SEC Company Response from WELLS FARGO & (WFC) — Aug 3, 2011
WELLS FARGO & COMPANY/MN (WFC, WFCNP, WFC-PA, WFC-PC, WFC-PD, WFC-PL, WFC-PY, WFC-PZ) (CIK 0000072971)
Date: Aug. 3, 2011 · CIK: 0000072971 · Accession: 0000950123-11-072239
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-02979
Referenced dates: July 13, 2011, June 9, 2011, May 11, 2011
Letter
VIA EDGAR AND ELECTRONIC MAIL Division of Corporation Finance Securities and Exchange Commission Wells Fargo & Company Form 10-K for Fiscal Year Ended December 31, 2010 Filed February 25, 2011 File No. 001-02979
Dear Ms. Hunsaker:
In response to follow-up discussions we’ve conducted with you concerning comments by the staff (“Staff”) of the Securities and Exchange Commission (“Commission”) contained in the Staff’s letter dated July 13, 2011, to Wells Fargo & Company (“Wells Fargo,” “Company,” “we,” or “our”), we submit the following information. The Staff’s comments, indicated in bold, are followed by Wells Fargo’s responses, with underlined text and strikethrough denoting updates to previously submitted proposed changes to our current disclosures.
Form 10-K for Fiscal Year Ended December 31, 2010
Risk Management — Credit Risk Management, page 54
Table 25: Home Equity Portfolios, page 63
1.
We note your response to prior comment one from our letter dated June 9, 2011 that your approach is to incorporate the default rates for junior liens behind delinquent first liens into your delinquency roll rate models. However, we note that in cases where you hold the junior lien behind a third party senior lien (which is 41% of the time for this loan category) you are not aware of whether the senior lien is delinquent or not, so please expand your disclosure in future filings to discuss how your modeling captures this risk, particularly since the delinquency and loss statistics are more severe in situations where you also do not own or service the senior lien. Additionally, we note
Stephanie L. Hunsaker
August 3, 2011
Page 2
your response to prior comment five from our letter dated May 11, 2011 that you have an indication of whether the senior lien is in default from reviewing credit bureau data which is not specific to which mortgage the borrower may have that is delinquent, but it is unclear how this is considered in your analysis, so please also address this in your future filings.
Wells Fargo response:
We will revise future filings as follows:
We continuously monitor the credit performance of our junior lien mortgage portfolio for trends and factors that influence the frequency and severity of loss. We have observed that the severity of loss for junior lien mortgages is high and generally not affected by whether we or a third party own or service the related first mortgage, but that the frequency of loss is lower when we own or service the first mortgage. Although we have observed that delinquency and default rates are lower when we own or service the related first mortgage, we have limited information available to identify which of our junior liens are behind delinquent third party originated or serviced first mortgages. To capture this loss content, we refined our allowance process during second quarter 2011 utilizing the experience of our junior lien mortgages behind delinquent first liens that are owned or serviced by us adjusted for observed higher delinquency rates associated with junior lien mortgages behind third party first mortgages. We then incorporated this expected loss content into our allowance for loan losses, which added $210 million to our allowance.
2.
We note your response to prior comment two from our letter dated June 9, 2011 that in substantially all cases, your junior lien positions modified under 2MP were performing at the time of the modification. As part of your proposed disclosure addressing the items discussed in comment one, please also discuss whether modifications under 2MP or other modification programs involving your junior liens typically result in significant additional allowances being recorded at the time of modification as prior to that point the loan would appear to be performing.
Wells Fargo response:
While our junior liens are typically performing at the time of their modification, the related first liens have generally shown some level of delinquency prior to our consideration of a modification. As noted in our response to comment one above, we have incorporated the performance of a junior lien behind a delinquent first lien into our loss forecasting calculations. In addition, our allowance considers the impact of modifications, including those that are probable to occur, by incorporating the associated credit cost, including re-defaults of modified loans and projected loss severity. Accordingly, the loss content associated with existing and probable modifications has been considered in our allowance methodology and substantial incremental allowances are not expected at the time of modification.
Stephanie L. Hunsaker
August 3, 2011
Page 3
We will revise future filings as follows:
Page 72
Risk Management — Credit Risk Management — Allowance for Credit Losses
In determining the appropriate allowance attributable to our residential mortgage portfolio, we incorporate the default rates and high severity of loss for junior lien mortgages behind delinquent first lien mortgages into our loss forecasting calculations. In addition,the loss rates we use in determining our allowance analysis include the impact of our established loan modification programs. When modifications occur or are probable to occur, our allowance considers the impact of these modifications, taking into consideration the associated credit cost, including re-defaults of modified loans and projected loss severity. Accordingly, the The loss content associated with the effects of existing and probable loan modifications and junior lien mortgages behind delinquent first lien mortgages has been captured in our allowance methodology.
********************
PAGE 58
Risk Management — Credit Risk Management — Real Estate 1-4 Family Mortgage Loans
We continue to modify real estate 1 — 4 family mortgage loans to assist homeowners and other borrowers in the current difficult economic cycle. Loans are underwritten at the time of the modification in accordance with underwriting guidelines established for governmental and proprietary loan modification programs. As a participant in the U.S. Treasury’s Making Home Affordable (MHA) programs, we are focused on helping the customers stay in their homes. The MHA programs create a standardization of modification terms including incentives paid to borrowers, servicers, and investors. MHA includes the Home Affordable Modification Program (HAMP) for first lien loans and the Second Lien Modification Program (2MP) for junior lien loans. Under both our proprietary programs and the MHA programs, we may provide concessions such as interest rate reductions, forbearance of principal, and in some cases, principal forgiveness. These programs generally include trial periods of three months, and after successful completion and compliance with terms during this period, the loan is considered to be modified. See the “Allowance for Credit Losses” section for discussion on how we determine the allowance attributable to our modified residential real estate portfolios.
Stephanie L. Hunsaker
August 3, 2011
Page 4
********************
In addition, the additional “PIIGS” disclosure we will include in future filings is as follows:
FOREIGN LOANS At June 30, 2011, foreign loans represented approximately 5% of our total consolidated loans outstanding and approximately 3% of our total assets. The United Kingdom was the only individual foreign country with cross-border outstandings, defined to include loans, acceptances, interest-bearing deposits with other banks, other interest bearing investments and any other monetary assets that exceeded 0.75% of our consolidated assets at June 30, 2011. The United Kingdom cross-border outstandings amounted to approximately $9.5 billion, or 0.75% of our consolidated assets, and included $1.7 billion of sovereign claims. Recently, there has been increased focus on the exposure of U.S. banks to Greece, Ireland, Italy, Portugal and Spain, which have experienced credit deterioration due to economic weakness and their respective fiscal situations. At June 30, 2011, our gross outside exposure to these five countries, including cross-border claims on an ultimate risk basis, and foreign exchange and derivative products, aggregated approximately $3.2 billion. Of this amount, we held approximately $100 million in sovereign claims, substantially all for Ireland, and no sovereign claims for Greece, Portugal and Spain. We did not have any sovereign credit default swaps that we have written or received associated with Greece, Ireland, Italy, Portugal and Spain.
Our foreign country risk monitoring process incorporates frequent dialogue with our foreign financial institution customers, counterparties and regulatory agencies, enhanced by centralized monitoring of macroeconomic and capital markets conditions. We establish exposure limits for each country via a centralized oversight process based on the needs of our customers, and in consideration of relevant economic, political, social, legal, and transfer risks. We monitor exposures closely and adjust our limits in response to changing conditions.
Stephanie L. Hunsaker
August 3, 2011
Page 5
The Company acknowledges that:
•
the Company is responsible for the adequacy and accuracy of the disclosure in the filing;
•
Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filing; and
•
the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Questions concerning the information set forth in this letter may be directed to me at (415) 222-3119.
Very truly yours,
/s/ RICHARD D. LEVY
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Richard D. Levy
Executive Vice President & Controller
MAC AO163-039
343, Sansome Street. 3rd Floor
San Francisco, CA 94104
415 222-3119
415 975-6871 Fax
richard.d.levy@wellsfargo.com
August 3, 2011
VIA EDGAR AND ELECTRONIC MAIL
Stephanie L. Hunsaker
Senior Assistant Chief Accountant
Division of Corporation Finance
Securities and Exchange Commission
Mail Stop 4720
Washington, D.C. 20549
Re:
Wells Fargo & Company
Form 10-K for Fiscal Year Ended December 31, 2010
Filed February 25, 2011
File No. 001-02979
Dear Ms. Hunsaker:
In response to follow-up discussions we’ve conducted with you concerning comments by the staff
(“Staff”) of the Securities and Exchange Commission (“Commission”) contained in the Staff’s letter
dated July 13, 2011, to Wells Fargo & Company (“Wells Fargo,” “Company,” “we,” or “our”), we submit
the following information. The Staff’s comments, indicated in bold, are followed by Wells Fargo’s
responses, with underlined text and strikethrough denoting updates to previously submitted proposed
changes to our current disclosures.
Form 10-K for Fiscal Year Ended December 31, 2010
Risk Management — Credit Risk Management, page 54
Table 25: Home Equity Portfolios, page 63
1.
We note your response to prior comment one from our letter dated June 9, 2011
that your approach is to incorporate the default rates for junior liens behind
delinquent first liens into your delinquency roll rate models. However, we note that in
cases where you hold the junior lien behind a third party senior lien (which is 41% of
the time for this loan category) you are not aware of whether the senior lien is
delinquent or not, so please expand your disclosure in future filings to discuss how
your modeling captures this risk, particularly since the delinquency and loss
statistics are more severe in situations where you also do not own or service the
senior lien. Additionally, we note
Stephanie L. Hunsaker
August 3, 2011
Page 2
your response to prior comment five from our letter dated May 11, 2011 that you have an indication
of whether the senior lien is in default from reviewing credit bureau data which is not specific to
which mortgage the borrower may have that is delinquent, but it is unclear how this is considered
in your analysis, so please also address this in your future filings.
Wells Fargo response:
We will revise future filings as follows:
We continuously monitor the credit performance of our junior lien mortgage portfolio for
trends and factors that influence the frequency and severity of loss. We have observed that
the severity of loss for junior lien mortgages is high and generally not affected by whether
we or a third party own or service the related first mortgage, but that the frequency of
loss is lower when we own or service the first mortgage. Although we have observed that
delinquency and default rates are lower when we own or service the related first mortgage,
we have limited information available to identify which of our junior liens are behind
delinquent third party originated or serviced first mortgages. To capture this loss content,
we refined our allowance process during second quarter 2011
utilizing the experience of our junior lien mortgages behind delinquent first liens
that are owned or serviced by us adjusted for observed higher delinquency rates
associated with junior lien mortgages behind third party first mortgages. We then
incorporated this expected loss content into our allowance for loan losses,
which added $210 million to our allowance.
2.
We note your response to prior comment two from our letter dated June 9, 2011
that in substantially all cases, your junior lien positions modified under 2MP were
performing at the time of the modification. As part of your proposed disclosure
addressing the items discussed in comment one, please also discuss whether
modifications under 2MP or other modification programs involving your junior liens
typically result in significant additional allowances being recorded at the time of
modification as prior to that point the loan would appear to be performing.
Wells Fargo response:
While our junior liens are typically performing at the time of their modification, the related
first liens have generally shown some level of delinquency prior to our consideration of a
modification. As noted in our response to comment one above, we have incorporated the performance
of a junior lien behind a delinquent first lien into our loss forecasting calculations. In
addition, our allowance considers the impact of modifications, including those that are probable to
occur, by incorporating the associated credit cost, including re-defaults of modified loans and
projected loss severity. Accordingly, the loss content associated with existing and probable
modifications has been considered in our allowance methodology and substantial incremental
allowances are not expected at the time of modification.
Stephanie L. Hunsaker
August 3, 2011
Page 3
We will revise future filings as follows:
Page 72
Risk Management — Credit Risk Management — Allowance for Credit Losses
In determining the appropriate allowance attributable to our residential mortgage
portfolio, we incorporate the default rates and high severity of loss for junior lien
mortgages behind delinquent first lien mortgages into our loss forecasting calculations. In
addition,the loss rates we use in determining our
allowance analysis include
the impact of our established loan modification programs. When modifications occur or are
probable to occur, our allowance considers the impact of these modifications, taking into
consideration the associated credit cost, including re-defaults of modified loans and
projected loss severity. Accordingly, the The loss content associated with the
effects of existing and probable loan modifications and junior lien mortgages behind
delinquent first lien mortgages has been captured in our allowance methodology.
********************
PAGE 58
Risk Management — Credit Risk Management — Real Estate 1-4 Family Mortgage
Loans
We continue to modify real estate 1 — 4 family mortgage loans to assist homeowners
and other borrowers in the current difficult economic cycle. Loans are underwritten at the
time of the modification in accordance with underwriting guidelines established for
governmental and proprietary loan modification programs. As a participant in the U.S.
Treasury’s Making Home Affordable (MHA) programs, we are focused on helping the customers
stay in their homes. The MHA programs create a standardization of modification terms
including incentives paid to borrowers, servicers, and investors. MHA includes the Home
Affordable Modification Program (HAMP) for first lien loans and the Second Lien Modification
Program (2MP) for junior lien loans. Under both our proprietary programs and the MHA
programs, we may provide concessions such as interest rate reductions, forbearance of
principal, and in some cases, principal forgiveness. These programs generally include trial
periods of three months, and after successful completion and compliance with terms during
this period, the loan is considered to be modified. See the “Allowance for Credit Losses”
section for discussion on how we determine the allowance attributable to our modified
residential real estate portfolios.
Stephanie L. Hunsaker
August 3, 2011
Page 4
********************
In addition, the additional “PIIGS” disclosure we will include in future filings is as
follows:
FOREIGN LOANS At June 30, 2011, foreign loans represented approximately 5% of our total
consolidated loans outstanding and approximately 3% of our total assets. The United Kingdom
was the only individual foreign country with cross-border outstandings, defined to include
loans, acceptances, interest-bearing deposits with other banks, other interest bearing
investments and any other monetary assets that exceeded 0.75% of our consolidated assets at
June 30, 2011. The United Kingdom cross-border outstandings amounted to approximately $9.5
billion, or 0.75% of our consolidated assets, and included $1.7 billion of sovereign claims.
Recently, there has been increased focus on the exposure of U.S. banks to Greece, Ireland,
Italy, Portugal and Spain, which have experienced credit deterioration due to economic
weakness and their respective fiscal situations. At June 30, 2011, our gross outside
exposure to these five countries, including cross-border claims on an ultimate risk basis,
and foreign exchange and derivative products, aggregated approximately $3.2 billion. Of this
amount, we held approximately $100 million in sovereign claims, substantially all for
Ireland, and no sovereign claims for Greece, Portugal and Spain. We did not have any
sovereign credit default swaps that we have written or received associated with Greece,
Ireland, Italy, Portugal and Spain.
Our foreign country risk monitoring process incorporates frequent dialogue with our
foreign financial institution customers, counterparties and regulatory agencies, enhanced by
centralized monitoring of macroeconomic and capital markets conditions. We establish
exposure limits for each country via a centralized oversight process based on the needs of
our customers, and in consideration of relevant economic, political, social, legal, and
transfer risks. We monitor exposures closely and adjust our limits in response to changing
conditions.
Stephanie L. Hunsaker
August 3, 2011
Page 5
The Company acknowledges that:
•
the Company is responsible for the adequacy and accuracy of the disclosure in the
filing;
•
Staff comments or changes to disclosure in response to Staff comments do not foreclose
the Commission from taking any action with respect to the filing; and
•
the Company may not assert Staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the United States.
Questions concerning the information set forth in this letter may be directed to me at (415)
222-3119.
Very truly yours,
/s/ RICHARD D. LEVY
Richard D. Levy
Executive Vice President and Controller
(Principal Accounting Officer)
cc:
John G. Stumpf, Chairman, President and Chief Executive Officer
Timothy J. Sloan, Senior Executive Vice President and Chief Financial Officer