Loans

Average total loans were $792.4 billion in 4Q09 compared with $810.2 billion in 3Q09. In part, the decline was driven by the Company’s objective to reduce identified higher-risk, non-strategic and liquidating consumer loan portfolios, down $4.7 billion in the quarter. Wells Fargo continued to gain market share in many lending segments including residential mortgage, auto, education finance, SBA and middle market commercial.
 

Deposits

Deposit growth remained very strong as WFC continued to build consumer and business checking account relationships. Average checking and savings deposits increased 20% (annualized) to $661.4 billion from $629.6 billion in 3Q09. Average mortgage escrow deposits were $27.5 billion compared with $28.7 billion in 3Q09. Average consumer checking accounts increased a net 5.8% from 2008 for Wells Fargo and Wachovia combined, and average business checking accounts increased a net 3.9% for the same period. Average total core deposits were $770.8 billion, up 6% (annualized) from $759.3 billion in 3Q09. During the quarter, $14 billion of Wachovia’s higher-rate certificates of deposit matured, with $6 billion of those balances retained. For FY09, $109 billion of Wachovia’s high-rate certificates of deposit matured, with $62 billion retained, largely in low-cost CDs, checking and savings accounts. Only $8 billion of Wachovia high-rate CDs are expected to mature in 2010.
 

Nonperforming Assets

Total non-performing assets (NPAs) were $27.6 billion (3.53% of total loans) on December 31, 2009, and included $24.4 billion of non-accrual loans and $3.2 billion of foreclosed assets (repossessed real estate and vehicles).

While commercial and commercial real estate non-accrual loans were up in the quarter, the rate of growth was slowing considerably quarter-to-quarter. The $1.4 billion increase in commercial real estate NPAs included impaired loans in the PCI portfolio placed in foreclosure and therefore moved to NPAs (written down at the time of the Wachovia merger). The Company believes the loss exposure expected in the NPAs is significantly mitigated by three factors. First, 96% of the non-performing loans (NPLs) are secured. Second, losses have already been recognized on 36% of the total. Specifically, 31% of commercial loan NPLs have been written down by 52% or more, and all residential real estate NPLs greater than 180 days old have been written down to net realizable value. Third, there are certain NPLs for which there are loan level reserves in the allowance, while other NPLs are covered by general reserves.

WFC expects commercial and commercial real estate losses to remain elevated for the near term; however they continue to believe that the portfolio will perform relatively well. The commercial real estate portfolio is well diversified with respect to product type and geography. The Wells Fargo portion of the portfolio reflected strong, consistent underwriting and a relationship approach, while the loss content in the Wachovia portion was significantly reduced when $7 billion in purchase accounting adjustments was taken at the time of the merger on $18 billion of the highest risk commercial real estate loans. As a result of improved residential real estate activity, stable employment and high quality recent vintages, consumer losses were essentially flat in 4Q09.

Wachovia’s Pick-a-Pay portfolio represents the largest portion of consumer non-accrual loans. Overall, the PCI portfolio has performed as expected in 4Q09, and the Company believes the remaining non-accretable balance is adequate to absorb estimated future life-of-loan losses on the portfolio. In fact, WFC expects the Pick-a-Pay portfolio, where $10.2 billion was recognized of the original $26.5 billion of PCI impairment taken on the Pick-a-Pay portfolio, to perform better than expected. Further, any further deterioration on the PCI loans will be reflected in credit costs while improvements in that portfolio will be reflected in revenue as increased yield or gains on asset sales. To date, these have largely offset one another.

Loans 90 days or more past due and still accruing totaled $22.2 billion on December 31, 2009 versus $18.9 billion on September 30, 2009. Over the same period, the totals included $15.3 billion and $12.9 billion, respectively, in advances pursuant to the Company’s servicing agreement to Government National Mortgage Association (GNMA) mortgage pools and similar loans, whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

Capital

WFC have built capital significantly in the last 15 months through industry-leading internal capital generation and three successful common stock offerings totaling over $33 billion, including the $12.2 billion offering in 4Q09 that allowed the Company to repay TARP in full. Despite doubling the size of the Company and cyclically elevated credit costs this past year, the capital ratios ended 2009 higher than they were upon completion of the Wachovia acquisition, even after redeeming TARP in full and purchasing Prudential’s non-controlling interest in the retail securities brokerage joint venture.

On December 23, 2009, WFC announced that it has redeemed the $25 billion of series D preferred stock issued to the U.S. Treasury under the Troubled Asset Relief Program’s (TARP) Capital Purchase Program. As part of the redemption of the preferred stock, Wells Fargo also paid accrued dividends of $131.9 million, bringing the total dividends paid to the U.S. Treasury and U.S. taxpayers to $1.441 billion since the preferred stock was issued in October 2008. As previously stated, by repaying the TARP investment, Wells Fargo will eliminate $1.25 billion in future annual preferred stock dividends. The U.S. Treasury continues to hold warrants to purchase approximately 110 million shares of Wells Fargo common stock at an exercise price of $34.01 per share.

On December 15, 2009, WFC announced that underwriters in Wells Fargo’s public offering of 426 million shares of common stock have fully exercised their option to purchase an additional 63.9 million shares. This represents 15% of the shares purchased in the original offering. The combination of the original offering of 426 million shares of common stock plus the additional 63.9 million shares results in a total offering of 489.9 million shares of common stock valued at $12.25 billion. Under terms of the TARP redemption agreement approved by the U.S. banking regulators, this increase in size eliminates the requirement to execute asset sales to generate $1.5 billion in equity. The original offering was announced on December 14 and priced on December 15, 2009. Wells Fargo will use the proceeds of this offering to redeem its series D preferred stock from the U.S. Treasury for $25 billion, repaying in full the government’s TARP investment.

In raising capital to redeem its TARP preferred shares, the Company's capital ratios are at present more in line with its peers, which are expected to give the Company greater operating flexibility in the coming quarters as WFC continues to internally generate excess capital.

Wells Fargo's Tier 1 common ratio improved from 3.1% in 4Q08 to 6.5% in 4Q09. Tier 1 capital ratio improved from 7.8% in 4Q08 to 9.3% in 4Q09 and total capital ratio increased from 11.8% to 13.3% in 4Q09.

On January 1, 2010, the Company adopted new accounting guidance contained in FASB ASC 810, Consolidations, and FASB ASC 860, Transfers and Servicing (FAS 166/167), which resulted in the consolidation of certain off-balance sheet assets not currently included in its financial statements. The adoption of the new guidance added approximately $10 billion in risk-weighted assets and had a small positive impact on common equity upon adoption. The total impact was to increase Tier 1 common equity as a percentage of risk-weighted assets by 1 basis point, to reduce the Tier 1 capital ratio by 1 basis point and to reduce the total capital ratio by 4 basis points.

Although TARP has been repaid and the Company is projected to be profitable going forward, most of the firms do not expect the dividend to be increased until capital levels improve further and more clarity is achieved regarding credit.

Credit Quality

In 4Q09, net charge offs were $5.4 billion, or 2.71% of average loans (annualized), compared with 3Q09 net charge-offs of $5.1 billion, or 2.50% of average loans. Total credit losses included $1.7 billion of commercial and commercial real estate loans (2.15% of average loans) and $3.7 billion of consumer loans (3.24% of average loans). Almost all of the increase in charge-offs was in commercial and consumer real estate, with the other portfolios showing flat to declining losses.

Total commercial net charge offs were $1,700 million in 4Q09, up from $1,464 million in 3Q09.

Total consumer net charge offs were $3,667 million in 4Q09, up from $3,587 million in 3Q09.

Net charge offs in the 1-4 family first mortgage portfolio totaled $1,018 million in 4Q09 versus $966 million in 3Q09.

Net charge offs in the real estate 1-4 family junior lien portfolio of $1,329 million in 4Q09 versus $1,291 million in 3Q09.

Credit card charge offs decreased to $634 million in 4Q09 from $648 million in 3Q09.

Other revolving credit net charge offs were $686 million in 4Q09, up from $682 million in 3Q09.

During the quarter, reserve build was $500 million, which was lower than expected due to slower growth in net charge offs, WFC’s improved outlook, and shrinking loan portfolios. About $100 million of the reserve build was for credit-impaired loans. WFC at present expects an earlier peak in consumer and commercial credits losses from 1H10 and 2H10, respectively.

The firms expect credit quality measures to deteriorate in the coming quarters; however, they expect the pace of deterioration to moderate from 4Q09 levels. Moreover, they expect reserve build to continue close to current levels over the near term.
 

Allowance for Credit Losses (Includes Wells Fargo and, beginning December 31, 2008, Wachovia)

The allowance for credit losses, including the reserve for unfunded commitments, totaled $25.0 billion on December 31, 2009, compared with $24.5 billion on September 30, 2009. The credit reserve reflects management’s estimate of inherent losses in the loan portfolio on December 31, 2009. Primary drivers of the increased allowance this quarter included $100 million associated with additional life-of-loan losses for several commercial PCI credits (as mentioned above, while this deterioration is reflected as credit costs, related improvements in any PCI loans are reflected as increased revenues) and the remainder associated with residential real estate loan modification programs.

The allowance coverage to total loans increased to 3.20% compared with 3.07% on September 30, 2009. The allowance coverage to NPLs was 103% on December 31, 2009, compared with 118% on September 30, 2009. In 2009, WFC provided $3.5 billion of reserves in excess of charge-offs, bringing total loan loss reserves to more than $25 billion. In addition to the loan loss reserve, the Company began 2010 with $22.9 billion available specifically to absorb losses in the PCI portfolio; i.e. to cover losses on the most severely distressed portion of the Wachovia loan portfolio. The allowance was adequate for losses inherent in the loan portfolio on December 31, 2009, including both performing and non-performing loans.

Dividend

On March 1, 2010, WFC paid a quarterly common stock dividend of $0.05 per share to stockholders of record on February 5, 2010. The Company has approximately 5.2 billion shares outstanding.

On December 31, 2009, Wachovia Preferred Funding Corp. paid a quarterly dividend on its Series A 7.25% preferred securities. The dividend is equal to $0.453125 per Series A security and was paid to holders of record as of the close of business on December 15, 2009.

On December 15, 2009, WFC paid dividends on two series of preferred stock. A quarterly cash dividend of $20 per share was declared on its 8.00% non-cumulative perpetual class A preferred stock, Series J, liquidation preference $1,000 per share. This dividend equals $0.50 per depositary share, each representing a 1/40th interest in a share of Series J preferred stock, which are traded on the New York Stock Exchange under the symbol “WFCPrJ.” The Series J dividend was paid to holders of record as of the close of business on November 30, 2009.

A quarterly cash dividend of $18.75 per share was declared on its 7.50% non-cumulative perpetual convertible class A preferred stock, Series L, liquidation preference $1,000 per share, which are traded on the New York Stock Exchange under the symbol “WFCPrL.” The Series L dividend was paid to holders of record as of the close of business on November 30, 2009.