
|
|
5 |
|
|
|
2,092 |
|
|
|
1,703 |
|
|
|
23 |
|
Employee benefits |
|
|
458 |
|
|
|
467 |
|
|
|
(2 |
) |
|
|
1,534 |
|
|
|
1,446 |
|
|
|
6 |
|
Equipment |
|
|
294 |
|
|
|
306 |
|
|
|
(4 |
) |
|
|
913 |
|
|
|
939 |
|
|
|
(3 |
) |
Net occupancy |
|
|
357 |
|
|
|
354 |
|
|
|
1 |
|
|
|
1,038 |
|
|
|
1,068 |
|
|
|
(3 |
) |
Operating leases |
|
|
155 |
|
|
|
159 |
|
|
|
(3 |
) |
|
|
473 |
|
|
|
474 |
|
|
|
|
|
Outside professional services |
|
|
240 |
|
|
|
230 |
|
|
|
4 |
|
|
|
669 |
|
|
|
582 |
|
|
|
15 |
|
Contract services |
|
|
143 |
|
|
|
163 |
|
|
|
(12 |
) |
|
|
414 |
|
|
|
443 |
|
|
|
(7 |
) |
Travel and entertainment |
|
|
132 |
|
|
|
120 |
|
|
|
10 |
|
|
|
401 |
|
|
|
347 |
|
|
|
16 |
|
Outside data processing |
|
|
111 |
|
|
|
114 |
|
|
|
(3 |
) |
|
|
324 |
|
|
|
341 |
|
|
|
(5 |
) |
Advertising and promotion |
|
|
123 |
|
|
|
128 |
|
|
|
(4 |
) |
|
|
354 |
|
|
|
334 |
|
|
|
6 |
|
Postage |
|
|
75 |
|
|
|
72 |
|
|
|
4 |
|
|
|
235 |
|
|
|
212 |
|
|
|
11 |
|
Telecommunications |
|
|
70 |
|
|
|
74 |
|
|
|
(5 |
) |
|
|
213 |
|
|
|
213 |
|
|
|
|
|
Insurance |
|
|
43 |
|
|
|
17 |
|
|
|
153 |
|
|
|
218 |
|
|
|
196 |
|
|
|
11 |
|
Stationery and supplies |
|
|
57 |
|
|
|
48 |
|
|
|
19 |
|
|
|
163 |
|
|
|
148 |
|
|
|
10 |
|
Operating losses |
|
|
33 |
|
|
|
52 |
|
|
|
(37 |
) |
|
|
140 |
|
|
|
156 |
|
|
|
(10 |
) |
Security |
|
|
43 |
|
|
|
42 |
|
|
|
2 |
|
|
|
130 |
|
|
|
125 |
|
|
|
4 |
|
Core deposit intangibles |
|
|
28 |
|
|
|
30 |
|
|
|
(7 |
) |
|
|
85 |
|
|
|
93 |
|
|
|
(9 |
) |
Charitable donations |
|
|
15 |
|
|
|
8 |
|
|
|
88 |
|
|
|
51 |
|
|
|
48 |
|
|
|
6 |
|
Net gains from debt extinguishment |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
100 |
|
|
|
(6 |
) |
|
|
(1 |
) |
|
|
500 |
|
All other |
|
|
227 |
|
|
|
259 |
|
|
|
(12 |
) |
|
|
695 |
|
|
|
666 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,081 |
|
|
$ |
4,889 |
|
|
|
4 |
|
|
$ |
15,331 |
|
|
$ |
14,135 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 4% increase in noninterest expense to $5.08 billion in third quarter 2006 from third
quarter 2005 was due to the increase in salary and incentive compensation from an additional 5,100
team members (full-time equivalent), largely sales people, across our businesses. We recognized
stock option expense, included in incentive compensation, of $28 million in third quarter 2006 and
$108 million in the first nine months of 2006, which included $33 million in first quarter 2006 for
the immediate expensing of stock options for retirement-eligible team members. We continued to
invest in our businesses during the quarter. In the last 12 months, we opened 119 new regional
banking stores, including 27 stores this quarter.
INCOME TAX EXPENSE
Our effective income tax rate was 32.28% for third quarter 2006, down from 33.57% for third quarter
2005, largely reflecting the benefits associated with tax-advantaged investments and favorable
resolution of disputed positions with taxing jurisdictions. For the first nine months of 2006, our
effective tax rate was 33.45% compared with 33.57% in the same period of 2005.
15
OPERATING SEGMENT RESULTS
Our lines of business for management reporting are Community Banking, Wholesale Banking and Wells
Fargo Financial. For a more complete description of our operating segments, including additional
financial information and the underlying management accounting process, see Note 13 (Operating
Segments) to Financial Statements.
Segment results for prior periods have been revised due to the realignment of our insurance
business into Wholesale Banking in first quarter 2006, designed to leverage the expertise, systems
and resources of the existing businesses.
Community Bankings net income decreased 1% to $1.47 billion in third quarter 2006 from $1.49
billion in third quarter 2005. Net income decreased 2% to $4.02 billion in the first nine months of
2006 from $4.09 billion in the first nine months of 2005. Net interest income increased 3% to $3.29
billion, and 5% to $9.87 billion in the third quarter and first nine months of 2006, respectively,
from the same periods of 2005, primarily due to growth in earning assets and deposits. Average
loans were $172.5 billion in third quarter 2006, down 6% from a year ago, predominantly due to
sales of ARMs. Excluding real estate 1-4 family mortgages the loan category affected by the
sales of ARMs total average loans grew by $13.8 billion, or 11%. Core deposits averaged $231.2
billion in third quarter 2006, up 3% over the prior year. Noninterest income of $2.49 billion in
third quarter 2006 decreased $127 million, or 5%, from third quarter 2005, predominantly due to a
$356 million MSRs valuation reserve release (income) recorded in third quarter 2005, partially
offset by gains of $106 million on the sale of debt securities in third quarter 2006. Noninterest
income for the first nine months of 2006 increased by $47 million from the same period of 2005.
Noninterest expense increased $42 million and $628 million in the third quarter and first nine
months of 2006, respectively, from the same periods of 2005, primarily due to an increase in the
number of sales and service team members, as well as investments in new banking stores, ATMs and
online banking.
Wholesale Bankings net income increased 31% to $527 million in third quarter 2006 from $403
million in third quarter 2005. Net income increased 17% to $1.58 billion in the first nine months
of 2006 from $1.34 billion in the first nine months of 2005. Revenue was $1.78 billion in third
quarter 2006, up 20% from $1.49 billion in third quarter 2005, primarily due to strong asset
management, insurance and capital markets revenue, along with the acquisition of Secured Capital
Corp in January 2006 and Reilly Mortgage in July 2006. Average loans increased 14% and average core
deposits grew 23% from third quarter 2005. Noninterest income for the third quarter and first nine
months of 2006 increased by $140 million and $365 million,
respectively, from the same periods of
2005. Wholesale Banking recorded no provision for credit losses in third quarter 2006 or third
quarter 2005. Noninterest expense increased 12% to $999 million and 15% to $3.01 billion in the
third quarter and first nine months of 2006, respectively, from the
same periods of 2005, due to
higher personnel related expenses and additional expenses from the Secured Capital Corp and Reilly
Mortgage acquisitions.
Wells Fargo Financials net income increased 146% to $194 million in third quarter 2006 from $79
million in third quarter 2005. For the first nine months of 2006, net income was $704 million,
compared with $311 million for the same period a year ago, which included a first quarter $163
million pre-tax charge to conform Wells Fargo Financials charge-off practices with FFIEC
guidelines. Net income for third quarter 2006 included a $50 million (pre tax) release of provision
for credit losses reversing the remaining portion of the $100 million (pre tax) provision
16
for credit losses related to Hurricane Katrina recorded in third quarter 2005. Total
revenue rose 15% in third quarter 2006, reaching $1.37 billion, compared with $1.18 billion in
third quarter 2005. Net interest income increased $135 million, or 16%, to $1.0 billion in third
quarter 2006 from $869 million in third quarter 2005, due to growth in average loans. Average real
estate secured receivables increased 21% to $21.0 billion and average auto finance receivables rose
34% to $26.4 billion from third quarter 2005. Noninterest expense increased 7% to $690 million in
third quarter 2006, primarily due to additional investments in the collections, underwriting and
service teams as a result of the growth of the business.
BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Our securities available for sale portfolio consists of both debt and marketable equity securities.
We hold debt securities available for sale primarily for liquidity, interest rate risk management
and yield enhancement. Accordingly, this portfolio primarily includes very liquid, high-quality
federal agency debt securities. At September 30, 2006, we held $51.8 billion of debt securities
available for sale, compared with $40.9 billion at December 31, 2005, with a net unrealized gain of
$733 million and $591 million for the same periods, respectively. The $18.8 billion decline in debt
securities from $70.6 billion at June 30, 2006, was primarily due to sales of debt securities
related to securities held on the balance sheet as economic hedges of mortgage banking activities.
We also held $829 million of marketable equity securities available for sale at September 30, 2006,
and $900 million at December 31, 2005, with a net unrealized gain of $232 million and $342 million
for the same periods, respectively.
The weighted-average expected maturity of debt securities available for sale was 5.2 years at
September 30, 2006. Since 79% of this portfolio was mortgage-backed securities, the expected
remaining maturity may differ from contractual maturity because borrowers may have the right to
prepay obligations before the underlying mortgages mature.
The estimated effect of a 200 basis point increase or decrease in interest rates on the fair value
and the expected remaining maturity of the mortgage-backed securities available for sale portfolio
are shown below.
MORTGAGE-BACKED SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Net unrealized |
|
|
Remaining |
|
(in billions) |
|
value |
|
|
gain (loss) |
|
|
maturity |
|
|
At September 30, 2006 |
|
|
$ 41.0 |
|
|
$ |
0.6 |
|
|
4.3yrs |
At September 30, 2006, assuming a 200 basis point: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in interest rates |
|
|
37.7 |
|
|
|
(2.7 |
) |
|
6.9yrs |
Decrease in interest rates |
|
|
41.8 |
|
|
|
1.4 |
|
|
1.1yrs |
|
See Note 4 (Securities Available for Sale) to Financial Statements for securities available
for sale by security type.
17
LOAN PORTFOLIO
A
discussion of average loan balances is included in Earnings Performance Net Interest Income
on page 12 and a comparative schedule of average loan balances is included in the table on page 10;
quarter-end balances are in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements.
Total loans at September 30, 2006, were $307.5 billion, compared with $296.2 billion at September
30, 2005. Real estate 1-4 family first mortgage loans decreased $19.5 billion to $49.8 billion at
September 30, 2006, from $69.3 billion at September 30, 2005, due to the sale of lower-yielding
ARMs earlier this year. This was offset by an increase of $9.7 billion in real estate 1-4 family
junior lien mortgage loans to $67.2 billion from $57.5 billion for the same periods. Commercial and
commercial real estate loans increased $10.6 billion to $117.6 billion from September 30, 2005.
Mortgages held for sale decreased to $39.9 billion at September 30, 2006, from $46.1 billion a year
ago.
DEPOSITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Noninterest-bearing |
|
$ |
86,849 |
|
|
$ |
87,712 |
|
|
$ |
89,304 |
|
Interest-bearing checking |
|
|
3,279 |
|
|
|
3,324 |
|
|
|
2,992 |
|
Market rate and other savings |
|
|
135,837 |
|
|
|
134,811 |
|
|
|
130,829 |
|
Savings certificates |
|
|
34,828 |
|
|
|
27,494 |
|
|
|
25,259 |
|
|
|
|
|
|
|
|
|
|
|
Core deposits |
|
|
260,793 |
|
|
|
253,341 |
|
|
|
248,384 |
|
Other time deposits |
|
|
32,185 |
|
|
|
46,488 |
|
|
|
26,718 |
|
Deposits in foreign offices |
|
|
21,341 |
|
|
|
14,621 |
|
|
|
13,927 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
314,319 |
|
|
$ |
314,450 |
|
|
$ |
289,029 |
|
|
|
|
|
|
|
|
|
|
|
|
Average core deposits increased $13.2 billion to $260.4 billion in third quarter 2006 from
third quarter 2005, predominantly due to growth in market rate and other savings, and savings
certificates, partially offset by a decrease in non-interest bearing deposits.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
In the ordinary course of business, we engage in financial transactions that are not recorded on
the balance sheet, or may be recorded on the balance sheet in amounts that are different than the
full contract or notional amount of the transaction. We also enter into certain contractual
obligations. For additional information on off-balance sheet arrangements and other contractual
obligations see Financial Review Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations in our 2005 Form 10-K and Note 17 (Guarantees) to Financial Statements in this Report.
RISK MANAGEMENT
CREDIT RISK MANAGEMENT PROCESS
Our credit risk management process provides for decentralized management and accountability by our
lines of business. Our overall credit process includes comprehensive credit policies,
18
frequent and detailed risk measurement and modeling, extensive credit training programs and a
continual loan audit review process. In addition, regulatory examiners review and perform detailed
tests of our credit underwriting, loan administration and allowance processes.
Nonaccrual Loans and Other Assets
The table below shows the comparative data for nonaccrual loans and other 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. |
Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2005 Form 10-K
describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
June 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
256 |
|
|
$ |
253 |
|
|
$ |
286 |
|
|
$ |
293 |
|
Other real estate mortgage |
|
|
116 |
|
|
|
137 |
|
|
|
165 |
|
|
|
197 |
|
Real estate construction |
|
|
90 |
|
|
|
31 |
|
|
|
31 |
|
|
|
43 |
|
Lease financing |
|
|
27 |
|
|
|
26 |
|
|
|
45 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
489 |
|
|
|
447 |
|
|
|
527 |
|
|
|
601 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
595 |
|
|
|
585 |
|
|
|
471 |
|
|
|
409 |
|
Real estate 1-4 family junior lien mortgage |
|
|
200 |
|
|
|
179 |
|
|
|
144 |
|
|
|
119 |
|
Other revolving credit and installment |
|
|
167 |
|
|
|
139 |
|
|
|
171 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
962 |
|
|
|
903 |
|
|
|
786 |
|
|
|
677 |
|
Foreign |
|
|
38 |
|
|
|
45 |
|
|
|
25 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans (1) |
|
|
1,489 |
|
|
|
1,395 |
|
|
|
1,338 |
|
|
|
1,301 |
|
As a percentage of total loans |
|
|
0.48 |
% |
|
|
0.46 |
% |
|
|
0.43 |
% |
|
|
0.44 |
% |
Foreclosed assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA loans (2) |
|
|
266 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
Other |
|
|
342 |
|
|
|
275 |
|
|
|
191 |
|
|
|
187 |
|
Real estate and other nonaccrual investments (3) |
|
|
3 |
|
|
|
9 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans and other assets |
|
$ |
2,100 |
|
|
$ |
1,917 |
|
|
$ |
1,531 |
|
|
$ |
1,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total loans |
|
|
0.68 |
% |
|
|
0.64 |
% |
|
|
0.49 |
% |
|
|
0.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes impaired loans of $192 million, $138 million, $190 million and $240 million at
September 30, 2006, June 30, 2006, December 31, 2005, and September 30, 2005, respectively.
See Note 5 to Financial Statements in this Report and Note 6 (Loans and Allowance for Credit
Losses) to Financial Statements in our 2005 Form 10-K for further information on impaired
loans. |
(2) |
|
As a result of a change in regulatory reporting requirements effective January 1, 2006,
foreclosed real estate securing GNMA loans has been classified as nonperforming. These assets
are fully collectible because the corresponding GNMA loans are insured by the FHA or
guaranteed by the Department of Veterans Affairs. |
(3) |
|
Includes real estate investments (contingent interest loans accounted for as investments)
that would be classified as nonaccrual if these assets were recorded as loans. |
About half of the $67 million increase in other foreclosed assets from June 30, 2006, to
September 30, 2006, related to consumer auto loans. We expect that the amount of nonaccrual loans
will change due to portfolio growth, portfolio seasoning, routine problem loan recognition and
resolution through collections, sales or charge-offs. The performance of any one loan can be
19
affected by external factors, such as economic conditions, or factors particular to a borrower,
such as actions of a borrowers management.
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 first mortgage loans or consumer loans exempt under regulatory rules from being classified
as nonaccrual.
The total of loans 90 days or more past due and still accruing was $3,664 million, $3,343 million,
$3,606 million and $2,955 million at September 30, 2006, June 30, 2006, December 31, 2005, and
September 30, 2005, respectively. At September 30, 2006, June 30, 2006, December 31, 2005, and
September 30, 2005, the total included $2,689 million, $2,526 million, $2,923 million and $2,328
million, respectively, in advances pursuant to our servicing agreements to GNMA mortgage pools
whose repayments are insured by the FHA or guaranteed by the Department of Veterans Affairs.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(EXCLUDING INSURED/GUARANTEED GNMA ADVANCES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
June 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
20 |
|
|
$ |
11 |
|
|
$ |
18 |
|
|
$ |
19 |
|
Other real estate mortgage |
|
|
8 |
|
|
|
2 |
|
|
|
13 |
|
|
|
3 |
|
Real estate construction |
|
|
4 |
|
|
|
10 |
|
|
|
9 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
32 |
|
|
|
23 |
|
|
|
40 |
|
|
|
25 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
123 |
|
|
|
107 |
|
|
|
103 |
|
|
|
100 |
|
Real estate 1-4 family junior lien mortgage |
|
|
50 |
|
|
|
39 |
|
|
|
50 |
|
|
|
41 |
|
Credit card |
|
|
213 |
|
|
|
181 |
|
|
|
159 |
|
|
|
145 |
|
Other revolving credit and installment |
|
|
516 |
|
|
|
431 |
|
|
|
290 |
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
902 |
|
|
|
758 |
|
|
|
602 |
|
|
|
558 |
|
Foreign |
|
|
41 |
|
|
|
36 |
|
|
|
41 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
975 |
|
|
$ |
817 |
|
|
$ |
683 |
|
|
$ |
627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately half of the $85 million increase in other revolving credit and installment loans
from June 30, 2006, to September 30, 2006, related to consumer auto loans.
Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan losses and the reserve
for unfunded credit commitments, is managements estimate of credit losses inherent in the loan
portfolio at the balance sheet date. We assume that our allowance for credit losses as a percentage
of charge-offs and nonaccrual loans will change at different points in time based on credit
performance, loan mix and collateral values. The detail of the changes in the allowance for credit
losses, including charge-offs and recoveries by loan category, is in Note 5 (Loans and Allowance
for Credit Losses) to Financial Statements.
20
In third quarter 2005, we provided $100 million for estimated credit losses related to Hurricane
Katrina. Since that time, we have identified and recorded approximately $50 million of
Katrina-related losses. Because we do not anticipate any further credit losses attributable to
Katrina, we released the remaining $50 million balance in third quarter 2006.
We consider the allowance for credit losses of $3.98 billion adequate to cover credit losses
inherent in the loan portfolio, including unfunded credit commitments, at September 30, 2006. The
process for determining the adequacy of the allowance for credit losses is critical to our
financial results. It requires difficult, subjective and complex judgments, as a result of the need
to make estimates about the effect of matters that are uncertain.
(See Financial Review
Critical Accounting Policies Allowance for Credit Losses in our 2005 Form 10-K.) Therefore, we
cannot provide assurance that, in any particular period, we will not have sizeable credit losses in
relation to the amount reserved. We may need to significantly adjust the allowance for credit
losses, considering current factors at the time, including economic conditions and ongoing internal
and external examination processes. Our process for determining the adequacy of the allowance for
credit losses is discussed in Note 6 (Loans and Allowance for Credit Losses) to Financial
Statements in our 2005 Form 10-K.
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
Asset/liability management involves the evaluation, monitoring and management of interest rate
risk, market risk, liquidity and funding. The Corporate Asset/Liability Management Committee
(Corporate ALCO) which oversees these risks and reports periodically to the Finance Committee of
the Board of Directors consists of senior financial and business executives. Each of our
principal business groups Community Banking (including Mortgage Banking), Wholesale Banking and
Wells Fargo Financial have individual asset/liability management committees and processes linked
to the Corporate ALCO process.
Interest Rate Risk
Interest rate risk, which potentially can have a significant earnings impact, is an integral part
of being a financial intermediary. We are subject to interest rate risk because:
|
|
|
assets and liabilities may mature or reprice at different times (for example, if assets
reprice faster than liabilities and interest rates are generally falling, earnings will
initially decline); |
|
|
|
assets and liabilities may reprice at the same time but by different amounts (for
example, when the general level of interest rates is falling, we may reduce rates paid on
checking and savings deposit accounts by an amount that is less than the general decline in
market interest rates); |
|
|
|
short-term and long-term market interest rates may change by different amounts (for
example, the shape of the yield curve may affect new loan yields and funding costs
differently); or |
|
|
|
the remaining maturity of various assets or liabilities may shorten or lengthen as
interest rates change (for example, if long-term mortgage interest rates decline sharply,
mortgage-backed securities held in the securities available for sale portfolio may prepay
significantly earlier than anticipated which could reduce portfolio income). |
21
Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage
origination volume, the value of MSRs, the value of the pension liability and other sources of
earnings.
We assess interest rate risk by comparing our most likely earnings plan with various earnings
simulations using many interest rate scenarios that differ in the direction of interest rate
changes, the degree of change over time, the speed of change and the projected shape of the yield
curve. For example, as of September 30, 2006, our most recent simulation indicated estimated
earnings at risk of less than 1% of our most likely earnings plan over the next 12 months to either
a scenario in which the federal funds rate declines 275 basis points to 2.50% and the Constant
Maturity Treasury bond yield declines 125 basis points to 3.75%, or a scenario in which the federal
funds rate rises 175 basis points to 7.00% and the Constant Maturity Treasury bond yield rises 225
basis points to 7.25%, over the same 12 month period. Simulation estimates depend on, and will
change with, the size and mix of our actual and projected balance sheet at the time of each
simulation. Due to timing differences between the quarterly valuation of MSRs and the eventual
impact of interest rates on mortgage banking volumes, earnings at risk in any particular quarter
could be higher than the average earnings at risk over the twelve month simulation period,
depending on the path of interest rates and on our MSRs hedging strategies. See Mortgage Banking
Interest Rate Risk below.
We use exchange-traded and over-the-counter interest rate derivatives to hedge our interest rate
exposures. The credit risk amount and estimated net fair values of these derivatives as of
September 30, 2006, and December 31, 2005, are presented in Note 19 (Derivatives) to Financial
Statements. We use derivatives for asset/liability management in three ways:
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to convert a major portion of our long-term fixed-rate debt, which we issue to finance
the Company, from fixed-rate payments to floating-rate payments by entering into
receive-fixed swaps; |
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to convert the cash flows from selected asset and/or liability instruments/portfolios
from fixed-rate payments to floating-rate payments or vice versa; and |
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to hedge our mortgage origination pipeline, funded mortgage loans and MSRs using
interest rate swaps, swaptions, futures, forwards and options. |
Mortgage Banking Interest Rate Risk
We originate, fund and service mortgage loans, which subjects us to various risks, including
credit, liquidity and interest rate risks. We reduce unwanted credit and liquidity risks by selling
or securitizing virtually all of the long-term fixed-rate mortgage loans we originate and most of
the ARMs we originate. From time to time, we have held originated ARMs in portfolio as an
investment for our growing base of core deposits. We determine whether the loans will be held for
investment or held for sale at the time of origination. We may subsequently change our intent to
hold loans for investment and sell some or all of our ARMs as part of our corporate asset/liability
management.
While credit and liquidity risks have historically been relatively low for mortgage banking
activities, interest rate risk can be substantial. Changes in interest rates may potentially impact
total origination and servicing fees, the value of our residential MSRs measured at fair value and
the associated income and loss reflected in mortgage banking noninterest income, the income
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and expense associated with instruments (economic hedges) used to hedge changes in the fair value
of MSRs, and the value of derivative loan commitments extended to mortgage applicants.
Interest rates impact the amount and timing of origination and servicing fees because consumer
demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage
interest rates. Typically, a decline in mortgage interest rates will lead to an increase in
mortgage originations and fees and may also lead to an increase in servicing fee income, depending
on the level of new loans added to the servicing portfolio and prepayments. Given the time it takes
for consumer behavior to fully react to interest rate changes, as well as the time required for
processing a new application, providing the commitment, and securitizing and selling the loan,
interest rate changes will impact origination and servicing fees with a lag. The amount and timing
of the impact on origination and servicing fees will depend on the magnitude, speed and duration of
the change in interest rates.
Under FAS 156, which we adopted January 1, 2006, we have elected to use the fair value measurement
method to initially measure and carry our residential MSRs, which represent substantially all of
our MSRs. Under this method, the initial measurement of fair value of MSRs at the time we sell or
securitize is recorded as a component of net gains on mortgage loan origination/sales activities.
The carrying value of MSRs reflects changes in fair value at the end of each quarter and changes
are included in net servicing income, a component of mortgage banking noninterest income. If the
fair value of the MSRs increases, income is recognized; if the fair value of the MSRs decreases, a
loss is recognized. We use a dynamic and sophisticated model to estimate the fair value of our
MSRs. While the valuation of MSRs can be highly subjective and involve complex judgments by
management about matters that are inherently unpredictable, changes in interest rates influence a
variety of assumptions included in the periodic valuation of MSRs. Assumptions affected include
prepayment speed, expected returns and potential risks on the servicing asset portfolio, the value
of escrow balances and other servicing valuation elements impacted by interest rates.
We hedge the risk of changes in the fair value of residential MSRs with market-based free-standing
derivative instruments (economic hedges), such as swaps, swaptions, Treasury futures and options,
Eurodollar futures and options, and forward contracts, and we also use securities available for
sale. Changes in the fair value of these free-standing derivatives, based on quoted market prices,
as well as changes in the fair value of MSRs determined by our valuation model, are both included
in net servicing income. Changes in fair value of securities available for sale (unrealized gains
and losses) are not included in net servicing income, but are reported in cumulative other
comprehensive income (net of tax) or, upon sale or determination that any impairment is other than
temporary, are reported in gains (losses) on debt securities available for sale.
A decline in interest rates increases the propensity for refinancing, reduces the expected duration
of the servicing portfolio and therefore reduces the estimated fair value of MSRs. This reduction
in fair value causes a charge to income (net of any gains on free-standing derivatives (economic
hedges) used to hedge MSRs). We may choose to not fully hedge all of the potential decline in the
value of our MSRs resulting from a decline in interest rates because the potential increase in
origination/servicing fees in that scenario may provide a partial natural business hedge. In a
rising rate period, when the MSRs may not be fully hedged with free-standing derivatives, the
change in the fair value of the MSRs that can be recaptured into
income will typically although
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not
always exceed the losses on any free-standing derivatives hedging the MSRs. In third quarter
2006, the decrease in the fair value of our MSRs exceeded the gains on derivatives used to hedge
the MSRs by $86 million. In the first nine months of 2006, the decrease in the fair value of our
MSRs and losses on free-standing derivatives used to hedge the MSRs totaled $253 million.
Hedging the various sources of interest rate risk in mortgage banking is a complex process that
requires sophisticated modeling and constant monitoring. While we attempt to balance these various
aspects of the mortgage business, there are several potential risks to earnings:
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MSRs valuation changes associated with interest rate changes are recorded in earnings
immediately within the accounting period in which those interest rate changes occur,
whereas the impact of those same changes in interest rates on origination and servicing
fees occur with a lag and over time. Thus, the mortgage business could be protected from
adverse changes in interest rates over a period of time on a cumulative basis but still
display large variations in income in any accounting period. |
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The degree to which the natural business hedge offsets changes in MSRs valuations is
imperfect, varies at different points in the interest rate cycle, and depends not just on
the direction of interest rates but on the pattern of quarterly interest rate changes. For
example, given the relatively high level of refinancing activity in recent years and the
increase in interest rates during the same period, any significant increase in refinancing
activity would likely occur only if rates drop substantially from year-end 2005 levels. |
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Origination volumes, the valuation of MSRs and hedging results and associated costs are
also impacted by many factors. Such factors include the mix of new business between ARMs
and fixed-rate mortgages, the relationship between short-term and long-term interest rates,
the degree of volatility in interest rates, the relationship between mortgage interest
rates and other interest rate markets, and other interest rate factors. Many of these
factors are hard to predict and we may not be able to directly or perfectly hedge their
effect. |
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While our hedging activities are designed to balance our mortgage banking interest rate
risks, the financial instruments we use may not perfectly correlate with the values and
income being hedged. For example, the change in value of ARMs production held for sale from
changes in mortgage interest rates may or may not be fully offset by Treasury and LIBOR
index-based financial instruments used as economic hedges for such ARMs. |
The total carrying value of our residential and commercial MSRs was $18.0 billion at September 30,
2006, and $12.5 billion, net of a valuation allowance of $1.2 billion, at December 31, 2005. The
weighted-average note rate on the owned servicing portfolio was 5.86% at September 30, 2006, and
5.72% at December 31, 2005. Our total MSRs were 1.46% of mortgage loans serviced for others at
September 30, 2006, compared with 1.44% at December 31, 2005.
As part of our mortgage banking activities, we enter into commitments to fund residential mortgage
loans at specified times in the future. A mortgage loan commitment is an interest rate lock that
binds us to lend funds to a potential borrower at a specified interest rate and within a specified
period of time, generally up to 60 days after inception of the rate lock. These loan commitments
are derivative loan commitments if the loans that will result from the exercise of the commitments
will be held for sale. Under FAS 133, these derivative loan commitments are
24
recognized at fair value on the balance sheet with changes in their fair values recorded as part of
mortgage banking noninterest income. Consistent with Emerging Issues Task Force Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management Activities, and SEC Staff Accounting
Bulletin No. 105, Application of Accounting Principles to Loan Commitments, we record no value for
the loan commitment at inception. Subsequent to inception, we recognize the fair value of the
derivative loan commitment based on estimated changes in the fair value of the underlying loan that
would result from the exercise of that commitment and on changes in the probability that the loan
will not fund within the terms of the commitment (referred to as a fall-out factor). The value of
that loan is affected primarily by changes in interest rates and the passage of time. The value of
the MSRs is recognized only after the servicing asset has been contractually separated from the
underlying loan by sale or securitization.
Outstanding derivative loan commitments expose us to the risk that the price of the loans
underlying the commitments might decline due to increases in mortgage interest rates from inception
of the rate lock to the funding of the loan. To minimize this risk, we utilize Treasury futures,
forwards and options, Eurodollar futures and forward contracts as economic hedges against the
potential decreases in the values of the loans that could result from the exercise of the loan
commitments. We expect that these derivative financial instruments will experience changes in fair
value that will either fully or partially offset the changes in fair value of the derivative loan
commitments.
Market Risk Trading Activities
From a market risk perspective, our net income is exposed to changes in interest rates, credit
spreads, foreign exchange rates, equity and commodity prices and their implied volatilities. The
primary purpose of our trading businesses is to accommodate customers in the management of their
market price risks. Also, we take positions based on market expectations or to benefit from price
differences between financial instruments and markets, subject to risk limits established and
monitored by Corporate ALCO. All securities, foreign exchange transactions, commodity transactions
and derivatives transacted with customers or used to hedge capital market transactions with
customers are carried at fair value. The Institutional Risk Committee establishes and monitors
counterparty risk limits. The credit risk amount and estimated net fair value of all customer
accommodation derivatives at September 30, 2006, and December 31, 2005, are included in Note 19
(Derivatives) to Financial Statements. Open, at risk positions for all trading business are
monitored by Corporate ALCO.
The standardized approach for monitoring and reporting market risk for the trading activities is
the value-at-risk (VAR) metrics complemented with factor analysis and stress testing. VAR measures
the worst expected loss over a given time interval and within a given confidence interval. We
measure and report daily VAR at a 99% confidence interval based on actual changes in rates and
prices over the past 250 days. The analysis captures all financial instruments that are considered
trading positions. The average one-day VAR throughout third quarter 2006 was $19.6 million, with a
lower bound of $10.2 million and an upper bound of $35.1 million.
25
Market
Risk Equity Markets
We are directly and indirectly affected by changes in the equity markets. We make and manage direct
equity investments in start-up businesses, emerging growth companies, management buy-outs,
acquisitions and corporate recapitalizations. We also invest in non-affiliated funds that make
similar private equity investments. These private equity investments are made within capital
allocations approved by management and the Board of Directors (the Board). The Board reviews
business developments, key risks and historical returns for the private equity investments at least
annually. Management reviews these investments at least quarterly and assesses them for possible
other-than-temporary impairment. For nonmarketable investments, the analysis is based on facts and
circumstances of each individual investment and the expectations for that investments cash flows
and capital needs, the viability of its business model and our exit strategy. Private equity
investments totaled $1.65 billion at September 30, 2006, compared with $1.54 billion at December
31, 2005.
We also have marketable equity securities in the available for sale investment portfolio, including
securities relating to our venture capital activities. We manage these investments within capital
risk limits approved by management and the Board and monitored by Corporate ALCO. Gains and losses
on these securities are recognized in net income when realized and other-than-temporary impairment
may be periodically recorded when identified. The initial indicator of impairment for marketable
equity securities is a sustained decline in market price below the amount recorded for that
investment. We consider a variety of factors, such as the length of time and the extent to which
the market value has been less than cost; the issuers financial condition, capital strength, and
near-term prospects; any recent events specific to that issuer and economic conditions of its
industry; and, to a lesser degree, our investment horizon in relationship to an anticipated
near-term recovery in the stock price, if any. The fair value of marketable equity securities was
$829 million and cost was $597 million at September 30, 2006, compared with $900 million and $558
million, respectively, at December 31, 2005.
Changes in equity market prices may also indirectly affect our net income (1) by affecting the
value of third party assets under management and, hence, fee income, (2) by affecting particular
borrowers, whose ability to repay principal and/or interest may be affected by the stock market, or
(3) by affecting brokerage activity, related commission income and other business activities. Each
business line monitors and manages these indirect risks.
Liquidity and Funding
The objective of effective liquidity management is to ensure that we can meet customer loan
requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both
normal operating conditions and under unpredictable circumstances of industry or market stress. To
achieve this objective, Corporate ALCO establishes and monitors liquidity guidelines that require
sufficient asset-based liquidity to cover potential funding requirements and to avoid
over-dependence on volatile, less reliable funding markets. We set these guidelines for both the
consolidated balance sheet and for the Parent to ensure that the Parent is a source of strength for
its regulated, deposit-taking banking subsidiaries.
Debt securities in the securities available for sale portfolio provide asset liquidity, in addition
to the immediately liquid resources of cash and due from banks, federal funds sold, securities
26
purchased under resale agreements and other short term investments. Asset liquidity is further
enhanced by our ability to sell or securitize loans in secondary markets through whole-loan sales
and securitizations.
Core customer deposits have historically provided a sizeable source of relatively stable and
low-cost funds. The remaining assets were funded by long-term debt, deposits in foreign offices,
short-term borrowings (federal funds purchased, securities sold under repurchase agreements,
commercial paper and other short-term borrowings) and trust preferred securities.
Liquidity is also available through our ability to raise funds in a variety of domestic and
international money and capital markets. We access capital markets for long-term funding by issuing
registered debt, private placements and asset-backed secured funding. In September 2003, Moodys
Investors Service rated Wells Fargo Bank, N.A. as Aaa, its highest investment grade, and rated
the Companys senior debt as Aa1. In August 2006, Standard & Poors raised Wells Fargo Bank,
N.A.s rating to AA+ from AA, and raised the Companys senior debt rating to AA from AA-.
Rating agencies base their ratings on many quantitative and qualitative factors, including capital
adequacy, liquidity, asset quality, business mix, and level and quality of earnings.
Parent. Under SEC rules effective December 1, 2005, the Parent is classified as a well-known
seasoned issuer, which allows it to file a registration statement that does not have a limit on
issuance capacity. However, the Parents ability to issue debt and other securities under a
registration statement filed with the SEC under these new rules is limited by the debt issuance
authority granted by the Board. The Parent is currently authorized by the Board to issue $20
billion in outstanding short-term debt and $90 billion in outstanding long-term debt, subject to a
total outstanding debt limit of $100 billion. In June 2006, the Parents registration statement
with the SEC for issuance of senior and subordinated notes, preferred stock and other securities
became effective. During the first nine months of 2006, the Parent issued a total of $8.9 billion
of registered senior notes, including $0.9 billion (denominated in pounds sterling) sold primarily
in the United Kingdom and $2.0 billion (denominated in euros) sold primarily in Europe. Also, in
the first nine months of 2006, the Parent issued $0.5 billion in private placements (denominated in
Australian dollars) under the Parents Australian debt issuance program. We used the proceeds from
securities issued in the first nine months of 2006 for general corporate purposes and expect that
the proceeds in the future will also be used for general corporate purposes. The Parent also issues
commercial paper from time to time, subject to its short-term debt limit.
Wells Fargo Bank, N.A. Wells Fargo Bank, N.A. is authorized by its board of directors to issue $20
billion in outstanding short-term debt and $40 billion in outstanding long-term debt. In March
2003, Wells Fargo Bank, N.A. established a $50 billion bank note program under which, subject to
any other debt outstanding under the limits described above, it may issue $20 billion in
outstanding short-term senior notes and $30 billion in long-term senior notes. Securities are
issued under this program as private placements in accordance with Office of the Comptroller of the
Currency (OCC) regulations. During the first nine months of 2006, Wells Fargo Bank, N.A. issued
$3.2 billion in long-term senior and subordinated notes, which included long-term senior notes
issued under the bank note program.
Wells Fargo Financial. In January 2006, Wells Fargo Financial Canada Corporation (WFFCC), a
wholly-owned Canadian subsidiary of Wells Fargo Financial, Inc. (WFFI), qualified for
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distribution with the provincial securities exchanges in Canada $7.0 billion (Canadian) of issuance
authority. During the first nine months of 2006, WFFCC issued $1.3 billion (Canadian) in senior
notes. At September 30, 2006, the remaining issuance capacity for WFFCC was $5.7 billion
(Canadian). WFFI issued $0.5 billion (U.S.) in private placements in the first nine months of 2006.
CAPITAL MANAGEMENT
We have an active program for managing stockholder capital. We use capital to fund organic growth,
acquire banks and other financial services companies, pay dividends and repurchase our shares. Our
objective is to produce above market long-term returns by opportunistically using capital when
returns are perceived to be high and issuing/accumulating capital when the cost of doing so is
perceived to be low.
From time to time the Board authorizes the Company to repurchase shares of our common stock.
Although we announce when the Board authorizes share repurchases, we typically do not give any
public notice before we repurchase our shares. Various factors determine the amount and timing of
our share repurchases, including our capital requirements, the number of shares we expect to issue
for acquisitions and employee benefit plans, market conditions (including the trading price of our
stock), and legal considerations. These factors can change at any time, and there can be no
assurance as to the number of shares we will repurchase or when we will repurchase them.
Historically, our policy has been to repurchase shares under the safe harbor conditions of Rule
10b-18 of the Exchange Act including a limitation on the daily volume of repurchases. Rule 10b-18
imposes an additional daily volume limitation on share repurchases during a pending merger or
acquisition in which shares of our stock will constitute some or all of the consideration. Our
management may determine that during a pending stock merger or acquisition when the safe harbor
would otherwise be available, it is in our best interest to repurchase shares in excess of this
additional daily volume limitation. In such cases, we intend to repurchase shares in compliance
with the other conditions of the safe harbor, including the standing daily volume limitation that
applies whether or not there is a pending stock merger or acquisition.
In 2005, the Board authorized the repurchase of up to 150 million additional shares of our
outstanding common stock. In June 2006, the Board authorized the repurchase of up to 50 million
additional shares of our outstanding common stock. During the first nine months of 2006, we
repurchased 47 million shares of our common stock. At September 30, 2006, the total remaining
common stock repurchase authority under the 2005 and 2006 authorizations was 73 million shares.
(For additional information regarding share repurchases and repurchase authorizations, see Part II
Item 2 of this Report.)
On June 27, 2006, the Board declared a two-for-one stock split in the form of a 100% stock dividend
on our common stock which was distributed August 11, 2006, to stockholders of record at the close
of business August 4, 2006. We distributed one share of common stock for each share of common stock
issued and outstanding or held in the treasury of the Company. Also, in June 2006, the Board
declared an increase in the quarterly common stock dividend to 56 cents per share, up 4 cents, or
8%. The cash dividend was on a pre-split basis and was payable September 1, 2006, to stockholders
of record at the close of business August 4, 2006.
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Our potential sources of capital include retained earnings, and issuances of common and preferred
stock and subordinated debt. In the first nine months of 2006, retained earnings increased $3.5
billion, predominantly resulting from net income of $6.3 billion and $0.1 billion from the adoption
of FAS 156 upon remeasurement of our residential MSRs to fair value, less dividends of $2.7
billion. In the first nine months of 2006, we issued $1.7 billion of common stock (including shares
issued for our ESOP plan) under various employee benefit and director plans and under our dividend
reinvestment and direct stock repurchase programs.
At September 30, 2006, the Company and each of our subsidiary banks were well capitalized under
the applicable regulatory capital adequacy guidelines. See Note 18 (Regulatory and Agency Capital
Requirements) to Financial Statements for additional information.
RISK FACTORS
An investment in the Company has risk. In addition, in accordance with the Private Securities
Litigation Reform Act of 1995, we caution you that actual results may differ from forward-looking
statements about our future financial and business performance contained in this Report and other
reports we file with the SEC and in other Company communications. This Report contains
forward-looking statements about:
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our belief that we will see an improvement in early 2007 in collections relating to our
consumer auto loans; |
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our anticipation that we will not incur additional credit losses attributable to
Hurricane Katrina; |
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the expected impact of changes in interest rates on loan demand, credit losses,
mortgage origination volume, the value of MSRs, and other items that may affect earnings; |
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the expected time periods over which unrecognized compensation expense relating to
stock options and restricted share rights will be recognized; |
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the expected timing and impact of the adoption of new accounting standards and
policies; |
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future credit losses and nonperforming assets, including changes in the amount of
nonaccrual loans due to portfolio growth, portfolio seasoning, and other factors; |
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the extent to which changes in the fair value of derivative financial instruments will
offset changes in the fair value of derivative loan commitments; |
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future short-term and long-term interest rate levels and their impact on net interest
margin, net income, liquidity and capital; |
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the anticipated use of proceeds from the issuance of securities; |
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how and when we intend to repurchase shares of our common stock; |
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the amount and timing of future contributions to the Cash Balance Plan; |
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the recovery of our investment in variable interest entities; |
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future reclassification to earnings of deferred net gains on derivatives; |
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expected completion dates of pending business combinations and other acquisitions; and |
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the amount of contingent consideration payable in connection with certain acquisitions. |
Factors that could cause our financial results and condition to vary significantly from quarter to
quarter or cause actual results to differ from our expectations for our future financial and
business performance include:
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lower or negative revenue growth because of our inability to sell more products to our
existing customers; |
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decreased demand for our products and services because of an economic slowdown; |
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reduced fee income from our brokerage and asset management businesses because of a fall
in stock market prices; |
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lower net interest margin, decreased mortgage loan originations and reductions in the
value of our MSRs because of changes in interest rates; |
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reduced earnings because of higher credit losses generally and specifically because of
higher than expected losses in our consumer auto loan portfolio because our increased
collection efforts are not as effective as we expect or take longer than we expect to
produce meaningful results; |
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reduced earnings because of changes in the value of our venture capital investments; |
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changes in our accounting policies or in accounting standards; |
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reduced earnings from not realizing the expected benefits of acquisitions or from
unexpected difficulties integrating acquisitions; |
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federal and state regulations; |
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reputational damage from negative publicity; |
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fines, penalties and other negative consequences from regulatory violations, even
inadvertent or unintentional violations; |
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the loss of checking and saving account deposits to alternative investments such as the
stock market and higher-yielding fixed income investments; and |
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fiscal and monetary policies of the Federal Reserve Board. |
Refer to our 2005 Form 10-K, including Risk Factors, for information about these factors. Refer
also to this Report, including the discussion below and under Risk Management in the Financial
Review section, for additional risk factors and other information that may supplement or modify the
discussion of risk factors in our 2005 Form 10-K.
Changes in interest rates could reduce the value of our mortgage servicing rights (MSRs) and earnings.
We have a sizeable portfolio of MSRs. A mortgage servicing right (MSR) is the right to service a
mortgage loan collect principal, interest, escrow amounts,
etc. for a fee. We acquire MSRs
when we keep the servicing rights after we sell or securitize the loans we have originated or when
we purchase the servicing rights to mortgage loans originated by other lenders. Effective January
1, 2006, upon adoption of FAS 156, we elected to initially measure and carry our residential MSRs
using the fair value measurement method. Fair value is the present value of estimated future net
servicing income, calculated based on a number of variables, including assumptions about the
likelihood of prepayment by borrowers.
Changes in interest rates can affect prepayment assumptions and thus fair value. When interest
rates fall, borrowers are more likely to prepay their mortgage loans by refinancing them at a lower
rate. As the likelihood of prepayment increases, the fair value of our MSRs can decrease. Each
quarter we evaluate the fair value of our MSRs, and any decrease in fair value reduces earnings in
the period in which the decrease occurs.
For more
information, refer to Critical Accounting Policies and
Risk Management
Asset/Liability and Market Risk Management Mortgage Banking Interest Rate Risk in the Financial
Review section of this Report.
30
Our mortgage banking revenue can be volatile from quarter to quarter.
We earn revenue from fees we receive for originating mortgage loans and for servicing mortgage
loans. When rates rise, the demand for mortgage loans tends to fall, reducing the revenue we
receive from loan originations. At the same time, revenue from our MSRs can increase, through
increases in fair value. When rates fall, mortgage originations tend to increase and the value of
our MSRs tends to decline, also with some offsetting revenue effect. Even though they can act as a
natural hedge, the hedge is not perfect, either in amount or timing. For example, the negative
effect on revenue from a decrease in the fair value of residential MSRs is immediate, but any
offsetting revenue benefit from more originations and the MSRs relating to the new loans would
accrue over time.
We typically use derivatives and other instruments to hedge our mortgage banking interest rate
risk. We generally do not hedge all of our risk, and the fact that we attempt to hedge any of the
risk does not mean we will be successful. Hedging is a complex process, requiring sophisticated
models and constant monitoring, and is not a perfect science. We may use hedging instruments tied
to U.S. Treasury rates, LIBOR or Eurodollars that may not perfectly correlate with the value or
income being hedged. We could incur losses from our hedging activities. There may be periods where
we elect not to use derivatives and other instruments to hedge mortgage banking interest rate risk.
For more
information, refer to Risk Management Asset/Liability
and Market Risk Management
Mortgage Banking Interest Rate Risk in the Financial Review section of this Report.
We may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations.
We maintain systems and procedures designed to ensure that we comply with applicable laws and
regulations. However, some legal/regulatory frameworks provide for the imposition of fines or
penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even
though there was in place at the time systems and procedures designed to ensure compliance. For
example, we are subject to regulations issued by the Office of Foreign Assets Control (OFAC) that
prohibit financial institutions from participating in the transfer of property belonging to the
governments of certain foreign countries and designated nationals of those countries. OFAC may
impose penalties for inadvertent or unintentional violations even if reasonable processes are in
place to prevent the violations. Therefore, the establishment and maintenance of systems and
procedures reasonably designed to ensure compliance cannot guarantee that we will be able to avoid
a fine or penalty for noncompliance. For example, in April 2003 and January 2005 OFAC reported
settlements with Wells Fargo Bank, N.A. in amounts of $5,500 and $42,833, respectively. These
settlements related to transactions involving inadvertent acts or human error alleged to have
violated OFAC regulations. There may be other negative consequences resulting from a finding of
noncompliance, including restrictions on certain activities. Such a finding may also damage our reputation (see Negative publicity could
damage our reputation under Risk Factors in our 2005 Form 10-K) and could restrict the ability
of institutional investment managers to invest in our securities.
31
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Companys management evaluated the effectiveness, as of September 30,
2006, of the Companys disclosure controls and procedures. The Companys chief executive officer
and chief financial officer participated in the evaluation. Based on this evaluation, the Companys
chief executive officer and chief financial officer concluded that the Companys disclosure
controls and procedures were effective as of September 30, 2006.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the
companys principal executive and principal financial officers and effected by the companys board
of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those
policies and procedures that:
|
|
|
pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of assets of the company; |
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and
expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and |
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys 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
third quarter 2006 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
32
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended Sept. 30 |
, |
|
Nine months ended Sept. 30 |
, |
(in millions, except per share amounts) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
$ |
45 |
|
|
$ |
44 |
|
|
$ |
179 |
|
|
$ |
142 |
|
Securities available for sale |
|
|
1,014 |
|
|
|
442 |
|
|
|
2,552 |
|
|
|
1,327 |
|
Mortgages held for sale |
|
|
702 |
|
|
|
674 |
|
|
|
2,119 |
|
|
|
1,585 |
|
Loans held for sale |
|
|
12 |
|
|
|
9 |
|
|
|
34 |
|
|
|
136 |
|
Loans |
|
|
6,555 |
|
|
|
5,416 |
|
|
|
18,910 |
|
|
|
15,359 |
|
Other interest income |
|
|
71 |
|
|
|
60 |
|
|
|
214 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
8,399 |
|
|
|
6,645 |
|
|
|
24,008 |
|
|
|
18,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,997 |
|
|
|
1,000 |
|
|
|
5,273 |
|
|
|
2,517 |
|
Short-term borrowings |
|
|
271 |
|
|
|
189 |
|
|
|
830 |
|
|
|
502 |
|
Long-term debt |
|
|
1,084 |
|
|
|
780 |
|
|
|
3,004 |
|
|
|
2,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
3,352 |
|
|
|
1,969 |
|
|
|
9,107 |
|
|
|
5,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
5,047 |
|
|
|
4,676 |
|
|
|
14,901 |
|
|
|
13,665 |
|
Provision for credit losses |
|
|
613 |
|
|
|
641 |
|
|
|
1,478 |
|
|
|
1,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
|
4,434 |
|
|
|
4,035 |
|
|
|
13,423 |
|
|
|
11,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
707 |
|
|
|
654 |
|
|
|
1,995 |
|
|
|
1,857 |
|
Trust and investment fees |
|
|
664 |
|
|
|
614 |
|
|
|
2,002 |
|
|
|
1,813 |
|
Card fees |
|
|
464 |
|
|
|
377 |
|
|
|
1,266 |
|
|
|
1,064 |
|
Other fees |
|
|
509 |
|
|
|
520 |
|
|
|
1,507 |
|
|
|
1,451 |
|
Mortgage banking |
|
|
484 |
|
|
|
743 |
|
|
|
1,634 |
|
|
|
1,794 |
|
Operating leases |
|
|
192 |
|
|
|
202 |
|
|
|
593 |
|
|
|
612 |
|
Insurance |
|
|
313 |
|
|
|
248 |
|
|
|
1,041 |
|
|
|
943 |
|
Net gains (losses) on debt securities available for sale |
|
|
121 |
|
|
|
(31 |
) |
|
|
(70 |
) |
|
|
4 |
|
Net gains from equity investments |
|
|
159 |
|
|
|
146 |
|
|
|
482 |
|
|
|
418 |
|
Other |
|
|
274 |
|
|
|
354 |
|
|
|
927 |
|
|
|
836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
3,887 |
|
|
|
3,827 |
|
|
|
11,377 |
|
|
|
10,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
1,769 |
|
|
|
1,571 |
|
|
|
5,195 |
|
|
|
4,602 |
|
Incentive compensation |
|
|
710 |
|
|
|
676 |
|
|
|
2,092 |
|
|
|
1,703 |
|
Employee benefits |
|
|
458 |
|
|
|
467 |
|
|
|
1,534 |
|
|
|
1,446 |
|
Equipment |
|
|
294 |
|
|
|
306 |
|
|
|
913 |
|
|
|
939 |
|
Net occupancy |
|
|
357 |
|
|
|
354 |
|
|
|
1,038 |
|
|
|
1,068 |
|
Operating leases |
|
|
155 |
|
|
|
159 |
|
|
|
473 |
|
|
|
474 |
|
Other |
|
|
1,338 |
|
|
|
1,356 |
|
|
|
4,086 |
|
|
|
3,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
5,081 |
|
|
|
4,889 |
|
|
|
15,331 |
|
|
|
14,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX EXPENSE |
|
|
3,240 |
|
|
|
2,973 |
|
|
|
9,469 |
|
|
|
8,642 |
|
Income tax expense |
|
|
1,046 |
|
|
|
998 |
|
|
|
3,168 |
|
|
|
2,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
2,194 |
|
|
$ |
1,975 |
|
|
$ |
6,301 |
|
|
$ |
5,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
$ |
0.65 |
|
|
$ |
0.59 |
|
|
$ |
1.87 |
|
|
$ |
1.70 |
|
DILUTED EARNINGS PER COMMON SHARE |
|
$ |
0.64 |
|
|
$ |
0.58 |
|
|
$ |
1.85 |
|
|
$ |
1.68 |
|
DIVIDENDS DECLARED PER COMMON SHARE |
|
$ |
|
|
|
$ |
0.26 |
|
|
$ |
0.80 |
|
|
$ |
0.74 |
|
Average common shares outstanding |
|
|
3,371.9 |
|
|
|
3,373.5 |
|
|
|
3,364.6 |
|
|
|
3,379.8 |
|
Diluted average common shares outstanding |
|
|
3,416.0 |
|
|
|
3,410.6 |
|
|
|
3,405.5 |
|
|
|
3,418.7 |
|
|
|
The accompanying notes are an integral part of these statements.
33
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
, |
|
December 31 |
, |
|
September 30 |
, |
(in millions, except shares) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
12,591 |
|
|
$ |
15,397 |
|
|
$ |
13,931 |
|
Federal funds sold, securities purchased under
resale agreements and other short-term investments |
|
|
4,079 |
|
|
|
5,306 |
|
|
|
5,861 |
|
Trading assets |
|
|
5,300 |
|
|
|
10,905 |
|
|
|
8,477 |
|
Securities available for sale |
|
|
52,635 |
|
|
|
41,834 |
|
|
|
34,480 |
|
Mortgages held for sale |
|
|
39,913 |
|
|
|
40,534 |
|
|
|
46,119 |
|
Loans held for sale |
|
|
617 |
|
|
|
612 |
|
|
|
629 |
|
Loans |
|
|
307,491 |
|
|
|
310,837 |
|
|
|
296,189 |
|
Allowance for loan losses |
|
|
(3,799 |
) |
|
|
(3,871 |
) |
|
|
(3,886 |
) |
|
|
|
|
|
|
|
|
|
|
Net loans |
|
|
303,692 |
|
|
|
306,966 |
|
|
|
292,303 |
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights: |
|
|
|
|
|
|
|
|
|
|
|
|
Measured at fair value (residential MSRs beginning 2006) |
|
|
17,712 |
|
|
|
|
|
|
|
|
|
Amortized |
|
|
328 |
|
|
|
12,511 |
|
|
|
10,711 |
|
Premises and equipment, net |
|
|
4,645 |
|
|
|
4,417 |
|
|
|
4,223 |
|
Goodwill |
|
|
11,192 |
|
|
|
10,787 |
|
|
|
10,776 |
|
Other assets |
|
|
30,737 |
|
|
|
32,472 |
|
|
|
25,984 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
483,441 |
|
|
$ |
481,741 |
|
|
$ |
453,494 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
86,849 |
|
|
$ |
87,712 |
|
|
$ |
89,304 |
|
Interest-bearing deposits |
|
|
227,470 |
|
|
|
226,738 |
|
|
|
199,725 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
314,319 |
|
|
|
314,450 |
|
|
|
289,029 |
|
Short-term borrowings |
|
|
13,800 |
|
|
|
23,892 |
|
|
|
23,243 |
|
Accrued expenses and other liabilities |
|
|
26,369 |
|
|
|
23,071 |
|
|
|
22,795 |
|
Long-term debt |
|
|
84,091 |
|
|
|
79,668 |
|
|
|
78,592 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
438,579 |
|
|
|
441,081 |
|
|
|
413,659 |
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
465 |
|
|
|
325 |
|
|
|
389 |
|
Common stock
$1-2/3 par value, authorized
6,000,000,000 shares; issued 3,472,762,050 shares |
|
|
5,788 |
|
|
|
5,788 |
|
|
|
5,788 |
|
Additional paid-in capital |
|
|
7,667 |
|
|
|
7,040 |
|
|
|
6,984 |
|
Retained earnings |
|
|
34,080 |
|
|
|
30,580 |
|
|
|
29,636 |
|
Cumulative other comprehensive income |
|
|
633 |
|
|
|
665 |
|
|
|
721 |
|
Treasury
stock 100,057,636 shares, 117,595,986 shares
and 114,421,240 shares |
|
|
(3,273 |
) |
|
|
(3,390 |
) |
|
|
(3,267 |
) |
Unearned ESOP shares |
|
|
(498 |
) |
|
|
(348 |
) |
|
|
(416 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
44,862 |
|
|
|
40,660 |
|
|
|
39,835 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
483,441 |
|
|
$ |
481,741 |
|
|
$ |
453,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
34
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Unearned |
|
|
Total |
|
|
|
|
Number of |
|
|
Preferred |
|
|
Common |
|
|
paid-in |
|
|
Retained |
|
|
comprehensive |
|
|
Treasury |
|
|
ESOP |
|
|
stockholders' |
|
(in millions, except shares) |
|
|
common shares |
|
|
stock |
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
income |
|
|
stock |
|
|
shares |
|
|
equity |
|
|
BALANCE DECEMBER 31, 2004 |
|
|
3,389,183,274 |
|
|
$ |
270 |
|
|
$ |
5,788 |
|
|
$ |
6,912 |
|
|
$ |
26,482 |
|
|
$ |
950 |
|
|
$ |
(2,247 |
) |
|
$ |
(289 |
) |
|
$ |
37,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,741 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Net unrealized losses on securities available
for sale and other interests held, net of
reclassification of $96 million of net gains
included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(316 |
) |
|
|
|
|
|
|
|
|
|
|
(316 |
) |
Net unrealized gains on derivatives and
hedging activities, net of reclassification of
$39 million of net losses on cash flow
hedges included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,512 |
|
Common stock issued |
|
|
35,491,748 |
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
(82 |
) |
|
|
|
|
|
|
984 |
|
|
|
|
|
|
|
858 |
|
Common stock issued for acquisitions |
|
|
3,909,004 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
|
|
|
|
122 |
|
Common stock repurchased |
|
|
(78,367,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,343 |
) |
|
|
|
|
|
|
(2,343 |
) |
Preferred stock (363,000) issued to ESOP |
|
|
|
|
|
|
363 |
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(387 |
) |
|
|
|
|
Preferred stock released to ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260 |
|
|
|
244 |
|
Preferred stock (243,669) converted to common
shares |
|
|
8,123,962 |
|
|
|
(244 |
) |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
|
|
Common stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,505 |
) |
Tax benefit upon exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80 |
|
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
|
(30,842,464 |
) |
|
|
119 |
|
|
|
|
|
|
|
72 |
|
|
|
3,154 |
|
|
|
(229 |
) |
|
|
(1,020 |
) |
|
|
(127 |
) |
|
|
1,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SEPTEMBER 30, 2005 |
|
|
3,358,340,810 |
|
|
$ |
389 |
|
|
$ |
5,788 |
|
|
$ |
6,984 |
|
|
$ |
29,636 |
|
|
$ |
721 |
|
|
$ |
(3,267 |
) |
|
$ |
(416 |
) |
|
$ |
39,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2005 |
|
|
3,355,166,064 |
|
|
$ |
325 |
|
|
$ |
5,788 |
|
|
$ |
7,040 |
|
|
$ |
30,580 |
|
|
$ |
665 |
|
|
$ |
(3,390 |
) |
|
$ |
(348 |
) |
|
$ |
40,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect from adoption of FAS 156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE JANUARY 1, 2006 |
|
|
3,355,166,064 |
|
|
|
325 |
|
|
|
5,788 |
|
|
|
7,040 |
|
|
|
30,681 |
|
|
|
665 |
|
|
|
(3,390 |
) |
|
|
(348 |
) |
|
|
40,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,301 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Net unrealized losses on securities available
for sale and other interests held, net of
reclassification of $87 million of net gains
included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Net unrealized losses on derivatives and
hedging activities, net of reclassification
of $71 million of net gains on cash flow
hedges included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,269 |
|
Common stock issued |
|
|
56,859,649 |
|
|
|
|
|
|
|
|
|
|
|
(48 |
) |
|
|
(207 |
) |
|
|
|
|
|
|
1,674 |
|
|
|
|
|
|
|
1,419 |
|
Common stock repurchased |
|
|
(47,488,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,566 |
) |
|
|
|
|
|
|
(1,566 |
) |
Preferred stock (414,000) issued to ESOP |
|
|
|
|
|
|
414 |
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(443 |
) |
|
|
|
|
Preferred stock released to ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293 |
|
|
|
274 |
|
Preferred stock (274,457) converted to common
shares |
|
|
8,167,309 |
|
|
|
(274 |
) |
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
|
|
Common stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,695 |
) |
Tax benefit upon exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179 |
|
Stock option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
|
Net change in deferred compensation and
related plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
16 |
|
Reclassification of share-based plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
(211 |
) |
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
|
17,538,350 |
|
|
|
140 |
|
|
|
|
|
|
|
627 |
|
|
|
3,399 |
|
|
|
(32 |
) |
|
|
117 |
|
|
|
(150 |
) |
|
|
4,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SEPTEMBER 30, 2006 |
|
|
3,372,704,414 |
|
|
$ |
465 |
|
|
$ |
5,788 |
|
|
$ |
7,667 |
|
|
$ |
34,080 |
|
|
$ |
633 |
|
|
$ |
(3,273 |
) |
|
$ |
(498 |
) |
|
$ |
44,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
35
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,301 |
|
|
$ |
5,741 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
1,478 |
|
|
|
1,680 |
|
Provision for MSRs in excess of fair value |
|
|
|
|
|
|
(323 |
) |
Change in fair value of residential MSRs |
|
|
(1,736 |
) |
|
|
|
|
Depreciation and amortization |
|
|
2,250 |
|
|
|
3,002 |
|
Net gains on securities available for sale |
|
|
(117 |
) |
|
|
(138 |
) |
Net losses (gains) on mortgage loan origination/sales activities |
|
|
811 |
|
|
|
(816 |
) |
Other net gains |
|
|
(200 |
) |
|
|
(29 |
) |
Preferred shares released to ESOP |
|
|
274 |
|
|
|
244 |
|
Stock option compensation expense |
|
|
108 |
|
|
|
|
|
Excess tax benefits related to stock option payments |
|
|
(179 |
) |
|
|
|
|
Net decrease in trading assets |
|
|
5,582 |
|
|
|
523 |
|
Net increase in deferred income taxes |
|
|
877 |
|
|
|
214 |
|
Net increase in accrued interest receivable |
|
|
(265 |
) |
|
|
(500 |
) |
Net increase in accrued interest payable |
|
|
358 |
|
|
|
271 |
|
Originations of mortgages held for sale |
|
|
(180,739 |
) |
|
|
(170,005 |
) |
Proceeds from sales of mortgages originated for sale |
|
|
175,655 |
|
|
|
150,456 |
|
Principal collected on mortgages originated for sale |
|
|
1,762 |
|
|
|
923 |
|
Net increase (decrease) in loans originated for sale |
|
|
(5 |
) |
|
|
666 |
|
Other assets, net |
|
|
2,949 |
|
|
|
(353 |
) |
Other accrued expenses and liabilities, net |
|
|
3,136 |
|
|
|
2,680 |
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
18,300 |
|
|
|
(5,764 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Sales proceeds |
|
|
43,896 |
|
|
|
7,343 |
|
Prepayments and maturities |
|
|
5,757 |
|
|
|
5,295 |
|
Purchases |
|
|
(61,347 |
) |
|
|
(10,578 |
) |
Net cash acquired from (paid for) acquisitions |
|
|
(526 |
) |
|
|
54 |
|
Increase in banking subsidiaries loan originations,
net of collections |
|
|
(26,503 |
) |
|
|
(25,867 |
) |
Proceeds from sales (including participations) of loans by banking subsidiaries |
|
|
35,637 |
|
|
|
35,141 |
|
Purchases (including participations) of loans by banking subsidiaries |
|
|
(4,136 |
) |
|
|
(5,611 |
) |
Principal collected on nonbank entities loans |
|
|
18,130 |
|
|
|
16,679 |
|
Loans originated by nonbank entities |
|
|
(19,956 |
) |
|
|
(24,503 |
) |
Proceeds from sales of foreclosed assets |
|
|
376 |
|
|
|
331 |
|
Net decrease (increase) in federal funds sold, securities purchased
under resale agreements and other short-term investments |
|
|
1,282 |
|
|
|
(836 |
) |
Net increase in MSRs |
|
|
(1,655 |
) |
|
|
(2,922 |
) |
Other, net |
|
|
(3,287 |
) |
|
|
(3,528 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(12,332 |
) |
|
|
(9,002 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
(376 |
) |
|
|
13,540 |
|
Net increase (decrease) in short-term borrowings |
|
|
(10,139 |
) |
|
|
1,230 |
|
Proceeds from issuance of long-term debt |
|
|
14,987 |
|
|
|
22,285 |
|
Long-term debt repayment |
|
|
(10,632 |
) |
|
|
(17,470 |
) |
Proceeds from issuance of common stock |
|
|
1,419 |
|
|
|
859 |
|
Common stock repurchased |
|
|
(1,566 |
) |
|
|
(2,343 |
) |
Cash dividends paid on common stock |
|
|
(2,695 |
) |
|
|
(2,505 |
) |
Excess tax benefits related to stock option payments |
|
|
179 |
|
|
|
|
|
Other, net |
|
|
49 |
|
|
|
198 |
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(8,774 |
) |
|
|
15,794 |
|
|
|
|
|
|
|
|
Net change in cash and due from banks |
|
|
(2,806 |
) |
|
|
1,028 |
|
Cash and due from banks at beginning of period |
|
|
15,397 |
|
|
|
12,903 |
|
|
|
|
|
|
|
|
Cash and due from banks at end of period |
|
$ |
12,591 |
|
|
$ |
13,931 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
8,749 |
|
|
$ |
5,324 |
|
Income taxes |
|
|
1,423 |
|
|
|
1,564 |
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Net transfers from loans to mortgages held for sale |
|
$ |
32,381 |
|
|
$ |
34,906 |
|
Net transfers from loans held for sale to loans |
|
|
|
|
|
|
7,444 |
|
Transfers from loans to foreclosed assets |
|
|
1,243 |
|
|
|
416 |
|
Transfers from mortgages held for sale to securities held for sale |
|
|
|
|
|
|
3,382 |
|
|
|
The accompanying notes are an integral part of these statements.
36
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells Fargo & Company is a diversified financial services company. We provide banking, insurance,
investments, mortgage banking and consumer finance through banking stores, the internet and other
distribution channels to consumers, businesses and institutions in all 50 states of the U.S. and in
other countries. When we refer to the Company, we, our and us in this Form 10-Q, we mean
Wells Fargo & Company and Subsidiaries (consolidated). Wells Fargo & Company (the Parent) is a
financial holding company and a bank holding company.
Our accounting and reporting policies conform with U.S. generally accepted accounting principles
(GAAP) and practices in the financial services industry. To prepare the financial statements in
conformity with GAAP, management must make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and income and expenses
during the reporting period.
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, 2005 (2005 Form
10-K).
In the Financial Statements and related Notes, all common share and per share disclosures reflect
the two-for-one stock split in the form of a 100% stock dividend distributed August 11, 2006.
Descriptions of our significant accounting policies are included in Note 1 (Summary of Significant
Accounting Policies) to Financial Statements in our 2005 Form 10-K. There have been no significant
changes to these policies, except as discussed below for transfers and servicing of financial
assets and stock-based compensation.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
We account for a transfer of financial assets as a sale when we surrender control of the
transferred assets. Effective January 1, 2006, upon adoption of Statement of Financial Accounting
Standards No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement
No. 140 (FAS 156), servicing rights resulting from the sale or securitization of loans we originate
and purchase (asset transfers), are initially measured at fair value at the date of transfer. We
recognize the rights to service mortgage loans for others, or mortgage servicing rights (MSRs), as
assets whether we purchase the MSRs or the MSRs result from an asset transfer. We determine the
fair value of servicing rights at the date of transfer using the present value of estimated future
net servicing income, using assumptions that market participants use in their estimates of values.
We use quoted market prices when available to determine the value of other interests held. Gain or
loss on sale of loans depends on (a) net proceeds received (including cash proceeds and the value
of any servicing asset recorded) and (b) the previous carrying
37
amount of the financial assets transferred and any interests we continue to hold (such as
interest-only strips) based on relative fair value at the date of transfer.
To determine the fair value of MSRs, we use a valuation model that calculates the present value of
estimated future net servicing income. We use assumptions in the valuation model that market
participants use in estimating future net servicing income, including estimates of prepayment
speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income,
ancillary income and late fees. This model is validated by an independent internal model validation
group operating in accordance with a model valuation policy approved by the Corporate
Asset/Liability Management Committee.
MSRs Measured at Fair Value
Effective January 1, 2006, upon adoption of FAS 156, we elected to initially measure and
subsequently carry our MSRs related to residential mortgage loans (residential MSRs) using the fair
value method. Under the fair value method, residential MSRs are carried on the balance sheet at
fair value and the changes in fair value, primarily due to changes in valuation inputs and
assumptions and to the collection/realization of expected cash flows, are reported in earnings in
the period in which the change occurs.
Effective January 1, 2006, upon the remeasurement of our residential MSRs at fair value, we
recorded a cumulative-effect adjustment to the 2006 beginning balance of retained earnings of $101
million after tax ($158 million pre tax) in our Statement of Changes in Stockholders Equity.
Amortized MSRs
Amortized MSRs, which include commercial MSRs and, prior to January 1, 2006, residential MSRs, are
carried at the lower of cost or market. These MSRs are amortized in proportion to, and over the
period of, estimated net servicing income. The amortization of MSRs is analyzed monthly and is
adjusted to reflect changes in prepayment speeds, as well as other factors.
STOCK-BASED COMPENSATION
We have several stock-based employee compensation plans, which are more fully discussed in Note 10.
Prior to January 1, 2006, we accounted for stock options and stock awards under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25), and related interpretations, as permitted by FAS 123, Accounting for
Stock-Based Compensation. Under this guidance, no stock option expense was recognized in our income
statement for periods prior to January 1, 2006, as all options granted under our plans had an
exercise price equal to the market value of the underlying common stock on the date of grant.
Effective January 1, 2006, we adopted FAS 123(R), Share-Based Payment, using the
modified-prospective transition method. Accordingly, compensation cost recognized in the first nine
months of 2006 includes; (1) compensation cost for all share-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance
with FAS 123, and (2) compensation cost for all share-based awards granted on or after January 1,
2006, including cost for retirement-eligible team members, which is immediately expensed upon
grant, based on the grant date fair value estimated in accordance with FAS 123(R). Results for
prior periods have not been restated. In calculating the common stock equivalents for purposes of
diluted earnings per share, we selected the transition
38
method provided by FASB Staff Position FAS 123(R)-3, Transition Election Related to Accounting for
the Tax Effects of Share-Based Payment Awards.
As a result of adopting FAS 123(R), as required, on January 1, 2006, our income before income taxes
of $3,240 million and net income of $2,194 million for the third quarter of 2006 was $28 million
and $17 million lower, respectively, and our income before income taxes of $9,469 million and net
income of $6,301 million for the first nine months of 2006 was $108 million and $67 million lower,
respectively, than if we had continued to account for share-based compensation under APB 25.
Earnings per share and diluted earnings per share for the third quarter of 2006 of $0.65 and $0.64,
respectively, were both less than $0.01 per share lower than if we had not adopted FAS 123(R).
Earnings per share and diluted earnings per share for the first nine months of 2006 of $1.87 and
$1.85, respectively, were both $0.02 per share lower than if we had not adopted FAS 123(R).
Prior to the adoption of FAS 123(R), we presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in the Statement of Cash Flows. FAS 123(R)
requires the cash flows from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be classified as financing
cash flows. The $179 million excess tax benefit for the first nine months of 2006 classified as a
financing cash inflow would have been classified as an operating cash inflow under APB 25.
Pro forma net income and earnings per common share information are provided in the table below as
if we accounted for employee stock option plans under the fair value method of FAS 123 in the third
quarter and first nine months of 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Nine months ended |
|
(in millions, except per share amounts) |
|
Sept. 30, 2005 |
|
|
Sept. 30, 2005 |
|
|
Net income, as reported |
|
$ |
1,975 |
|
|
$ |
5,741 |
|
Add: |
|
Stock-based employee compensation expense |
|
|
|
|
|
|
|
|
|
|
included in reported net income, net of tax |
|
|
1 |
|
|
|
1 |
|
Less: |
|
Total stock-based employee compensation |
|
|
|
|
|
|
|
|
|
|
expense under the fair value method for |
|
|
|
|
|
|
|
|
|
|
all awards, net of tax |
|
|
(19 |
) |
|
|
(167 |
) |
|
|
|
|
|
|
|
|
|
Net income, pro forma |
|
$ |
1,957 |
|
|
$ |
5,575 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.59 |
|
|
$ |
1.70 |
|
Pro forma |
|
|
0.58 |
|
|
|
1.65 |
|
Diluted earnings per common share |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.58 |
|
|
$ |
1.68 |
|
Pro forma |
|
|
0.57 |
|
|
|
1.63 |
|
|
|
Stock options granted in our February 2005 grant, under our Long-Term Incentive Compensation
Plan, fully vested upon grant, resulting in full recognition of stock-based compensation expense
under the fair value method in the table above.
39
2. BUSINESS COMBINATIONS
We regularly explore opportunities to acquire financial services companies and businesses.
Generally, we do not make a public announcement about an acquisition opportunity until a definitive
agreement has been signed.
Transactions completed in the first nine months of 2006 were:
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Date |
|
|
Assets |
|
|
Secured Capital Corp / Secured Capital LLC, Los Angeles, California |
|
January 18 |
|
$ |
132 |
|
Martinius Corporation, Rogers, Minnesota |
|
March 1 |
|
|
91 |
|
Commerce Funding Corporation, Vienna, Virginia |
|
April 17 |
|
|
82 |
|
Fremont National Bank of Canon City / Centennial Bank of Pueblo,
Canon City and Pueblo, Colorado |
|
June 7 |
|
|
201 |
|
Certain assets of the Reilly Mortgage Companies, McLean, Virginia |
|
August 1 |
|
|
303 |
|
Other (1) |
|
Various |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of six acquisitions of insurance brokerage businesses. |
At September 30, 2006, we had one pending business combination with assets of approximately $8
million. We expect to complete this transaction in fourth quarter 2006.
3. FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS
The following table provides the detail of federal funds sold, securities purchased under resale
agreements and other short-term investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Federal funds sold and securities purchased under
resale agreements |
|
$ |
2,768 |
|
|
$ |
3,789 |
|
|
$ |
3,854 |
|
Interest-earning deposits |
|
|
629 |
|
|
|
847 |
|
|
|
1,289 |
|
Other short-term investments |
|
|
682 |
|
|
|
670 |
|
|
|
718 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,079 |
|
|
$ |
5,306 |
|
|
$ |
5,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
40
4. SECURITIES AVAILABLE FOR SALE
The following table provides the cost and fair value for the major categories of securities
available for sale carried at fair value. There were no securities classified as held to maturity
as of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, 2006 |
|
|
Dec. 31, 2005 |
|
|
Sept. 30, 2005 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
fair |
|
|
|
|
|
|
fair |
|
|
|
|
|
|
fair |
|
(in millions) |
|
Cost |
|
|
value |
|
|
Cost |
|
|
value |
|
|
Cost |
|
|
value |
|
|
Securities of U.S. Treasury and
federal agencies |
|
$ |
892 |
|
|
$ |
886 |
|
|
$ |
845 |
|
|
$ |
839 |
|
|
$ |
1,061 |
|
|
$ |
1,058 |
|
Securities of U.S. states and
political subdivisions |
|
|
3,241 |
|
|
|
3,388 |
|
|
|
3,048 |
|
|
|
3,191 |
|
|
|
3,129 |
|
|
|
3,291 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
35,549 |
|
|
|
36,045 |
|
|
|
25,304 |
|
|
|
25,616 |
|
|
|
17,803 |
|
|
|
18,155 |
|
Private collateralized mortgage obligations (1) |
|
|
4,842 |
|
|
|
4,912 |
|
|
|
6,628 |
|
|
|
6,750 |
|
|
|
6,118 |
|
|
|
6,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
40,391 |
|
|
|
40,957 |
|
|
|
31,932 |
|
|
|
32,366 |
|
|
|
23,921 |
|
|
|
24,349 |
|
Other |
|
|
6,549 |
|
|
|
6,575 |
|
|
|
4,518 |
|
|
|
4,538 |
|
|
|
4,915 |
|
|
|
4,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
51,073 |
|
|
|
51,806 |
|
|
|
40,343 |
|
|
|
40,934 |
|
|
|
33,026 |
|
|
|
33,663 |
|
Marketable equity securities |
|
|
597 |
|
|
|
829 |
|
|
|
558 |
|
|
|
900 |
|
|
|
553 |
|
|
|
817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,670 |
|
|
$ |
52,635 |
|
|
$ |
40,901 |
|
|
$ |
41,834 |
|
|
$ |
33,579 |
|
|
$ |
34,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Most of the private collateralized mortgage obligations are AAA-rated bonds collateralized
by 1-4 family residential first mortgages. |
The following table provides the components of the estimated unrealized net gains on
securities available for sale. The estimated unrealized net gains and losses on securities
available for sale are reported on an after-tax basis as a component of cumulative other
comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Estimated unrealized gross gains |
|
$ |
1,050 |
|
|
$ |
1,041 |
|
|
$ |
1,021 |
|
Estimated unrealized gross losses |
|
|
(85 |
) |
|
|
(108 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
Estimated unrealized net gains |
|
$ |
965 |
|
|
$ |
933 |
|
|
$ |
901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the realized net gains (losses) on the sales of securities from the
securities available for sale portfolio, including marketable equity securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Nine months |
|
|
|
ended Sept. 30 |
, |
|
ended Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Realized gross gains |
|
$ |
143 |
|
|
$ |
29 |
|
|
$ |
390 |
|
|
$ |
316 |
|
Realized gross losses (1) |
|
|
(15 |
) |
|
|
(61 |
) |
|
|
(273 |
) |
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized net gains (losses) |
|
$ |
128 |
|
|
$ |
(32 |
) |
|
$ |
117 |
|
|
$ |
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other-than-temporary impairment of $4 million and $17 million for the third
quarter and first nine months of 2006, respectively, and $27 million and $42 million for the
third quarter and first nine months of 2005, respectively. |
41
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of the major categories of loans outstanding is shown in the following table. Outstanding
loan balances reflect unearned income, net deferred loan fees, and unamortized discount and premium
totaling $3,050 million, $3,918 million and $3,586 million, at September 30, 2006, December 31,
2005, and September 30, 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
66,797 |
|
|
$ |
61,552 |
|
|
$ |
60,588 |
|
Other real estate mortgage |
|
|
29,914 |
|
|
|
28,545 |
|
|
|
28,571 |
|
Real estate construction |
|
|
15,397 |
|
|
|
13,406 |
|
|
|
12,587 |
|
Lease financing |
|
|
5,443 |
|
|
|
5,400 |
|
|
|
5,244 |
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
117,551 |
|
|
|
108,903 |
|
|
|
106,990 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
49,765 |
|
|
|
77,768 |
|
|
|
69,259 |
|
Real estate 1-4 family junior lien mortgage |
|
|
67,185 |
|
|
|
59,143 |
|
|
|
57,491 |
|
Credit card |
|
|
13,343 |
|
|
|
12,009 |
|
|
|
11,060 |
|
Other revolving credit and installment |
|
|
53,080 |
|
|
|
47,462 |
|
|
|
46,201 |
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
183,373 |
|
|
|
196,382 |
|
|
|
184,011 |
|
Foreign |
|
|
6,567 |
|
|
|
5,552 |
|
|
|
5,188 |
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
307,491 |
|
|
$ |
310,837 |
|
|
$ |
296,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The recorded investment in impaired loans and the methodology used to measure impairment was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Impairment measurement based on: |
|
|
|
|
|
|
|
|
|
|
|
|
Collateral value method |
|
$ |
121 |
|
|
$ |
115 |
|
|
$ |
132 |
|
Discounted cash flow method |
|
|
71 |
|
|
|
75 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
Total (1) |
|
$ |
192 |
|
|
$ |
190 |
|
|
$ |
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $61 million, $56 million and $41 million of impaired loans with a related
allowance of $8 million, $10 million and $9 million at September 30, 2006, December 31, 2005,
and September 30, 2005, respectively. |
The average recorded investment in impaired loans was $168 million and $252 million during
third quarter 2006 and 2005, respectively, and $159 million and $278 million in the first nine
months of 2006 and 2005, respectively.
42
The allowance for credit losses consists of the allowance for loan losses and the reserve for
unfunded credit commitments. Changes in the allowance for credit losses were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Nine months |
|
|
|
ended Sept. 30 |
, |
|
ended Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Balance, beginning of period |
|
$ |
4,035 |
|
|
$ |
3,944 |
|
|
$ |
4,057 |
|
|
$ |
3,950 |
|
Provision for credit losses |
|
|
613 |
|
|
|
641 |
|
|
|
1,478 |
|
|
|
1,680 |
|
Loan charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
(103 |
) |
|
|
(95 |
) |
|
|
(275 |
) |
|
|
(271 |
) |
Other real estate mortgage |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
Real estate construction |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(6 |
) |
Lease financing |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
(22 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
(111 |
) |
|
|
(104 |
) |
|
|
(301 |
) |
|
|
(310 |
) |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
(30 |
) |
|
|
(24 |
) |
|
|
(81 |
) |
|
|
(83 |
) |
Real estate 1-4 family junior lien mortgage |
|
|
(36 |
) |
|
|
(37 |
) |
|
|
(98 |
) |
|
|
(100 |
) |
Credit card |
|
|
(133 |
) |
|
|
(128 |
) |
|
|
(351 |
) |
|
|
(389 |
) |
Other revolving credit and installment |
|
|
(501 |
) |
|
|
(369 |
) |
|
|
(1,172 |
) |
|
|
(1,015 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consumer |
|
|
(700 |
) |
|
|
(558 |
) |
|
|
(1,702 |
) |
|
|
(1,587 |
) |
Foreign |
|
|
(74 |
) |
|
|
(72 |
) |
|
|
(222 |
) |
|
|
(216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan charge-offs |
|
|
(885 |
) |
|
|
(734 |
) |
|
|
(2,225 |
) |
|
|
(2,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
26 |
|
|
|
35 |
|
|
|
84 |
|
|
|
102 |
|
Other real estate mortgage |
|
|
8 |
|
|
|
4 |
|
|
|
14 |
|
|
|
13 |
|
Real estate construction |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
7 |
|
Lease financing |
|
|
4 |
|
|
|
5 |
|
|
|
16 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
38 |
|
|
|
44 |
|
|
|
116 |
|
|
|
138 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
8 |
|
|
|
6 |
|
|
|
20 |
|
|
|
15 |
|
Real estate 1-4 family junior lien mortgage |
|
|
9 |
|
|
|
8 |
|
|
|
27 |
|
|
|
22 |
|
Credit card |
|
|
23 |
|
|
|
20 |
|
|
|
72 |
|
|
|
64 |
|
Other revolving credit and installment |
|
|
124 |
|
|
|
97 |
|
|
|
401 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
164 |
|
|
|
131 |
|
|
|
520 |
|
|
|
351 |
|
Foreign |
|
|
20 |
|
|
|
18 |
|
|
|
61 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan recoveries |
|
|
222 |
|
|
|
193 |
|
|
|
697 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
|
(663 |
) |
|
|
(541 |
) |
|
|
(1,528 |
) |
|
|
(1,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
(7 |
) |
|
|
13 |
|
|
|
(29 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
3,978 |
|
|
$ |
4,057 |
|
|
$ |
3,978 |
|
|
$ |
4,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
3,799 |
|
|
$ |
3,886 |
|
|
$ |
3,799 |
|
|
$ |
3,886 |
|
Reserve for unfunded credit commitments |
|
|
179 |
|
|
|
171 |
|
|
|
179 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
3,978 |
|
|
$ |
4,057 |
|
|
$ |
3,978 |
|
|
$ |
4,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs (annualized) as a
percentage of average total loans |
|
|
0.86 |
% |
|
|
0.73 |
% |
|
|
0.67 |
% |
|
|
0.72 |
% |
Allowance for loan losses as a percentage of total loans |
|
|
1.24 |
% |
|
|
1.31 |
% |
|
|
1.24 |
% |
|
|
1.31 |
% |
Allowance for credit losses as a percentage of total loans |
|
|
1.29 |
|
|
|
1.37 |
|
|
|
1.29 |
|
|
|
1.37 |
|
|
|
43
6. OTHER ASSETS
The components of other assets were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Nonmarketable equity investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity investments |
|
$ |
1,654 |
|
|
$ |
1,537 |
|
|
$ |
1,500 |
|
Federal bank stock |
|
|
1,338 |
|
|
|
1,402 |
|
|
|
1,423 |
|
All other |
|
|
2,084 |
|
|
|
2,151 |
|
|
|
2,106 |
|
|
|
|
|
|
|
|
|
|
|
Total nonmarketable equity investments (1) |
|
|
5,076 |
|
|
|
5,090 |
|
|
|
5,029 |
|
Operating lease assets |
|
|
3,120 |
|
|
|
3,414 |
|
|
|
3,425 |
|
Accounts receivable |
|
|
7,048 |
|
|
|
11,606 |
|
|
|
3,777 |
|
Interest receivable |
|
|
2,544 |
|
|
|
2,279 |
|
|
|
1,983 |
|
Core deposit intangibles |
|
|
410 |
|
|
|
489 |
|
|
|
519 |
|
Foreclosed assets: |
|
|
|
|
|
|
|
|
|
|
|
|
GNMA loans (2) |
|
|
266 |
|
|
|
|
|
|
|
|
|
Other |
|
|
342 |
|
|
|
191 |
|
|
|
187 |
|
Due from customers on acceptances |
|
|
140 |
|
|
|
104 |
|
|
|
133 |
|
Other |
|
|
11,791 |
|
|
|
9,299 |
|
|
|
10,931 |
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
30,737 |
|
|
$ |
32,472 |
|
|
$ |
25,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At September 30, 2006, December 31, 2005, and September 30, 2005, $4.4 billion, $3.1
billion and $3.1 billion, respectively, of nonmarketable equity investments, including all
federal bank stock, were accounted for at cost. |
|
(2) |
|
As a result of a change in regulatory reporting requirements effective January 1, 2006,
foreclosed assets included foreclosed real estate securing Government National Mortgage
Association (GNMA) loans. These assets are fully collectible because the corresponding GNMA
loans are insured by the Federal Housing Administration or guaranteed by the Department of
Veterans Affairs. Such assets were included in accounts receivable at December 31, 2005, and
September 30, 2005. |
Income related to nonmarketable equity investments was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Nine months |
|
|
|
ended Sept. 30 |
, |
|
ended Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Net gains from private equity investments |
|
$ |
152 |
|
|
$ |
147 |
|
|
$ |
295 |
|
|
$ |
284 |
|
Net gains (losses) from all other nonmarketable equity investments |
|
|
8 |
|
|
|
22 |
|
|
|
(11 |
) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains from nonmarketable equity investments |
|
$ |
160 |
|
|
$ |
169 |
|
|
$ |
284 |
|
|
$ |
299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
7. INTANGIBLE ASSETS
The gross carrying amount of intangible assets and accumulated amortization was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
, |
|
|
2006 |
|
|
2005 |
|
|
|
Gross |
|
|
Accumulated |
|
|
Gross |
|
|
Accumulated |
|
(in millions) |
|
carrying amount |
|
|
amortization |
|
|
carrying amount |
|
|
amortization |
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSRs, before valuation allowance (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
|
|
|
$ |
|
|
|
$ |
22,748 |
|
|
$ |
10,902 |
|
Commercial |
|
|
396 |
|
|
|
68 |
|
|
|
147 |
|
|
|
40 |
|
Core deposit intangibles |
|
|
2,374 |
|
|
|
1,964 |
|
|
|
2,432 |
|
|
|
1,913 |
|
Credit card and other intangibles |
|
|
576 |
|
|
|
370 |
|
|
|
562 |
|
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
3,346 |
|
|
$ |
2,402 |
|
|
$ |
25,889 |
|
|
$ |
13,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSRs (fair value) (1) |
|
$ |
17,712 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Trademark |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior to 2006, amortized intangible assets included both residential and commercial MSRs. Effective January 1, 2006, upon adoption of FAS 156, residential MSRs are measured at fair
value and are no longer amortized. See Note 15 for additional information on MSRs. |
As of September 30, 2006, the current year and estimated future amortization expense for
intangible assets was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
deposit |
|
|
|
|
|
|
|
(in millions) |
|
intangibles |
|
|
Other(1) |
|
|
Total |
|
|
Nine months ended September 30, 2006 (actual) |
|
$ |
85 |
|
|
$ |
77 |
|
|
$ |
162 |
|
|
|
|
|
|
|
|
|
|
|
Estimate for year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
$ |
112 |
|
|
$ |
99 |
|
|
$ |
211 |
|
2007 |
|
|
102 |
|
|
|
78 |
|
|
|
180 |
|
2008 |
|
|
94 |
|
|
|
72 |
|
|
|
166 |
|
2009 |
|
|
86 |
|
|
|
66 |
|
|
|
152 |
|
2010 |
|
|
77 |
|
|
|
62 |
|
|
|
139 |
|
2011 |
|
|
19 |
|
|
|
53 |
|
|
|
72 |
|
|
|
|
|
|
(1) |
|
Includes amortized commercial MSRs and credit card and other intangibles. |
We based the projections of amortization expense for core deposit intangibles shown above on
existing asset balances at September 30, 2006. Future amortization expense may vary based on
additional core deposit intangibles acquired through business combinations.
45
8. GOODWILL
The changes in the carrying amount of goodwill as allocated to our operating segments for goodwill
impairment analysis were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
|
Wholesale |
|
|
Wells Fargo |
|
|
Consolidated |
|
(in millions) |
|
Banking |
|
|
Banking |
|
|
Financial |
|
|
Company |
|
|
December 31, 2004 |
|
$ |
7,291 |
|
|
$ |
3,037 |
|
|
$ |
353 |
|
|
$ |
10,681 |
|
Reduction in goodwill related to
divested business |
|
|
(31 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(34 |
) |
Goodwill from business combinations |
|
|
125 |
|
|
|
2 |
|
|
|
|
|
|
|
127 |
|
Realignment of automobile financing
business |
|
|
(11 |
) |
|
|
|
|
|
|
11 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
$ |
7,374 |
|
|
$ |
3,036 |
|
|
$ |
366 |
|
|
$ |
10,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
$ |
7,374 |
|
|
$ |
3,047 |
|
|
$ |
366 |
|
|
$ |
10,787 |
|
Goodwill from business combinations
(including contingent payments) |
|
|
30 |
|
|
|
373 |
|
|
|
|
|
|
|
403 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Realignment of businesses
(primarily insurance) |
|
|
(19 |
) |
|
|
19 |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
$ |
7,385 |
|
|
$ |
3,439 |
|
|
$ |
368 |
|
|
$ |
11,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For our goodwill impairment analysis, we allocate all of the goodwill to the individual operating
segments. For management reporting we do not allocate all of the goodwill to the individual
operating segments: some is allocated at the enterprise level. See Note 13 for further information
on management reporting. The balances of goodwill for management reporting were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
|
Wholesale |
|
|
Wells Fargo |
|
|
|
|
|
|
Consolidated |
|
(in millions) |
|
Banking |
|
|
Banking |
|
|
Financial |
|
|
Enterprise |
|
|
Company |
|
|
September 30, 2005 |
|
$ |
3,516 |
|
|
$ |
1,097 |
|
|
$ |
366 |
|
|
$ |
5,797 |
|
|
$ |
10,776 |
|
September 30, 2006 |
|
|
3,538 |
|
|
|
1,489 |
|
|
|
368 |
|
|
|
5,797 |
|
|
|
11,192 |
|
|
|
46
9. PREFERRED STOCK
We are authorized to issue 20 million shares of preferred stock and 4 million shares of preference
stock, both without par value. Preferred shares outstanding rank senior to common shares both as to
dividends and liquidation preference but have no general voting rights. We have not issued any
preference shares under this authorization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued and outstanding |
|
|
Carrying amount (in millions) |
|
|
Adjustable |
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
|
dividends rate |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Minimum |
|
|
Maximum |
|
ESOP Preferred Stock (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
162,493 |
|
|
|
|
|
|
|
|
|
|
$ |
162 |
|
|
$ |
|
|
|
$ |
|
|
|
|
10.75 |
% |
|
|
11.75 |
% |
2005 |
|
|
89,984 |
|
|
|
102,184 |
|
|
|
135,845 |
|
|
|
90 |
|
|
|
102 |
|
|
|
136 |
|
|
|
9.75 |
|
|
|
10.75 |
|
2004 |
|
|
71,280 |
|
|
|
74,880 |
|
|
|
81,180 |
|
|
|
71 |
|
|
|
75 |
|
|
|
81 |
|
|
|
8.50 |
|
|
|
9.50 |
|
2003 |
|
|
49,843 |
|
|
|
52,643 |
|
|
|
57,243 |
|
|
|
50 |
|
|
|
53 |
|
|
|
57 |
|
|
|
8.50 |
|
|
|
9.50 |
|
2002 |
|
|
37,774 |
|
|
|
39,754 |
|
|
|
44,554 |
|
|
|
38 |
|
|
|
40 |
|
|
|
45 |
|
|
|
10.50 |
|
|
|
11.50 |
|
2001 |
|
|
27,003 |
|
|
|
28,263 |
|
|
|
32,863 |
|
|
|
27 |
|
|
|
28 |
|
|
|
33 |
|
|
|
10.50 |
|
|
|
11.50 |
|
2000 |
|
|
18,542 |
|
|
|
19,282 |
|
|
|
23,482 |
|
|
|
19 |
|
|
|
19 |
|
|
|
24 |
|
|
|
11.50 |
|
|
|
12.50 |
|
1999 |
|
|
6,094 |
|
|
|
6,368 |
|
|
|
8,368 |
|
|
|
6 |
|
|
|
6 |
|
|
|
8 |
|
|
|
10.30 |
|
|
|
11.30 |
|
1998 |
|
|
1,863 |
|
|
|
1,953 |
|
|
|
2,853 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
10.75 |
|
|
|
11.75 |
|
1997 |
|
|
130 |
|
|
|
136 |
|
|
|
2,136 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
9.50 |
|
|
|
10.50 |
|
1996 |
|
|
|
|
|
|
|
|
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.50 |
|
|
|
9.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP Preferred Stock |
|
|
465,006 |
|
|
|
325,463 |
|
|
|
388,894 |
|
|
$ |
465 |
|
|
$ |
325 |
|
|
$ |
389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned ESOP shares (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(498 |
) |
|
$ |
(348 |
) |
|
$ |
(416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Liquidation preference $1,000. |
(2) |
|
In accordance with the American Institute of Certified Public Accountants (AICPA) Statement
of Position 93-6, Employers Accounting for Employee Stock Ownership Plans, we recorded a
corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP
Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock
are committed to be released. |
47
10. COMMON STOCK PLANS
We offer several stock-based employee compensation plans, which are described below. Effective
January 1, 2006, we adopted FAS 123(R), Share-Based Payment, using the modified prospective
transition method. FAS 123(R) requires that we measure the cost of employee services received in
exchange for an award of equity instruments, such as stock options or restricted share rights
(RSRs), based on the fair value of the award on the grant date. The cost is normally recognized in
our income statement over the vesting period of the award; awards with graded vesting are expensed
on a straight-line method. Awards to retirement-eligible employees are subject to immediate
expensing upon grant. Total stock option compensation expense was $108 million in the first nine
months of 2006, with a related recognized tax benefit of $41 million. Stock option expense is based
on the fair value of the awards at the date of grant and includes expense for awards granted in
2006 and expense for the unvested portion of awards granted prior to January 1, 2006. Prior to
January 1, 2006, we did not record any compensation expense for stock options.
EMPLOYEE STOCK PLANS
Long-Term Incentive Compensation Plans Our stock incentive plans provide for awards of
incentive and nonqualified stock options, stock appreciation rights, restricted shares, RSRs,
performance awards and stock awards without restrictions. Options must have an exercise price at or
above fair market value (as defined in the plan) of the stock at the date of grant (except for
substitute or replacement options granted in connection with mergers or other acquisitions) and a
term of no more than 10 years. Options granted in 2003 and prior generally become exercisable over
three years from the date of grant. Options granted in 2004 and the beginning of 2005 generally
were fully vested upon grant. Options granted in 2006 generally become exercisable over three years
from the date of grant. Except as otherwise permitted under the plan, if employment is ended for
reasons other than retirement, permanent disability or death, the option period is reduced or the
options are canceled.
Options granted prior to 2004 may include the right to acquire a reload stock option. If an
option contains the reload feature and if a participant pays all or part of the exercise price of
the option with shares of stock purchased in the market or held by the participant for at least six
months, upon exercise of the option, the participant is granted a new option to purchase, at the
fair market value of the stock as of the date of the reload, the number of shares of stock equal to
the sum of the number of shares used in payment of the exercise price and a number of shares with
respect to related statutory minimum withholding taxes. Reload grants are fully vested upon grant
and are expensed immediately under FAS 123(R) beginning in 2006.
Holders of RSRs are entitled to the related shares of common stock at no cost generally over
three to five years after the RSRs were granted. Holders of RSRs generally are entitled to receive
cash payments equal to the cash dividends that would have been paid had the RSRs been issued and
outstanding shares of common stock. Except in limited circumstances, RSRs are canceled when
employment ends.
The compensation expense for RSRs equals the quoted market price of the related stock at the date
of grant and is accrued over the vesting period. Total compensation expense for RSRs was not
significant in the first nine months of 2006 and 2005.
48
For various acquisitions and mergers, we converted employee and director stock options of acquired
or merged companies into stock options to purchase our common stock based on the terms of the
original stock option plan and the agreed-upon exchange ratio.
Broad-Based Plans In 1996, we adopted the PartnerShares® Stock Option Plan, a broad-based
employee stock option plan. It covers full- and part-time employees who generally were not included
in the long-term incentive compensation plans described above. At September 30, 2006, there were
9,125,030 shares available for grant. The exercise date of options granted to date under the
PartnerShares Plan is the earlier of (1) five years after the date of grant or (2) when the quoted
market price of the stock reaches a predetermined price. These options generally expire 10 years
after the date of grant. No options have been granted under the PartnerShares Plans since 2002.
Because the exercise price of each PartnerShares grant has been equal to or higher than the quoted
market price of our common stock at the date of grant, we did not recognize any compensation
expense in 2005 and prior years. In 2006, under FAS 123(R), we began to recognize expense related
to these grants, based on the remaining vesting period.
DIRECTOR PLANS
We provide a stock award to non-employee directors as part of their annual retainer under our
director plans. We also provide annual grants of options to purchase common stock to each
non-employee director elected or re-elected at the annual meeting of stockholders. The options can
be exercised after six months and through the tenth anniversary of the grant date.
49
The table below summarizes stock option activity and related information for the first nine
months of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
average |
|
|
|
|
|
|
|
|
|
|
average |
|
|
remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
exercise |
|
|
contractual |
|
|
intrinsic value |
|
|
|
Number |
|
|
price |
|
|
term (in yrs.) |
|
|
(in millions) |
|
|
|
Long-Term Incentive Compensation Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2005 |
|
|
221,182,224 |
|
|
$ |
24.82 |
|
|
|
|
|
|
|
|
|
First nine months of 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
43,933,400 |
|
|
|
32.55 |
|
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(861,988 |
) |
|
|
30.88 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(34,744,922 |
) |
|
|
22.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of September 30, 2006 |
|
|
229,508,714 |
|
|
|
26.59 |
|
|
|
6.1 |
|
|
$ |
2,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to be exercisable (1) |
|
|
227,906,580 |
|
|
|
26.55 |
|
|
|
6.1 |
|
|
|
2,196 |
|
Options exercisable |
|
|
191,130,236 |
|
|
|
25.50 |
|
|
|
5.4 |
|
|
|
2,042 |
|
Broad-Based Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2005 |
|
|
48,985,522 |
|
|
$ |
22.75 |
|
|
|
|
|
|
|
|
|
First nine months of 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(1,785,224 |
) |
|
|
24.79 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(7,848,848 |
) |
|
|
20.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of September 30, 2006 |
|
|
39,351,450 |
|
|
|
23.15 |
|
|
|
4.3 |
|
|
$ |
513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to be exercisable (1) |
|
|
39,191,022 |
|
|
|
23.14 |
|
|
|
4.3 |
|
|
|
511 |
|
Options exercisable |
|
|
21,166,000 |
|
|
|
21.38 |
|
|
|
3.3 |
|
|
|
313 |
|
Director Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2005 |
|
|
779,028 |
|
|
$ |
24.33 |
|
|
|
|
|
|
|
|
|
First nine months of 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
91,219 |
|
|
|
32.69 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(55,440 |
) |
|
|
15.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of September 30, 2006 |
|
|
814,807 |
|
|
|
25.88 |
|
|
|
5.8 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to be exercisable (1) |
|
|
814,807 |
|
|
|
25.88 |
|
|
|
5.8 |
|
|
|
8 |
|
Options exercisable |
|
|
724,748 |
|
|
|
25.03 |
|
|
|
5.3 |
|
|
|
8 |
|
|
|
|
|
|
(1) |
|
Adjusted for estimated forfeitures. |
As of September 30, 2006, there was $105 million of unrecognized compensation cost related to
stock options. That cost is expected to be recognized over a weighted-average period of 2.3 years.
The total intrinsic value of options exercised during the first nine months of 2006 and 2005 was
$485 million and $213 million, respectively.
Cash received from the exercise of options for the first nine months of 2006 and 2005 was $893
million and $418 million, respectively. The actual tax benefit recognized in stockholders
50
equity for the tax deductions from the exercise of options totaled $179 million and $80 million for the
first nine months of 2006 and 2005, respectively.
We do not have a specific policy on repurchasing shares to satisfy share option exercises. Rather,
we have a general policy on repurchasing shares to meet common stock issuance requirements for our
benefit plans (including share option exercises), conversion of our convertible securities,
acquisitions, and other corporate purposes. Various factors determine the amount and timing of our
share repurchases, including our capital requirements, the number of shares we expect to issue for
acquisitions and employee benefit plans, market conditions (including the trading price of our
stock), and legal considerations. These factors can change at any time, and there can be no
assurance as to the number of shares we will repurchase or when we will repurchase them.
Effective with the adoption of FAS 123(R), the fair value of each option award granted on or after
January 1, 2006, is estimated using a Black-Scholes valuation model. The expected term of options
granted is generally based on the historical exercise behavior of full-term options. Our expected
volatilities are based on a combination of the historical volatility of our common stock and
implied volatilities for traded options on our common stock. The risk-free rate is based on the
U.S. Treasury zero-coupon yield curve in effect at the time of grant. Both expected volatility and
the risk-free rates are based on a period commensurate with our expected term. The expected
dividend is based on the current dividend, our historical pattern of dividend increases and the
current market price of our stock.
Prior to the adoption of FAS 123(R), we also used a Black-Scholes valuation model to estimate the
fair value of options granted for the pro forma disclosures of net income and earnings per common
share that were required by FAS 123.
Effective with the adoption of FAS 123(R), we changed our method of estimating our volatility
assumption. Prior to 2006, we used a volatility based on historical stock price changes. Effective
January 1, 2006, we used a volatility based on a combination of historical stock price changes and
implied volatilities of traded options as both volatilities are relevant in estimating our expected
volatility.
The following table presents the weighted-average per share fair value of options granted and the
assumptions used, based on a Black-Scholes valuation model.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended Sept. 30 |
, |
|
|
2006 |
|
|
2005 |
|
|
|
Per share fair value of options granted: |
|
|
|
|
|
|
|
|
Long-Term Incentive Compensation Plans |
|
$ |
4.06 |
|
|
$ |
3.77 |
|
Director Plans |
|
|
4.66 |
|
|
|
3.13 |
|
Expected volatility |
|
|
16.2 |
% |
|
|
16.3 |
% |
Expected dividends |
|
|
3.4 |
|
|
|
3.4 |
|
Expected term (in years) |
|
|
4.4 |
|
|
|
4.4 |
|
Risk-free interest rate |
|
|
4.4 |
% |
|
|
4.0 |
% |
|
|
51
A summary of the status of our RSRs at September 30, 2006, and changes during the first nine
months of 2006 is in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant-date |
|
|
|
Number |
|
|
fair value |
|
|
|
Nonvested at January 1, 2006 |
|
|
212,366 |
|
|
|
$26.92 |
|
Granted |
|
|
15,200 |
|
|
|
32.93 |
|
Vested |
|
|
(91,800 |
) |
|
|
24.75 |
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
135,766 |
|
|
|
29.05 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of RSRs granted during the first nine months of
2005 was $30.74. At September 30, 2006, there was $2 million of total unrecognized compensation
cost related to nonvested RSRs. The cost is expected to be recognized over a weighted-average
period of 3.1 years. The total fair value of RSRs that vested during the first nine months of 2006
and 2005 was $3 million and $4 million, respectively.
52
11. EMPLOYEE BENEFITS
We sponsor noncontributory qualified defined benefit retirement plans including the Cash Balance
Plan. The Cash Balance Plan is an active plan that covers eligible employees (except employees of
certain subsidiaries).
We expect that we will not be required to make a minimum contribution in 2006 for the Cash Balance
Plan. We are currently assessing how much to contribute, if any, to the Cash Balance Plan this
year. Our decision depends on several factors, including the actual investment performance of plan
assets. We cannot at this time reliably estimate the amount that we will contribute in 2006 to the
Cash Balance Plan.
The net periodic benefit cost for the third quarter and first nine months of 2006 and 2005 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits |
|
|
|
|
|
|
Pension benefits |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Other |
|
|
|
|
|
|
Non- |
|
|
Other |
|
(in millions) |
|
Qualified |
|
|
qualified |
|
|
benefits |
|
|
Qualified |
|
|
qualified |
|
|
benefits |
|
Quarter ended September 30, |
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
62 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
51 |
|
|
$ |
6 |
|
|
$ |
5 |
|
Interest cost |
|
|
56 |
|
|
|
4 |
|
|
|
10 |
|
|
|
55 |
|
|
|
3 |
|
|
|
11 |
|
Expected return on plan assets |
|
|
(105 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
(6 |
) |
Recognized net actuarial loss (1) |
|
|
14 |
|
|
|
2 |
|
|
|
1 |
|
|
|
17 |
|
|
|
1 |
|
|
|
2 |
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
27 |
|
|
$ |
10 |
|
|
$ |
6 |
|
|
$ |
24 |
|
|
$ |
9 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
186 |
|
|
$ |
12 |
|
|
$ |
12 |
|
|
$ |
155 |
|
|
$ |
16 |
|
|
$ |
15 |
|
Interest cost |
|
|
168 |
|
|
|
12 |
|
|
|
30 |
|
|
|
165 |
|
|
|
10 |
|
|
|
33 |
|
Expected return on plan assets |
|
|
(315 |
) |
|
|
|
|
|
|
(24 |
) |
|
|
(294 |
) |
|
|
|
|
|
|
(19 |
) |
Recognized net actuarial loss (1) |
|
|
42 |
|
|
|
6 |
|
|
|
4 |
|
|
|
51 |
|
|
|
3 |
|
|
|
7 |
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
Special termination benefits |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
83 |
|
|
$ |
30 |
|
|
$ |
10 |
|
|
$ |
74 |
|
|
$ |
27 |
|
|
$ |
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net actuarial loss is generally amortized over five years. |
53
12. EARNINGS PER COMMON SHARE
The table below shows earnings per common share and diluted earnings per common share and
reconciles the numerator and denominator of both earnings per common share calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Nine months |
|
|
|
ended Sept. 30 |
, |
|
ended Sept. 30 |
, |
(in millions, except per share amounts) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
Net income (numerator) |
|
$ |
2,194 |
|
|
$ |
1,975 |
|
|
$ |
6,301 |
|
|
$ |
5,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding (denominator) |
|
|
3,371.9 |
|
|
|
3,373.5 |
|
|
|
3,364.6 |
|
|
|
3,379.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share |
|
$ |
0.65 |
|
|
$ |
0.59 |
|
|
$ |
1.87 |
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
3,371.9 |
|
|
|
3,373.5 |
|
|
|
3,364.6 |
|
|
|
3,379.8 |
|
Add: Stock options |
|
|
44.0 |
|
|
|
36.5 |
|
|
|
40.8 |
|
|
|
38.3 |
|
Restricted share rights |
|
|
0.1 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average common shares outstanding (denominator) |
|
|
3,416.0 |
|
|
|
3,410.6 |
|
|
|
3,405.5 |
|
|
|
3,418.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share |
|
$ |
0.64 |
|
|
$ |
0.58 |
|
|
$ |
1.85 |
|
|
$ |
1.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In third quarter 2006 and 2005, options to purchase 4.4 million and 8.8 million shares,
respectively, were outstanding but not included in the calculation of diluted earnings per common
share because the exercise price was higher than the market price, and therefore they were
antidilutive.
54
13. OPERATING SEGMENTS
We have three lines of business for management reporting: Community Banking, Wholesale Banking and
Wells Fargo Financial. The results for these lines of business are based on our management
accounting process, which assigns balance sheet and income statement items to each responsible
operating segment. This process is dynamic and, unlike financial accounting, there is no
comprehensive, authoritative guidance for management accounting equivalent to generally accepted
accounting principles. The management accounting process measures the performance of the operating
segments based on our management structure and is not necessarily comparable with similar
information for other financial services companies. We define our operating segments by product
type and customer segments. If the management structure and/or the allocation process changes,
allocations, transfers and assignments may change. To reflect the realignment of our insurance
business into Wholesale Banking in first quarter 2006, results for prior periods have been revised.
The Community Banking Group offers a complete line of diversified financial products and services
to consumers and small businesses with annual sales generally up to $20 million in which the owner
generally is the financial decision maker. Community Banking also offers investment management and
other services to retail customers and high net worth individuals, securities brokerage through
affiliates and venture capital financing. These products and services include the Wells Fargo
Advantage FundsSM, a family of mutual funds, as well as personal trust and agency
assets. Loan products include lines of credit, equity lines and loans, equipment and transportation
(recreational vehicle and marine) loans, education loans, origination and purchase of residential
mortgage loans and servicing of mortgage loans and credit cards. Other credit products and
financial services available to small businesses and their owners include receivables and inventory
financing, equipment leases, real estate financing, Small Business Administration financing,
venture capital financing, cash management, payroll services, retirement plans, Health Savings
Accounts and credit and debit card processing. Consumer and business deposit products include
checking accounts, savings deposits, market rate accounts, Individual Retirement Accounts (IRAs),
time deposits and debit cards.
Community Banking serves customers through a wide range of channels, which include traditional
banking stores, in-store banking centers, business centers and ATMs. Also, Phone BankSM
centers and the National Business Banking Center provide 24-hour telephone service. Online banking
services include single sign-on to online banking, bill pay and brokerage, as well as online
banking for small business.
The Wholesale Banking Group serves businesses across the United States with annual sales generally
in excess of $10 million. Wholesale Banking provides a complete line of commercial, corporate and
real estate banking products and services. These include traditional commercial loans and lines of
credit, letters of credit, asset-based lending, equipment leasing, mezzanine financing, high-yield
debt, international trade facilities, foreign exchange services, treasury management, investment
management, institutional fixed income and equity sales, interest rate, commodity and equity risk
management, online/electronic products such as the Commercial Electronic Office®
(CEO®) portal, insurance and investment banking services. Wholesale Banking manages and
administers institutional investments, employee benefit trusts and mutual funds, including the
Wells Fargo Advantage Funds. Wholesale Banking includes the majority ownership interest in the
Wells Fargo HSBC Trade Bank, which provides trade financing, letters of credit
55
and collection services and is sometimes supported by the Export-Import Bank of the United States
(a public agency of the United States offering export finance support for American-made products).
Wholesale Banking also supports the commercial real estate market with products and services such
as construction loans for commercial and residential development, land acquisition and development
loans, secured and unsecured lines of credit, interim financing arrangements for completed
structures, rehabilitation loans, affordable housing loans and letters of credit, permanent loans
for securitization, commercial real estate loan servicing and real estate and mortgage brokerage
services.
Wells Fargo Financial includes consumer finance and auto finance operations. Consumer finance
operations make direct consumer and real estate loans to individuals and purchase sales finance
contracts from retail merchants from offices throughout the United States and in Canada, Latin
America, the Caribbean and the Pacific Rim. Automobile finance operations specialize in purchasing
sales finance contracts directly from automobile dealers and making loans secured by automobiles in
the United States, Canada and Puerto Rico. Wells Fargo Financial also provides credit cards and
lease and other commercial financing.
The Consolidated Company total of average assets includes unallocated goodwill balances held at the
enterprise level.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(income/expense in millions, |
|
Community |
|
|
Wholesale |
|
|
Wells Fargo |
|
|
Consolidated |
|
average balances in billions) |
|
Banking |
|
|
Banking |
|
|
Financial |
|
|
Company |
|
Quarter ended September 30, |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net interest income (1) |
|
$ |
3,292 |
|
|
$ |
3,209 |
|
|
$ |
751 |
|
|
$ |
598 |
|
|
$ |
1,004 |
|
|
$ |
869 |
|
|
$ |
5,047 |
|
|
$ |
4,676 |
|
Provision for credit losses |
|
|
236 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
377 |
|
|
|
415 |
|
|
|
613 |
|
|
|
641 |
|
Noninterest income |
|
|
2,492 |
|
|
|
2,619 |
|
|
|
1,033 |
|
|
|
893 |
|
|
|
362 |
|
|
|
315 |
|
|
|
3,887 |
|
|
|
3,827 |
|
Noninterest expense |
|
|
3,392 |
|
|
|
3,350 |
|
|
|
999 |
|
|
|
895 |
|
|
|
690 |
|
|
|
644 |
|
|
|
5,081 |
|
|
|
4,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
expense |
|
|
2,156 |
|
|
|
2,252 |
|
|
|
785 |
|
|
|
596 |
|
|
|
299 |
|
|
|
125 |
|
|
|
3,240 |
|
|
|
2,973 |
|
Income tax expense |
|
|
683 |
|
|
|
759 |
|
|
|
258 |
|
|
|
193 |
|
|
|
105 |
|
|
|
46 |
|
|
|
1,046 |
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,473 |
|
|
$ |
1,493 |
|
|
$ |
527 |
|
|
$ |
403 |
|
|
$ |
194 |
|
|
$ |
79 |
|
|
$ |
2,194 |
|
|
$ |
1,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans |
|
$ |
172.5 |
|
|
$ |
184.4 |
|
|
$ |
72.3 |
|
|
$ |
63.3 |
|
|
$ |
59.2 |
|
|
$ |
47.9 |
|
|
$ |
304.0 |
|
|
$ |
295.6 |
|
Average assets (2) |
|
|
326.7 |
|
|
|
298.8 |
|
|
|
97.5 |
|
|
|
90.1 |
|
|
|
64.7 |
|
|
|
53.5 |
|
|
|
494.7 |
|
|
|
448.2 |
|
Average core deposits |
|
|
231.2 |
|
|
|
223.5 |
|
|
|
29.1 |
|
|
|
23.6 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
260.4 |
|
|
|
247.2 |
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (1) |
|
$ |
9,869 |
|
|
$ |
9,421 |
|
|
$ |
2,137 |
|
|
$ |
1,755 |
|
|
$ |
2,895 |
|
|
$ |
2,489 |
|
|
$ |
14,901 |
|
|
$ |
13,665 |
|
Provision (reversal of provision)
for credit losses |
|
|
612 |
|
|
|
610 |
|
|
|
(9 |
) |
|
|
(6 |
) |
|
|
875 |
|
|
|
1,076 |
|
|
|
1,478 |
|
|
|
1,680 |
|
Noninterest income |
|
|
7,033 |
|
|
|
6,986 |
|
|
|
3,214 |
|
|
|
2,849 |
|
|
|
1,130 |
|
|
|
957 |
|
|
|
11,377 |
|
|
|
10,792 |
|
Noninterest expense |
|
|
10,264 |
|
|
|
9,636 |
|
|
|
3,009 |
|
|
|
2,611 |
|
|
|
2,058 |
|
|
|
1,888 |
|
|
|
15,331 |
|
|
|
14,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
expense |
|
|
6,026 |
|
|
|
6,161 |
|
|
|
2,351 |
|
|
|
1,999 |
|
|
|
1,092 |
|
|
|
482 |
|
|
|
9,469 |
|
|
|
8,642 |
|
Income tax expense |
|
|
2,007 |
|
|
|
2,075 |
|
|
|
773 |
|
|
|
655 |
|
|
|
388 |
|
|
|
171 |
|
|
|
3,168 |
|
|
|
2,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,019 |
|
|
$ |
4,086 |
|
|
$ |
1,578 |
|
|
$ |
1,344 |
|
|
$ |
704 |
|
|
$ |
311 |
|
|
$ |
6,301 |
|
|
$ |
5,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans |
|
$ |
178.8 |
|
|
$ |
186.0 |
|
|
$ |
70.1 |
|
|
$ |
61.3 |
|
|
$ |
56.2 |
|
|
$ |
45.6 |
|
|
$ |
305.1 |
|
|
$ |
292.9 |
|
Average assets (2) |
|
|
322.9 |
|
|
|
292.7 |
|
|
|
96.9 |
|
|
|
88.1 |
|
|
|
61.6 |
|
|
|
51.5 |
|
|
|
487.2 |
|
|
|
438.1 |
|
Average core deposits |
|
|
230.0 |
|
|
|
214.9 |
|
|
|
27.3 |
|
|
|
24.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
257.4 |
|
|
|
239.2 |
|
|
|
|
|
|
(1) |
|
Net interest income is the difference between interest earned on assets and the cost of
liabilities to fund those assets. Interest earned includes actual interest earned on segment
assets and, if the segment has excess liabilities, interest credits for providing funding to
other segments. The cost of liabilities includes interest expense on segment liabilities and,
if the segment does not have enough liabilities to fund its assets, a funding charge based on
the cost of excess liabilities from another segment. In general, Community Banking has excess
liabilities and receives interest credits for the funding it provides to other segments. |
(2) |
|
The Consolidated Company balance includes unallocated goodwill held at the enterprise level
of $5.8 billion for all periods presented. |
56
14. VARIABLE INTEREST ENTITIES
We are a variable interest holder in certain special-purpose entities that are consolidated because
we absorb a majority of each entitys expected losses, receive a majority of each entitys expected
returns or both. We do not hold a majority voting interest in these entities. Our consolidated
variable interest entities, substantially all of which were formed to invest in securities and to
securitize real estate investment trust securities, had approximately $3.2 billion and $2.5 billion
in total assets at September 30, 2006, and December 31, 2005, respectively. The primary activities
of these entities consist of acquiring and disposing of, and investing and reinvesting in
securities, and issuing beneficial interests secured by those securities to investors. The
creditors of a majority of these consolidated entities have no recourse against us.
We also hold variable interests greater than 20% but less than 50% in certain special-purpose
entities formed to provide affordable housing and to securitize corporate debt that had
approximately $2.8 billion and $2.9 billion in total assets at September 30, 2006, and December 31,
2005, respectively. We are not required to consolidate these entities. Our maximum exposure to loss
as a result of our involvement with these unconsolidated variable interest entities was
approximately $820 million and $870 million at September 30, 2006, and December 31, 2005,
respectively, predominantly representing investments in entities formed to invest in affordable
housing. However, we expect to recover our investment over time, primarily through realization of
federal low-income housing tax credits.
57
15. MORTGAGE BANKING ACTIVITIES
Mortgage banking activities, included in the Community Banking and Wholesale Banking operating
segments, consist of residential and commercial mortgage originations and servicing.
Effective January 1, 2006, upon adoption of FAS 156, we remeasured our residential mortgage
servicing rights (MSRs) at fair value and recognized a pre-tax adjustment of $158 million to
residential MSRs and recorded a corresponding cumulative effect adjustment of $101 million (after
tax) to the 2006 beginning balance of retained earnings in our Statement of Changes in
Stockholders Equity. The table below reconciles the December 31, 2005, and January 1, 2006,
balance of MSRs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
Total |
|
(in millions) |
|
MSRs |
|
|
MSRs |
|
|
MSRs |
|
|
|
Balance at December 31, 2005 |
|
$ |
12,389 |
|
|
$ |
122 |
|
|
$ |
12,511 |
|
Remeasurement upon adoption of FAS 156 |
|
|
158 |
|
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2006 |
|
$ |
12,547 |
|
|
$ |
122 |
|
|
$ |
12,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in residential MSRs measured using the fair value method were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Nine months ended |
|
(in millions) |
|
Sept. 30, 2006 |
|
|
Sept. 30, 2006 |
|
|
|
Fair value, beginning of period |
|
$ |
15,650 |
|
|
$ |
12,547 |
|
Purchases |
|
|
2,907 |
|
|
|
3,637 |
|
Servicing from securitizations or asset transfers |
|
|
965 |
|
|
|
3,264 |
|
Changes in fair value: |
|
|
|
|
|
|
|
|
Due to changes in valuation model inputs or assumptions (1) |
|
|
(1,147 |
) |
|
|
(75 |
) |
Other changes in fair value (2) |
|
|
(663 |
) |
|
|
(1,661 |
) |
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
17,712 |
|
|
$ |
17,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principally reflects changes in discount rates and prepayment speed assumptions, mostly due
to changes in interest rates. |
(2) |
|
Represents changes due to collection/realization of expected cash flows over time. |
58
The changes in amortized MSRs were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended Sept. 30 |
, |
|
Nine months ended Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
Balance, beginning of period |
|
$ |
175 |
|
|
$ |
10,096 |
|
|
$ |
122 |
|
|
$ |
9,466 |
|
Purchases (1) |
|
|
161 |
|
|
|
783 |
|
|
|
225 |
|
|
|
1,771 |
|
Servicing from securitizations or asset transfers (1) |
|
|
2 |
|
|
|
850 |
|
|
|
2 |
|
|
|
1,764 |
|
Amortization |
|
|
(10 |
) |
|
|
(542 |
) |
|
|
(21 |
) |
|
|
(1,505 |
) |
Other (includes changes due to hedging) |
|
|
|
|
|
|
766 |
|
|
|
|
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
328 |
|
|
$ |
11,953 |
|
|
$ |
328 |
|
|
$ |
11,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
1,598 |
|
|
$ |
|
|
|
$ |
1,565 |
|
Reversal of provision for MSRs in excess of fair value |
|
|
|
|
|
|
(356 |
) |
|
|
|
|
|
|
(323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
|
$ |
1,242 |
|
|
$ |
|
|
|
$ |
1,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized MSRs, net |
|
$ |
328 |
|
|
$ |
10,711 |
|
|
$ |
328 |
|
|
$ |
10,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of amortized MSRs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
$ |
252 |
|
|
$ |
8,517 |
|
|
$ |
146 |
|
|
$ |
7,913 |
|
End of period |
|
|
440 |
|
|
|
10,845 |
|
|
|
440 |
|
|
|
10,845 |
|
|
|
|
|
|
(1) |
|
Based on September 30, 2006, assumptions, the weighted-average amortization period for MSRs
added during the third quarter and first nine months of 2006 was approximately 18.0 years and
16.2 years, respectively. |
The components of our managed servicing portfolio were:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
, |
(in billions) |
|
2006 |
|
|
2005 |
|
|
|
Loans serviced for others (1) |
|
$ |
1,235 |
|
|
$ |
815 |
|
Owned loans serviced (2) |
|
|
90 |
|
|
|
115 |
|
|
|
|
|
|
|
|
Total owned servicing |
|
|
1,325 |
|
|
|
930 |
|
Sub-servicing |
|
|
20 |
|
|
|
29 |
|
|
|
|
|
|
|
|
Total managed servicing portfolio |
|
$ |
1,345 |
|
|
$ |
959 |
|
|
|
|
|
|
|
|
Ratio of MSRs to related loans serviced for others |
|
|
1.46 |
% |
|
|
1.31 |
% |
|
|
|
|
|
(1) |
|
Consists of 1-4 family first mortgage and commercial mortgage loans. |
(2) |
|
Consists of mortgages held for sale and 1-4 family first mortgage loans. |
59
The components of mortgage banking noninterest income were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended Sept. 30 |
, |
|
Nine months ended Sept. 30 |
, |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
Servicing income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees (1) |
|
$ |
947 |
|
|
$ |
619 |
|
|
$ |
2,514 |
|
|
$ |
1,782 |
|
Changes in fair value of residential MSRs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to changes in valuation model inputs
or assumptions (2) |
|
|
(1,147 |
) |
|
|
|
|
|
|
(75 |
) |
|
|
|
|
Other changes in fair value (3) |
|
|
(663 |
) |
|
|
|
|
|
|
(1,661 |
) |
|
|
-- |
|
Amortization |
|
|
(10 |
) |
|
|
(542 |
) |
|
|
(21 |
) |
|
|
(1,505 |
) |
Reversal of provision for MSRs in excess of fair value |
|
|
|
|
|
|
356 |
|
|
|
|
|
|
|
323 |
|
Net derivative gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value accounting hedges (4) |
|
|
|
|
|
|
(60 |
) |
|
|
|
|
|
|
130 |
|
Economic hedges (5) |
|
|
1,061 |
|
|
|
|
|
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing income, net |
|
|
188 |
|
|
|
373 |
|
|
|
579 |
|
|
|
730 |
|
Net gains on mortgage loan origination/sales activities |
|
|
179 |
|
|
|
273 |
|
|
|
811 |
|
|
|
816 |
|
All other |
|
|
117 |
|
|
|
97 |
|
|
|
244 |
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking noninterest income |
|
$ |
484 |
|
|
$ |
743 |
|
|
$ |
1,634 |
|
|
$ |
1,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market-related valuation changes to MSRs, net of
hedge results (2) + (5) |
|
$ |
(86 |
) |
|
|
|
|
|
$ |
(253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes contractually specified servicing fees, late charges and other ancillary revenues. |
(2) |
|
Principally reflects changes in discount rates and prepayment speed assumptions, mostly due
to changes in interest rates. |
(3) |
|
Represents changes due to collection/realization of expected cash flows over time. |
(4) |
|
Results related to MSRs fair value hedging activities under FAS 133, Accounting for
Derivative Instruments and Hedging Activities (as amended), consist of gains and losses
excluded from the evaluation of hedge effectiveness and the ineffective portion of the change
in the value of these derivatives. Gains and losses excluded from the evaluation of hedge
effectiveness are those caused by market conditions (volatility) and the spread between spot
and forward rates priced into the derivative contracts (the passage
of time). See Note 19
Fair Value Hedges for additional discussion and detail. |
(5) |
|
Represents results from free-standing derivatives (economic hedges) used to hedge the risk of
changes in fair value of MSRs. See Note 19 Free-Standing Derivatives for additional
discussion and detail. |
60
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Following are the condensed consolidating financial statements of the Parent and Wells Fargo
Financial Inc. and its wholly-owned subsidiaries (WFFI). The Wells Fargo Financial business segment
for management reporting (see Note 13) consists of WFFI and other affiliated consumer finance
entities managed by WFFI that are included within other consolidating subsidiaries in the following
tables.
Condensed Consolidating Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating |
|
|
|
|
|
|
Consolidated |
|
(in millions) |
|
Parent |
|
|
WFFI |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Company |
|
|
|
Dividends from subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
$ |
637 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(637 |
) |
|
$ |
|
|
Nonbank |
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
|
|
|
|
Interest income from loans |
|
|
|
|
|
|
1,336 |
|
|
|
5,231 |
|
|
|
(12 |
) |
|
|
6,555 |
|
Interest income from subsidiaries |
|
|
862 |
|
|
|
|
|
|
|
|
|
|
|
(862 |
) |
|
|
|
|
Other interest income |
|
|
27 |
|
|
|
26 |
|
|
|
1,794 |
|
|
|
(3 |
) |
|
|
1,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
1,571 |
|
|
|
1,362 |
|
|
|
7,025 |
|
|
|
(1,559 |
) |
|
|
8,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
1,997 |
|
|
|
|
|
|
|
1,997 |
|
Short-term borrowings |
|
|
139 |
|
|
|
96 |
|
|
|
288 |
|
|
|
(252 |
) |
|
|
271 |
|
Long-term debt |
|
|
834 |
|
|
|
457 |
|
|
|
180 |
|
|
|
(387 |
) |
|
|
1,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
973 |
|
|
|
553 |
|
|
|
2,465 |
|
|
|
(639 |
) |
|
|
3,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
598 |
|
|
|
809 |
|
|
|
4,560 |
|
|
|
(920 |
) |
|
|
5,047 |
|
Provision for credit losses |
|
|
|
|
|
|
362 |
|
|
|
251 |
|
|
|
|
|
|
|
613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for credit losses |
|
|
598 |
|
|
|
447 |
|
|
|
4,309 |
|
|
|
(920 |
) |
|
|
4,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income
nonaffiliates |
|
|
|
|
|
|
76 |
|
|
|
2,268 |
|
|
|
|
|
|
|
2,344 |
|
Other |
|
|
85 |
|
|
|
48 |
|
|
|
1,417 |
|
|
|
(7 |
) |
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
85 |
|
|
|
124 |
|
|
|
3,685 |
|
|
|
(7 |
) |
|
|
3,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
5 |
|
|
|
280 |
|
|
|
2,652 |
|
|
|
|
|
|
|
2,937 |
|
Other |
|
|
13 |
|
|
|
217 |
|
|
|
2,159 |
|
|
|
(245 |
) |
|
|
2,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
18 |
|
|
|
497 |
|
|
|
4,811 |
|
|
|
(245 |
) |
|
|
5,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX
EXPENSE (BENEFIT) AND EQUITY
IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES |
|
|
665 |
|
|
|
74 |
|
|
|
3,183 |
|
|
|
(682 |
) |
|
|
3,240 |
|
Income tax expense (benefit) |
|
|
(54 |
) |
|
|
27 |
|
|
|
1,073 |
|
|
|
|
|
|
|
1,046 |
|
Equity in undistributed income of subsidiaries |
|
|
1,475 |
|
|
|
|
|
|
|
|
|
|
|
(1,475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
2,194 |
|
|
$ |
47 |
|
|
$ |
2,110 |
|
|
$ |
(2,157 |
) |
|
$ |
2,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Condensed Consolidating Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating |
|
|
|
|
|
|
Consolidated |
|
(in millions) |
|
Parent |
|
|
WFFI |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Company |
|
|
|
Dividends from subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
$ |
900 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(900 |
) |
|
$ |
|
|
Nonbank |
|
|
566 |
|
|
|
|
|
|
|
|
|
|
|
(566 |
) |
|
|
|
|
Interest income from loans |
|
|
|
|
|
|
1,154 |
|
|
|
4,270 |
|
|
|
(8 |
) |
|
|
5,416 |
|
Interest income from subsidiaries |
|
|
598 |
|
|
|
|
|
|
|
|
|
|
|
(598 |
) |
|
|
|
|
Other interest income |
|
|
25 |
|
|
|
21 |
|
|
|
1,183 |
|
|
|
|
|
|
|
1,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
2,089 |
|
|
|
1,175 |
|
|
|
5,453 |
|
|
|
(2,072 |
) |
|
|
6,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
1,000 |
|
Short-term borrowings |
|
|
60 |
|
|
|
62 |
|
|
|
228 |
|
|
|
(161 |
) |
|
|
189 |
|
Long-term debt |
|
|
554 |
|
|
|
350 |
|
|
|
161 |
|
|
|
(285 |
) |
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
614 |
|
|
|
412 |
|
|
|
1,389 |
|
|
|
(446 |
) |
|
|
1,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
1,475 |
|
|
|
763 |
|
|
|
4,064 |
|
|
|
(1,626 |
) |
|
|
4,676 |
|
Provision for credit losses |
|
|
|
|
|
|
486 |
|
|
|
155 |
|
|
|
|
|
|
|
641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for credit losses |
|
|
1,475 |
|
|
|
277 |
|
|
|
3,909 |
|
|
|
(1,626 |
) |
|
|
4,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income
nonaffiliates |
|
|
|
|
|
|
61 |
|
|
|
2,104 |
|
|
|
|
|
|
|
2,165 |
|
Other |
|
|
62 |
|
|
|
90 |
|
|
|
1,539 |
|
|
|
(29 |
) |
|
|
1,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
62 |
|
|
|
151 |
|
|
|
3,643 |
|
|
|
(29 |
) |
|
|
3,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
43 |
|
|
|
249 |
|
|
|
2,422 |
|
|
|
|
|
|
|
2,714 |
|
Other |
|
|
31 |
|
|
|
227 |
|
|
|
2,105 |
|
|
|
(188 |
) |
|
|
2,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
74 |
|
|
|
476 |
|
|
|
4,527 |
|
|
|
(188 |
) |
|
|
4,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX
EXPENSE (BENEFIT) AND EQUITY
IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES |
|
|
1,463 |
|
|
|
(48 |
) |
|
|
3,025 |
|
|
|
(1,467 |
) |
|
|
2,973 |
|
Income tax expense (benefit) |
|
|
(50 |
) |
|
|
(18 |
) |
|
|
1,066 |
|
|
|
|
|
|
|
998 |
|
Equity in undistributed income of subsidiaries |
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
(462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
1,975 |
|
|
$ |
(30 |
) |
|
$ |
1,959 |
|
|
$ |
(1,929 |
) |
|
$ |
1,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
Condensed Consolidating Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating |
|
|
|
|
|
Consolidated |
|
(in millions) |
|
Parent |
|
|
WFFI |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Company |
|
|
|
Dividends from subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
$ |
1,472 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,472 |
) |
|
$ |
|
|
Nonbank |
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
(218 |
) |
|
|
|
|
Interest income from loans |
|
|
|
|
|
|
3,933 |
|
|
|
15,007 |
|
|
|
(30 |
) |
|
|
18,910 |
|
Interest income from subsidiaries |
|
|
2,430 |
|
|
|
|
|
|
|
|
|
|
|
(2,430 |
) |
|
|
|
|
Other interest income |
|
|
79 |
|
|
|
76 |
|
|
|
4,946 |
|
|
|
(3 |
) |
|
|
5,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
4,199 |
|
|
|
4,009 |
|
|
|
19,953 |
|
|
|
(4,153 |
) |
|
|
24,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
5,273 |
|
|
|
|
|
|
|
5,273 |
|
Short-term borrowings |
|
|
349 |
|
|
|
274 |
|
|
|
888 |
|
|
|
(681 |
) |
|
|
830 |
|
Long-term debt |
|
|
2,333 |
|
|
|
1,310 |
|
|
|
473 |
|
|
|
(1,112 |
) |
|
|
3,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
2,682 |
|
|
|
1,584 |
|
|
|
6,634 |
|
|
|
(1,793 |
) |
|
|
9,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
1,517 |
|
|
|
2,425 |
|
|
|
13,319 |
|
|
|
(2,360 |
) |
|
|
14,901 |
|
Provision for credit losses |
|
|
|
|
|
|
689 |
|
|
|
789 |
|
|
|
|
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for credit losses |
|
|
1,517 |
|
|
|
1,736 |
|
|
|
12,530 |
|
|
|
(2,360 |
) |
|
|
13,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income nonaffiliates |
|
|
|
|
|
|
206 |
|
|
|
6,564 |
|
|
|
|
|
|
|
6,770 |
|
Other |
|
|
58 |
|
|
|
171 |
|
|
|
4,413 |
|
|
|
(35 |
) |
|
|
4,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
58 |
|
|
|
377 |
|
|
|
10,977 |
|
|
|
(35 |
) |
|
|
11,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
57 |
|
|
|
817 |
|
|
|
7,947 |
|
|
|
|
|
|
|
8,821 |
|
Other |
|
|
(4 |
) |
|
|
653 |
|
|
|
6,566 |
|
|
|
(705 |
) |
|
|
6,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
53 |
|
|
|
1,470 |
|
|
|
14,513 |
|
|
|
(705 |
) |
|
|
15,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX
EXPENSE (BENEFIT) AND EQUITY
IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES |
|
|
1,522 |
|
|
|
643 |
|
|
|
8,994 |
|
|
|
(1,690 |
) |
|
|
9,469 |
|
Income tax expense (benefit) |
|
|
(114 |
) |
|
|
228 |
|
|
|
3,054 |
|
|
|
|
|
|
|
3,168 |
|
Equity in undistributed income of subsidiaries |
|
|
4,665 |
|
|
|
|
|
|
|
|
|
|
|
(4,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
6,301 |
|
|
$ |
415 |
|
|
$ |
5,940 |
|
|
$ |
(6,355 |
) |
|
$ |
6,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
Condensed Consolidating Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating |
|
|
|
|
|
|
Consolidated |
|
(in millions) |
|
Parent |
|
|
WFFI |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Company |
|
|
|
Dividends from subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
$ |
3,824 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,824 |
) |
|
$ |
|
|
Nonbank |
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
(751 |
) |
|
|
|
|
Interest income from loans |
|
|
|
|
|
|
3,221 |
|
|
|
12,146 |
|
|
|
(8 |
) |
|
|
15,359 |
|
Interest income from subsidiaries |
|
|
1,553 |
|
|
|
|
|
|
|
|
|
|
|
(1,553 |
) |
|
|
|
|
Other interest income |
|
|
78 |
|
|
|
79 |
|
|
|
3,202 |
|
|
|
|
|
|
|
3,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
6,206 |
|
|
|
3,300 |
|
|
|
15,348 |
|
|
|
(6,136 |
) |
|
|
18,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
2,517 |
|
|
|
|
|
|
|
2,517 |
|
Short-term borrowings |
|
|
171 |
|
|
|
135 |
|
|
|
623 |
|
|
|
(427 |
) |
|
|
502 |
|
Long-term debt |
|
|
1,380 |
|
|
|
990 |
|
|
|
446 |
|
|
|
(782 |
) |
|
|
2,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
1,551 |
|
|
|
1,125 |
|
|
|
3,586 |
|
|
|
(1,209 |
) |
|
|
5,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
4,655 |
|
|
|
2,175 |
|
|
|
11,762 |
|
|
|
(4,927 |
) |
|
|
13,665 |
|
Provision for credit losses |
|
|
|
|
|
|
1,123 |
|
|
|
557 |
|
|
|
|
|
|
|
1,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for credit losses |
|
|
4,655 |
|
|
|
1,052 |
|
|
|
11,205 |
|
|
|
(4,927 |
) |
|
|
11,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income nonaffiliates |
|
|
|
|
|
|
169 |
|
|
|
6,016 |
|
|
|
|
|
|
|
6,185 |
|
Other |
|
|
133 |
|
|
|
203 |
|
|
|
4,366 |
|
|
|
(95 |
) |
|
|
4,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
133 |
|
|
|
372 |
|
|
|
10,382 |
|
|
|
(95 |
) |
|
|
10,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
55 |
|
|
|
731 |
|
|
|
6,965 |
|
|
|
|
|
|
|
7,751 |
|
Other |
|
|
36 |
|
|
|
571 |
|
|
|
6,223 |
|
|
|
(446 |
) |
|
|
6,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
91 |
|
|
|
1,302 |
|
|
|
13,188 |
|
|
|
(446 |
) |
|
|
14,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX
EXPENSE (BENEFIT) AND EQUITY
IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES |
|
|
4,697 |
|
|
|
122 |
|
|
|
8,399 |
|
|
|
(4,576 |
) |
|
|
8,642 |
|
Income tax expense (benefit) |
|
|
(52 |
) |
|
|
40 |
|
|
|
2,913 |
|
|
|
|
|
|
|
2,901 |
|
Equity in undistributed income of subsidiaries |
|
|
992 |
|
|
|
|
|
|
|
|
|
|
|
(992 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
5,741 |
|
|
$ |
82 |
|
|
$ |
5,486 |
|
|
$ |
(5,568 |
) |
|
$ |
5,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
Condensed Consolidating Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating |
|
|
|
|
|
|
Consolidated |
|
(in millions) |
|
Parent |
|
|
WFFI |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Company |
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents due from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary banks |
|
$ |
11,879 |
|
|
$ |
232 |
|
|
$ |
|
|
|
$ |
(12,111 |
) |
|
$ |
|
|
Nonaffiliates |
|
|
77 |
|
|
|
195 |
|
|
|
16,398 |
|
|
|
|
|
|
|
16,670 |
|
Securities available for sale |
|
|
986 |
|
|
|
1,798 |
|
|
|
49,857 |
|
|
|
(6 |
) |
|
|
52,635 |
|
Mortgages and loans held for sale |
|
|
|
|
|
|
29 |
|
|
|
40,501 |
|
|
|
|
|
|
|
40,530 |
|
Loans |
|
|
|
|
|
|
47,174 |
|
|
|
261,213 |
|
|
|
(896 |
) |
|
|
307,491 |
|
Loans to subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
3,400 |
|
|
|
|
|
|
|
|
|
|
|
(3,400 |
) |
|
|
|
|
Nonbank |
|
|
46,369 |
|
|
|
63 |
|
|
|
|
|
|
|
(46,432 |
) |
|
|
|
|
Allowance for loan losses |
|
|
|
|
|
|
(1,147 |
) |
|
|
(2,652 |
) |
|
|
|
|
|
|
(3,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
|
49,769 |
|
|
|
46,090 |
|
|
|
258,561 |
|
|
|
(50,728 |
) |
|
|
303,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
41,335 |
|
|
|
|
|
|
|
|
|
|
|
(41,335 |
) |
|
|
|
|
Nonbank |
|
|
5,168 |
|
|
|
|
|
|
|
|
|
|
|
(5,168 |
) |
|
|
|
|
Other assets |
|
|
5,817 |
|
|
|
1,456 |
|
|
|
64,148 |
|
|
|
(1,507 |
) |
|
|
69,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
115,031 |
|
|
$ |
49,800 |
|
|
$ |
429,465 |
|
|
$ |
(110,855 |
) |
|
$ |
483,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
|
|
|
$ |
|
|
|
$ |
326,430 |
|
|
$ |
(12,111 |
) |
|
$ |
314,319 |
|
Short-term borrowings |
|
|
18 |
|
|
|
7,909 |
|
|
|
19,072 |
|
|
|
(13,199 |
) |
|
|
13,800 |
|
Accrued expenses and other liabilities |
|
|
3,359 |
|
|
|
1,018 |
|
|
|
24,038 |
|
|
|
(2,046 |
) |
|
|
26,369 |
|
Long-term debt |
|
|
61,817 |
|
|
|
37,944 |
|
|
|
16,447 |
|
|
|
(32,117 |
) |
|
|
84,091 |
|
Indebtedness to subsidiaries |
|
|
4,975 |
|
|
|
|
|
|
|
|
|
|
|
(4,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
70,169 |
|
|
|
46,871 |
|
|
|
385,987 |
|
|
|
(64,448 |
) |
|
|
438,579 |
|
Stockholders equity |
|
|
44,862 |
|
|
|
2,929 |
|
|
|
43,478 |
|
|
|
(46,407 |
) |
|
|
44,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
115,031 |
|
|
$ |
49,800 |
|
|
$ |
429,465 |
|
|
$ |
(110,855 |
) |
|
$ |
483,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
Condensed Consolidating Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating |
|
|
|
|
|
|
Consolidated |
|
(in millions) |
|
Parent |
|
|
WFFI |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Company |
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents due from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary banks |
|
$ |
10,888 |
|
|
$ |
263 |
|
|
$ |
28 |
|
|
$ |
(11,179 |
) |
|
$ |
|
|
Nonaffiliates |
|
|
235 |
|
|
|
343 |
|
|
|
19,214 |
|
|
|
|
|
|
|
19,792 |
|
Securities available for sale |
|
|
1,239 |
|
|
|
1,771 |
|
|
|
31,475 |
|
|
|
(5 |
) |
|
|
34,480 |
|
Mortgages and loans held for sale |
|
|
|
|
|
|
25 |
|
|
|
46,723 |
|
|
|
|
|
|
|
46,748 |
|
Loans |
|
|
1 |
|
|
|
41,507 |
|
|
|
255,570 |
|
|
|
(889 |
) |
|
|
296,189 |
|
Loans to subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
2,300 |
|
|
|
|
|
|
|
|
|
|
|
(2,300 |
) |
|
|
|
|
Nonbank |
|
|
43,556 |
|
|
|
949 |
|
|
|
|
|
|
|
(44,505 |
) |
|
|
|
|
Allowance for loan losses |
|
|
|
|
|
|
(1,200 |
) |
|
|
(2,686 |
) |
|
|
|
|
|
|
(3,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
|
45,857 |
|
|
|
41,256 |
|
|
|
252,884 |
|
|
|
(47,694 |
) |
|
|
292,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
36,364 |
|
|
|
|
|
|
|
|
|
|
|
(36,364 |
) |
|
|
|
|
Nonbank |
|
|
4,140 |
|
|
|
|
|
|
|
|
|
|
|
(4,140 |
) |
|
|
|
|
Other assets |
|
|
6,343 |
|
|
|
1,149 |
|
|
|
54,729 |
|
|
|
(2,050 |
) |
|
|
60,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
105,066 |
|
|
$ |
44,807 |
|
|
$ |
405,053 |
|
|
$ |
(101,432 |
) |
|
$ |
453,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
|
|
|
$ |
|
|
|
$ |
300,207 |
|
|
$ |
(11,178 |
) |
|
$ |
289,029 |
|
Short-term borrowings |
|
|
82 |
|
|
|
8,567 |
|
|
|
29,004 |
|
|
|
(14,410 |
) |
|
|
23,243 |
|
Accrued expenses and other liabilities |
|
|
4,056 |
|
|
|
1,262 |
|
|
|
20,289 |
|
|
|
(2,812 |
) |
|
|
22,795 |
|
Long-term debt |
|
|
57,236 |
|
|
|
32,501 |
|
|
|
17,627 |
|
|
|
(28,772 |
) |
|
|
78,592 |
|
Indebtedness to subsidiaries |
|
|
3,857 |
|
|
|
|
|
|
|
|
|
|
|
(3,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
65,231 |
|
|
|
42,330 |
|
|
|
367,127 |
|
|
|
(61,029 |
) |
|
|
413,659 |
|
Stockholders equity |
|
|
39,835 |
|
|
|
2,477 |
|
|
|
37,926 |
|
|
|
(40,403 |
) |
|
|
39,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
105,066 |
|
|
$ |
44,807 |
|
|
$ |
405,053 |
|
|
$ |
(101,432 |
) |
|
$ |
453,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
Condensed Consolidating Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries/ |
|
|
Consolidated |
|
(in millions) |
|
Parent |
|
|
WFFI |
|
|
eliminations |
|
|
Company |
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
2,235 |
|
|
$ |
714 |
|
|
$ |
15,351 |
|
|
$ |
18,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales proceeds |
|
|
188 |
|
|
|
443 |
|
|
|
43,265 |
|
|
|
43,896 |
|
Prepayments and maturities |
|
|
4 |
|
|
|
172 |
|
|
|
5,581 |
|
|
|
5,757 |
|
Purchases |
|
|
(265 |
) |
|
|
(646 |
) |
|
|
(60,436 |
) |
|
|
(61,347 |
) |
Net cash paid for acquisitions |
|
|
|
|
|
|
|
|
|
|
(526 |
) |
|
|
(526 |
) |
Increase in banking subsidiaries loan
originations, net of collections |
|
|
|
|
|
|
(1,448 |
) |
|
|
(25,055 |
) |
|
|
(26,503 |
) |
Proceeds from sales (including participations) of loans by
banking subsidiaries |
|
|
|
|
|
|
50 |
|
|
|
35,587 |
|
|
|
35,637 |
|
Purchases (including participations) of loans by
banking subsidiaries |
|
|
|
|
|
|
(202 |
) |
|
|
(3,934 |
) |
|
|
(4,136 |
) |
Principal collected on nonbank entities loans |
|
|
|
|
|
|
15,092 |
|
|
|
3,038 |
|
|
|
18,130 |
|
Loans originated by nonbank entities |
|
|
|
|
|
|
(16,638 |
) |
|
|
(3,318 |
) |
|
|
(19,956 |
) |
Net repayments from (advances to) nonbank entities |
|
|
(54 |
) |
|
|
|
|
|
|
54 |
|
|
|
|
|
Capital notes and term loans ma |