8-KOther Events

WELLS FARGO & COMPANY/MN 8-K Report, Corporate Update (Nov 27, 2007)

Filed November 27, 2007For Securities:WFCWFC-PDWFC-PCWFC-PYWFC-PAWFC-PLWFCNPWFC-PZ

Summary

Wells Fargo & Company (WFC) announced on November 27, 2007, a significant adjustment to its credit loss provisioning and lending practices, particularly within its home equity loan portfolio. The company will record a special pre-tax provision of $1.4 billion for the fourth quarter of 2007. This provision is largely attributed to higher anticipated losses from certain indirect lending channels, specifically wholesale and correspondent relationships, which the company is ceasing or restricting. These channels, particularly those with higher loan-to-value ratios or where the second mortgage is not behind a Wells Fargo first mortgage, are being moved to a special liquidating portfolio, which constituted about 3% of total loans outstanding at September 30, 2007. In addition to the provision for credit losses, Wells Fargo also addressed the accounting impact of the Visa restructuring. The company will record litigation liabilities totaling $265 million ($95 million for Q2 2006 and $170 million for Q3 2007) related to indemnification obligations under judgment sharing agreements. While these amounts reduce previously reported diluted earnings per share, management considers them immaterial to the affected periods. The company expects its Q4 2007 provision to adequately cover all inherent losses across its portfolios, including those in the newly designated liquidating portfolio.

Key Highlights

  • 1Wells Fargo is establishing a special fourth quarter 2007 provision for credit losses of $1.4 billion (pre-tax).
  • 2The provision is primarily to address anticipated higher losses in certain indirect home equity lending channels (wholesale and correspondent).
  • 3The company is significantly tightening home equity lending standards by ceasing new originations/acquisitions through specific indirect channels.
  • 4A $11.9 billion portfolio of higher-risk home equity loans (3% of total loans) will be placed into a special liquidating portfolio.
  • 5These loans in the liquidating portfolio are concentrated in recent vintages, with high loan-to-value ratios and are exposed to markets with steep housing price declines.
  • 6Wells Fargo will record $265 million in litigation liabilities related to Visa restructuring transactions (for Q2 2006 and Q3 2007).
  • 7The company expects the Q4 2007 provision to cover all losses inherent in its portfolios.

Frequently Asked Questions

Wells Fargo is taking a special provision of $1.4 billion (pre-tax) for the fourth quarter of 2007 primarily due to higher-than-expected losses anticipated from certain indirect home equity lending channels. These channels, which include wholesale and correspondent relationships, are being restricted or ceased due to worsening market conditions and higher risk profiles.

The 'liquidating portfolio' consists of $11.9 billion of home equity loans that are deemed higher risk. These include loans originated through wholesale channels with a combined loan-to-value ratio of 90% or higher, or where the second mortgage is not behind a Wells Fargo first mortgage, as well as all home equity loans acquired through the correspondent channel. This portfolio represents about 3% of Wells Fargo's total loans outstanding as of September 30, 2007.

Wells Fargo will record litigation liabilities totaling $265 million ($95 million for Q2 2006 and $170 million for Q3 2007) related to indemnification obligations from the Visa restructuring. These amounts will reduce previously reported diluted earnings per share for those periods by $0.02 and $0.04, respectively, although management deems them immaterial to the affected periods.

The primary risks are further deterioration in the housing market and the credit quality of these loans, driven by factors such as higher interest rates, increased unemployment, or a decline in home values. These loans are concentrated in areas experiencing the steepest housing price declines and have higher combined loan-to-value ratios, making them more vulnerable to market downturns.