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 June 30, 2014

 

Commission file number 001-2979

 

WELLS FARGO & COMPANY

(Exact name of registrant as specified in its charter)

 

                                                  Delaware                                                                                     No. 41-0449260

                                        (State of incorporation)                                                         (I.R.S. Employer Identification No.)

 

420 Montgomery Street, San Francisco, California 94163

(Address of principal executive offices)  (Zip Code)

 

Registrant’s 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 ¨ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes þ              No ¨ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

        Large accelerated filer          þ                                                                                          Accelerated filer  ¨ 

        Non‑accelerated filer            ¨  (Do not check if a smaller reporting company)               Smaller reporting company  ¨ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨              No þ 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

                                                                                                                                                          Shares Outstanding

                                                                                                                                                             July 31, 2014

Common stock, $1-2/3 par value                                                                                         5,220,407,047               

 

 


 

 

 

FORM 10-Q

CROSS-REFERENCE INDEX

  

  

  

  

  

PART I

Financial Information

  

Item 1.

Financial Statements

Page

  

Consolidated Statement of Income .....................................................................................................................................................  

71

  

Consolidated Statement of Comprehensive Income ..................................................................................................................................  

72

  

Consolidated Balance Sheet .............................................................................................................................................................  

73

  

Consolidated Statement of Changes in Equity ........................................................................................................................................  

74

  

Consolidated Statement of Cash Flows ................................................................................................................................................  

76

  

Notes to Financial Statements

  

  

1

-

Summary of Significant Accounting Policies .....................................................................................................................................  

77

  

2

-

Business Combinations ..............................................................................................................................................................  

79

  

3

-

Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments ...............................................................  

79

  

4

-

Investment Securities ................................................................................................................................................................  

80

  

5

-

Loans and Allowance for Credit Losses ...........................................................................................................................................  

88

  

6

-

Other Assets ..........................................................................................................................................................................  

106

  

7

-

Securitizations and Variable Interest Entities ......................................................................................................................................  

107

  

8

-

Mortgage Banking Activities .......................................................................................................................................................  

115

  

9

-

Intangible Assets .....................................................................................................................................................................  

118

  

10

-

Guarantees, Pledged Assets and Collateral ........................................................................................................................................  

119

  

11

-

Legal Actions .........................................................................................................................................................................  

122

  

12

-

Derivatives ............................................................................................................................................................................  

123

  

13

-

Fair Values of Assets and Liabilities ...............................................................................................................................................  

130

  

14

-

Preferred Stock .......................................................................................................................................................................  

151

  

15

-

Employee Benefits ...................................................................................................................................................................  

153

  

16

-

Earnings Per Common Share .......................................................................................................................................................  

154

  

17

-

Other Comprehensive Income ......................................................................................................................................................  

155

  

18

-

Operating Segments ..................................................................................................................................................................  

157

  

19

-

Regulatory and Agency Capital Requirements ....................................................................................................................................  

158

  

  

  

  

  

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)

  

  

Summary Financial Data ................................................................................................................................................................  

2

  

Overview ..................................................................................................................................................................................  

3

  

Earnings Performance ...................................................................................................................................................................  

5

  

Balance Sheet Analysis ..................................................................................................................................................................  

13

  

Off-Balance Sheet Arrangements ......................................................................................................................................................  

17

  

Risk Management ........................................................................................................................................................................  

18

  

Capital Management .....................................................................................................................................................................  

59

  

Regulatory Reform .......................................................................................................................................................................  

65

  

Critical Accounting Policies .............................................................................................................................................................  

66

  

Current Accounting Developments ....................................................................................................................................................  

67

  

Forward-Looking Statements ...........................................................................................................................................................  

68

  

Risk Factors ...............................................................................................................................................................................  

69

  

Glossary of Acronyms ..................................................................................................................................................................  

159

  

  

  

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk ......................................................................................................................  

44

  

  

  

  

  

Item 4.

Controls and Procedures ................................................................................................................................................................  

70

  

  

  

  

  

PART II

Other Information

  

Item 1.

Legal Proceedings ........................................................................................................................................................................  

160

  

  

  

  

  

Item 1A.

Risk Factors ...............................................................................................................................................................................  

160

  

  

  

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds ......................................................................................................................  

160

  

  

  

  

  

Item 6.

Exhibits ....................................................................................................................................................................................  

161

  

  

  

  

  

Signature .........................................................................................................................................................................................  

161

  

  

  

  

  

Exhibit Index ....................................................................................................................................................................................  

162

1

 


 

 

 

 

PART I - FINANCIAL INFORMATION

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

FINANCIAL REVIEW

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Summary Financial Data

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

% Change

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended

  

June 30, 2014 from

  

Six months ended

  

  

  

  

  

  

  

  

  

June 30,

  

March 31,

  

June 30,

  

March 31,

  

June 30,

  

June 30,

  

June 30,

%

  

($ in millions, except per share amounts)

  

 2014 

  

 2014 

  

 2013 

  

 2014 

  

 2013 

  

 2014 

  

 2013 

Change

  

For the Period

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo net income

$

 5,726 

  

 5,893 

  

 5,519 

  

 (3) 

%

 4 

  

 11,619 

  

 10,690 

 9 

%

Wells Fargo net income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

applicable to common stock

  

 5,424 

  

 5,607 

  

 5,272 

  

 (3) 

  

 3 

  

 11,031 

  

 10,203 

 8 

  

Diluted earnings per common share

  

 1.01 

  

 1.05 

  

 0.98 

  

 (4) 

  

 3 

  

 2.06 

  

 1.90 

 8 

  

Profitability ratios (annualized):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo net income to

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

average assets (ROA) (1)

  

 1.47 

%

 1.57 

  

 1.55 

  

 (6) 

  

 (5) 

  

 1.52 

  

 1.52 

 - 

  

  

Wells Fargo net income applicable

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

to common stock to average

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo common

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

stockholders' equity (ROE)

  

 13.40 

  

 14.35 

  

 14.02 

  

 (7) 

  

 (4) 

  

 13.86 

  

 13.81 

 - 

  

Efficiency ratio (2)

  

 57.9 

  

 57.9 

  

 57.3 

  

 - 

  

 1 

  

 57.9 

  

 57.8 

 - 

  

Total revenue

$

 21,066 

  

 20,625 

  

 21,378 

  

 2 

  

 (1) 

  

 41,691 

  

 42,637 

 (2) 

  

Pre-tax pre-provision profit (PTPP) (3)

  

 8,872 

  

 8,677 

  

 9,123 

  

 2 

  

 (3) 

  

 17,549 

  

 17,982 

 (2) 

  

Dividends declared per common share

  

 0.35 

  

 0.30 

  

 0.30 

  

 17 

  

 17 

  

 0.65 

  

 0.55 

 18 

  

Average common shares outstanding

  

 5,268.4 

  

 5,262.8 

  

 5,304.7 

  

 - 

  

 (1) 

  

 5,265.6 

  

 5,291.9 

 - 

  

Diluted average common shares outstanding

  

 5,350.8 

  

 5,353.3 

  

 5,384.6 

  

 - 

  

 (1) 

  

 5,353.2 

  

 5,369.9 

 - 

  

Average loans (1)

$

 831,043 

  

 823,790 

  

 798,386 

  

 1 

  

 4 

  

 827,436 

  

 797,528 

 4 

  

Average assets (1)

  

 1,564,003 

  

 1,525,905 

  

 1,427,150 

  

 2 

  

 10 

  

 1,545,060 

  

 1,415,105 

 9 

  

Average core deposits (4)

  

 991,727 

  

 973,801 

  

 936,090 

  

 2 

  

 6 

  

 982,814 

  

 931,006 

 6 

  

Average retail core deposits (5)

  

 698,763 

  

 690,643 

  

 666,043 

  

 1 

  

 5 

  

 694,726 

  

 664,487 

 5 

  

Net interest margin (1)

  

 3.15 

%

 3.20 

  

 3.47 

  

 (2) 

  

 (9) 

  

 3.17 

  

 3.48 

 (9) 

  

At Period End

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Investment securities

$

 279,069 

  

 270,327 

  

 249,439 

  

 3 

  

 12 

  

 279,069 

  

 249,439 

 12 

  

Loans (1)

  

 828,942 

  

 826,443 

  

 799,867 

  

 - 

  

 4 

  

 828,942 

  

 799,867 

 4 

  

Allowance for loan losses

  

 13,101 

  

 13,695 

  

 16,144 

  

 (4) 

  

 (19) 

  

 13,101 

  

 16,144 

 (19) 

  

Goodwill

  

 25,705 

  

 25,637 

  

 25,637 

  

 - 

  

 - 

  

 25,705 

  

 25,637 

 - 

  

Assets (1)

  

 1,598,874 

  

 1,546,707 

  

 1,438,456 

  

 3 

  

 11 

  

 1,598,874 

  

 1,438,456 

 11 

  

Core deposits (4)

  

 1,007,485 

  

 994,185 

  

 941,158 

  

 1 

  

 7 

  

 1,007,485 

  

 941,158 

 7 

  

Wells Fargo stockholders' equity

  

 180,859 

  

 175,654 

  

 162,421 

  

 3 

  

 11 

  

 180,859 

  

 162,421 

 11 

  

Total equity

  

 181,549 

  

 176,469 

  

 163,777 

  

 3 

  

 11 

  

 181,549 

  

 163,777 

 11 

  

Tier 1 capital (6)

  

 151,679 

  

 147,549 

  

 132,969 

  

 3 

  

 14 

  

 151,679 

  

 132,969 

 14 

  

Total capital (6)

  

 189,480 

  

 183,559 

  

 164,998 

  

 3 

  

 15 

  

 189,480 

  

 164,998 

 15 

  

Capital ratios:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total equity to assets (1)

  

 11.35 

%

 11.41 

  

 11.39 

  

 - 

  

 - 

  

 11.35 

  

 11.39 

 - 

  

  

Risk-based capital (6):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Tier 1 capital

  

 12.72 

  

 12.63 

  

 12.12 

  

 1 

  

 5 

  

 12.72 

  

 12.12 

 5 

  

  

  

Total capital

  

 15.89 

  

 15.71 

  

 15.03 

  

 1 

  

 6 

  

 15.89 

  

 15.03 

 6 

  

  

Tier 1 leverage (6)

  

 9.86 

  

 9.84 

  

 9.63 

  

 - 

  

 2 

  

 9.86 

  

 9.63 

 2 

  

  

Common Equity Tier 1 (7)

  

 11.31 

  

 11.36 

  

 10.71 

  

 - 

  

 6 

  

 11.31 

  

 10.71 

 6 

  

Common shares outstanding

  

 5,249.9 

  

 5,265.7 

  

 5,302.2 

  

 - 

  

 (1) 

  

 5,249.9 

  

 5,302.2 

 (1) 

  

Book value per common share

$

 31.18 

  

 30.48 

  

 28.26 

  

 2 

  

 10 

  

 31.18 

  

 28.26 

 10 

  

Common stock price:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

High

  

  

 53.05 

  

 49.97 

  

 41.74 

  

 6 

  

 27 

  

 53.05 

  

 41.74 

 27 

  

  

Low

  

  

 46.72 

  

 44.17 

  

 36.19 

  

 6 

  

 29 

  

 44.17 

  

 34.43 

 28 

  

  

Period end

  

  

 52.56 

  

 49.74 

  

 41.27 

  

 6 

  

 27 

  

 52.56 

  

 41.27 

 27 

  

Team members (active, full-time equivalent)

  

 263,500 

  

 265,300 

  

 274,300 

  

 (1) 

  

 (4) 

  

 263,500 

  

 274,300 

 (4) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Financial information for certain periods prior to 2014 was revised to reflect our determination that certain factoring arrangements did not qualify as loans. Accordingly, we revised our commercial loan balances for year-end 2012 and each of the quarters in 2013 in order to present the Company’s lending trends on a comparable basis over this period. This revision, which resulted in a reduction to total commercial loans and a corresponding decrease to other liabilities, did not impact the Company’s consolidated net income or total cash flows. We reduced our commercial loans by $3.5 billion, $3.2 billion, $2.1 billion, $1.6 billion and $1.2 billion at December 31, September 30, June 30, and March 31, 2013, and December 31, 2012, respectively, which represented less than 1% of total commercial loans and less than 0.5% of our total loan portfolio. Other affected financial information, including financial guarantees and financial ratios, has been appropriately revised to reflect this revision. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.

  

(2)

The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).

  

  

(3)

Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company's ability to generate capital to cover credit losses through a credit cycle.

  

(4)

Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).

  

(5)

Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.

  

  

(6)

See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.

  

  

(7)

See the “Capital Management” section in this Report for additional information.

  

  

2

 


 

 

This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” section, and the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K).

 

When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia). See the Glossary of Acronyms for terms used throughout this Report.

 

Financial Review [1] 

 

Overview

Wells Fargo & Company is a nationwide, diversified, community-based financial services company with $1.6 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, insurance, investments, mortgage, and consumer and commercial finance through more than 9,000 locations, 12,500 ATMs and the internet (wellsfargo.com), and we have offices in 36 countries to support customers who conduct business in the global economy. With approximately 265,000 active, full-time equivalent team members, we serve one in three households in the United States and rank No. 29 on Fortune’s  2014 rankings of America’s largest corporations. We ranked fourth in assets and first in the market value of our common stock among all U.S. banks at June 30, 2014.  

We use our Vision and Values to guide us toward growth and success. Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Important to our strategy to achieve this vision is to increase the number of our products our customers utilize and to offer them all of the financial products that fulfill their financial needs. Our cross-sell strategy, diversified business model and the breadth of our geographic reach facilitate growth in both strong and weak economic cycles. We can grow by expanding the number of products our current customers have with us, gain new customers in our extended markets, and increase market share in many businesses.

We have six primary values, which are based on our vision and provide the foundation for everything we do. First, we value and support our people as a competitive advantage and strive to attract, develop, retain and motivate the most talented people we can find. Second, we strive for the highest ethical standards with our team members, our customers, our communities and our shareholders. Third, with respect to our customers, we strive to base our decisions and actions on what is right for them in everything we do. Fourth, for team members we strive to build and sustain a diverse and inclusive culture – one where they feel valued and respected for who they are as well as for the skills and experiences they bring to our company. Fifth, we also look to each of our team members to be leaders in establishing, sharing and communicating our vision. Sixth, we strive to make risk management a competitive advantage by working hard to ensure that appropriate controls are in place to reduce risks to our customers, maintain and increase our competitive market position, and protect Wells Fargo’s long-term safety, soundness and reputation.

 

Financial Performance

Wells Fargo net income was $5.7 billion in second quarter 2014 with diluted earnings per share (EPS) of $1.01 as we continued our focus on creating long-term shareholder value through meeting our customers’ financial needs including growing loans and deposits. Our results demonstrated our ability to consistently achieve strong financial performance across a variety of economic and interest-rate environments and the benefit of our diversified business model. Compared with a year ago:

·          our loans increased $29.1 billion, or 4%,  even with the planned runoff in our non-strategic/liquidating portfolios and a $9.7 billion transfer of government guaranteed student loans at the end of the quarter to loans held for sale, and our core loan portfolio grew by $51.3 billion, or 7%; 

·          our deposit franchise continued to generate solid deposit growth, with total deposits up $97.0 billion, or 9%;

·          our credit performance continued to improve with total net charge-offs down $435 million, or 38%, and represented only 35 basis points (annualized) of average loans;

·          noninterest expense was $12.2 billion, down $61 million, while we continued to invest in our businesses including strengthening our risk management infrastructure; and

·          we continued to deepen our solid customer relationships across our company, with Retail Banking cross-sell of 6.17 products per household (May 2014); Wholesale Banking cross-sell of 7.2 products (March 2014); and Wealth, Brokerage and Retirement cross-sell of 10.44 products (May 2014).

 

Balance Sheet and Liquidity

Our balance sheet continued to strengthen in second quarter 2014 with further core loan and deposit growth. We have been able to grow our loans on a year-over-year basis for 12 consecutive quarters (for the past nine quarters year-over-year loan growth has been 3% or greater) despite the planned runoff from our non-strategic/liquidating portfolios. Our non-strategic/liquidating loan portfolios decreased $12.7 billion during the quarter and our core loan portfolio increased $15.1   billion. O ur investment securities increased by $8.7   billion during the quarter, which reflected our purchases of U.S. Treasuries and federal agency debt.

Deposit growth remained strong with period-end deposits up $39.4   billion, or 4%, from December 31, 2013. This increase reflected solid growth across both our commercial and consumer businesses. Average deposits have grown while deposit costs have declined for 15  


[1] Financial information for certain periods prior to 2014 was revised to reflect our determination that certain factoring arrangements did not qualify as loans. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.

3

 


 

    

consecutive quarters. We grew our primary consumer checking customers by a net 4.6% from a year ago (May 2014 compared with May 2013) . Our ability to grow primary customers is important to our results because these customers have more interactions with us, have higher cross-sell and are more than twice as profitable as non-primary customers.

 

Credit Quality

Credit quality continued to improve in second quarter 2014 as losses remained at historically low levels, nonperforming assets (NPAs) continued to decrease and we continued to originate high quality loans, reflecting our long-term risk focus and the benefit from the improved housing market. Net charge-offs were $717   million, or 0.35% (annualized) of average loans, in second quarter 2014, compared with $1.2 billion a year ago (0.58%), a 38% year-over-year decrease in losses. Net losses in our commercial portfolio were only $31 million, or 3 basis points of average commercial loans. Net consumer losses declined to 62 basis points from 101 basis points in second quarter 2013. Our commercial real estate portfolios were in a net recovery position for the sixth consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Losses on our consumer real estate portfolios declined $390 million from a year ago, down 57%. The consumer loss levels reflected the positive momentum in the residential real estate market, with home values improving significantly in many markets, as well as lower default frequency.

Reflecting these improvements in our loan portfolios, our $217 million provision for credit losses this quarter was $435   million less than a year ago. This provision reflected a release of $500   million from the allowance for credit losses, which was equal to the release a year ago. We continue to expect future allowance releases absent a significant deterioration in the economy, but expect a lower level of future releases as the rate of credit improvement slows and the loan portfolio continues to grow.

In addition to lower net charge-offs and provision expense, NPAs also improved and were down $686 million, or 4%, from March 31, 2014, the seventh consecutive quarter of decline. Nonaccrual loans declined $678 million from the prior quarter while foreclosed assets were down $8 million.

 

Capital

We continued to maintain strong capital ratios while returning more capital to shareholders, increasing total equity to $181.5 billion at June 30, 2014, up $5.1 billion from the prior quarter. In second quarter 2014, we increased our common stock dividend by 17% to $0.35 per share and continued to reduce our common share count through the repurchase of 39.4 million common shares and the execution of a $1 billion forward repurchase contract that settled in July 2014 for 19.5 million shares. In addition, in July 2014 we entered into a $1.0 billion forward repurchase contract with an unrelated third party that is expected to settle in fourth quarter 2014 for approximately 21 million shares. We expect our share count to continue to decline in 2014 as a result of anticipated net share repurchases. Our net payout ratio (which is the ratio of (i) common stock dividends and share repurchases less issuances, divided by (ii) net income applicable to common stock) in second quarter 2014 was 66%, in line with our recent guidance of 55-75%.

We believe an important measure of our capital strength is the estimated Common Equity Tier 1 ratio under Basel III, using the Advanced Approach, fully phased-in, which increased to 10.14% in second quarter 2014

Our regulatory capital ratios under Basel III (General Approach) remained strong with a total risk-based capital ratio of 15.89%, Tier 1 risk-based capital ratio of 12.72% and Tier 1 leverage ratio of 9.86% at June 30, 2014, compared with 15.71%, 12.63% and 9.84%, respectively, at March 31, 2014. See the “Capital Management” section in this Report for more information regarding our capital, including the calculation of common equity for regulatory purposes.

4

 


 

      

Earnings Performance                                                                                                                                               

Wells Fargo net income for second quarter 2014 was $5.7 billion ($1.01 diluted earnings per common share) compared with $5.5 billion ($0.98) for second quarter 2013 . Net income for the first half of 2014 was $11.6 billion ($2.06) compared with $10.7 billion ($1.90) for the same period a year ago. Our  second quarter 2014  earnings reflected continued execution of our business strategy and growth in many of our businesses. The key drivers of our financial performance in the second quarter and first half of 2014 were balanced net interest and fee income, diversified sources of fee income, a diversified loan portfolio and strong underlying credit performance.  

Revenue, the sum of net interest income and noninterest income, was $21.1 billion in second quarter 2014, compared with $21.4 billion in second quarter 2013. Revenue for the first half of 2014 was $41.7 billion, down 2% from the first half of 2013. The decrease in revenue for the second quarter and first half of 2014 from the same periods a year ago was primarily due to a decline in mortgage banking revenue, partially offset by an increase in deposit service charges, trust and investment fees, and market sensitive revenue (net gains from trading activities, debt securities and equity investments). Noninterest income represented 49% of revenue for the second quarter 2014 and first half of 2014 compared with 50% for the same periods a year ago. The drivers of our fee income can differ depending on the interest rate and economic environment. For example, net gains on mortgage loan origination/sales activities were 7% of our fee income in second quarter 2014, down from 23% in the same period a year ago when the refinance market was strong. Other businesses, such as equity investments, brokerage, and mortgage servicing, contributed more to fee income this quarter, demonstrating the benefit of our diversified business model.

 

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 on deposits, short-term borrowings and long-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 on a taxable-equivalent basis in Table 1 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.

While the Company believes that it has the ability to increase net interest income over time, net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning asset portfolio and the cost of funding those assets. In addition, some sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan prepayment fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income growth has been challenged during the prolonged low interest rate environment as higher yielding loans and securities runoff have been replaced with lower yielding assets. The pace of this repricing has slowed in recent periods.  

Net interest income on a taxable-equivalent basis was $11.0 billion and $21.8 billion in the second quarter and first half of 2014, up from $10.9 billion and $21.6 billion, respectively, for the same periods a year ago. The net interest margin was 3.15% and 3.17% for the second quarter and first half of 2014, down from 3.47% and 3.48% in the same periods a year ago. The  increase in net interest income in the second quarter and first half of 2014 from the same periods a year ago was largely driven by reduced deposit costs and the maturing of higher yielding long-term debt. Growth in earning assets also improved net interest income as it offset the decrease in earning asset yields. The decline in net interest margin in second quarter and first half of 2014,  compared with the same periods a year ago was primarily driven by higher funding balances, including customer-driven deposit growth and actions we have taken in response to increased regulatory liquidity expectations which raised long-term debt and term deposits. This growth in funding increased cash and federal funds sold and other short-term investments which are dilutive to net interest margin although essentially neutral to net interest income.

Average earning assets increased $138.5 billion in the second quarter and $134.7 billion in  the first half of 2014  from the same periods a year ago, as average federal funds sold and other short-term investments increased $93.3 billion in the second quarter and $92.8 billion in the first half of 2014 from the same periods a year ago, and average investment securities increased $29.1 billion in the second quarter and $30.4 billion in the first half of 2014 from the same periods a year ago. In addition, an increase in commercial and industrial loans contributed to $32.7 billion and $29.9 billion higher average loans in the second quarter and first half of 2014, respectively, compared with the same periods a year ago.

Core deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $991.7 billion in second quarter 2014 ($982.8 billion in the first half of 2014), compared with $936.1 billion in second quarter 2013 ($931.0 billion in the first half of 2013), and funded 119% of average loans in second quarter 2014 (117% for the first half of 2014), compared with 117% the same period a year ago (117% for the first half of 2013). Average core deposits decreased to 71% of average earning assets in both the second quarter and first half of 2014, compared with 74% in second quarter 2013 and 75% for the first half of 2013. The cost of these deposits has continued to decline due to a sustained low interest rate environment and a shift in our deposit mix from higher cost certificates of deposit to lower yielding checking and savings products. About 96% of our average core deposits are in checking and savings deposits, one of the highest industry percentages.

5

 


 

      

 

Table 1:  Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

 2014 

  

  

  

  

  

 2013 

  

  

  

  

  

  

  

  

  

  

  

  

  

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

$

 229,770 

 0.28 

%

$

 161 

  

 136,484 

 0.33 

%

$

 113 

Trading assets

  

 54,347 

 3.05 

  

  

 414 

  

 46,622 

 2.98 

  

  

 347 

Investment securities (3): 

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 6,580 

 1.78 

  

  

 29 

  

 6,684 

 1.73 

  

  

 29 

  

  

Securities of U.S. states and political subdivisions

  

 42,721 

 4.26 

  

  

 456 

  

 39,267 

 4.42 

  

  

 434 

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Federal agencies

  

 116,475 

 2.85 

  

  

 831 

  

 102,007 

 2.79 

  

  

 711 

  

  

  

Residential and commercial

  

 27,252 

 6.11 

  

  

 416 

  

 31,315 

 6.50 

  

  

 509 

  

  

  

  

Total mortgage-backed securities

  

 143,727 

 3.47 

  

  

 1,247 

  

 133,322 

 3.66 

  

  

 1,220 

  

  

Other debt and equity securities

  

 48,734 

 3.76 

  

  

 457 

  

 55,533 

 3.84 

  

  

 531 

  

  

  

  

  

Total available-for-sale securities

  

 241,762 

 3.62 

  

  

 2,189 

  

 234,806 

 3.77 

  

  

 2,214 

  

Held-to-maturity securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 10,829 

 2.20 

  

  

 59 

  

 - 

 -   

  

  

 - 

  

  

Securities of U.S. states and political subdivisions

  

 8 

 6.00 

  

  

 - 

  

 - 

 -   

  

  

 - 

  

  

Federal agency mortgage-backed securities

  

 6,089 

 2.74 

  

  

 42 

  

 - 

 -   

  

  

 - 

  

  

Other debt securities

  

 5,206 

 1.90 

  

  

 25 

  

 - 

 -   

  

  

 - 

  

  

  

  

  

Total held-to-maturity securities

  

 22,132 

 2.28 

  

  

 126 

  

 - 

 -   

  

  

 - 

  

  

  

  

  

  

Total investment securities

  

 263,894 

 3.51 

  

  

 2,315 

  

 234,806 

 3.77 

  

  

 2,214 

Mortgages held for sale (4)

  

 18,824 

 4.16 

  

  

 195 

  

 43,422 

 3.48 

  

  

 378 

Loans held for sale (4)

  

 157 

 2.55 

  

  

 1 

  

 177 

 7.85 

  

  

 4 

Loans:

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

  

 199,246 

 3.39 

  

  

 1,687 

  

 184,306 

 3.73 

  

  

 1,714 

  

  

Real estate mortgage

  

 107,673 

 3.56 

  

  

 955 

  

 105,261 

 3.92 

  

  

 1,029 

  

  

Real estate construction

  

 17,249 

 4.17 

  

  

 179 

  

 16,458 

 5.02 

  

  

 206 

  

  

Lease financing

  

 11,824 

 5.70 

  

  

 169 

  

 12,338 

 6.66 

  

  

 206 

  

  

Foreign

  

 48,847 

 2.39 

  

  

 290 

  

 42,242 

 2.23 

  

  

 235 

  

  

  

Total commercial

  

 384,839 

 3.42 

  

  

 3,280 

  

 360,605 

 3.77 

  

  

 3,390 

  

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 259,974 

 4.20 

  

  

 2,729 

  

 252,558 

 4.23 

  

  

 2,671 

  

  

Real estate 1-4 family junior lien mortgage

  

 63,273 

 4.31 

  

  

 680 

  

 71,376 

 4.29 

  

  

 764 

  

  

Credit card

  

 26,431 

 11.97 

  

  

 789 

  

 24,023 

 12.55 

  

  

 752 

  

  

Automobile

  

 53,480 

 6.34 

  

  

 845 

  

 47,942 

 7.05 

  

  

 842 

  

  

Other revolving credit and installment

  

 43,046 

 5.07 

  

  

 544 

  

 41,882 

 4.74 

  

  

 495 

  

  

  

Total consumer

  

 446,204 

 5.02 

  

  

 5,587 

  

 437,781 

 5.05 

  

  

 5,524 

  

  

  

  

Total loans (4)

  

 831,043 

 4.28 

  

  

 8,867 

  

 798,386 

 4.47 

  

  

 8,914 

Other

  

 4,535 

 5.74 

  

  

 65 

  

 4,151 

 5.55 

  

  

 57 

  

  

  

  

  

  

Total earning assets

$

 1,402,570 

 3.43 

%

$

 12,018 

  

 1,264,048 

 3.81 

%

$

 12,027 

Funding sources

  

  

  

  

  

  

  

  

  

  

  

  

Deposits:

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest-bearing checking

$

 40,193 

 0.07 

%

$

 7 

  

 40,422 

 0.06 

%

$

 6 

  

Market rate and other savings

  

 583,907 

 0.07 

  

  

 101 

  

 541,843 

 0.08 

  

  

 111 

  

Savings certificates

  

 38,754 

 0.86 

  

  

 82 

  

 52,552 

 1.23 

  

  

 161 

  

Other time deposits

  

 48,512 

 0.41 

  

  

 50 

  

 26,045 

 0.76 

  

  

 50 

  

Deposits in foreign offices

  

 94,232 

 0.15 

  

  

 35 

  

 68,871 

 0.15 

  

  

 25 

  

  

Total interest-bearing deposits

  

 805,598 

 0.14 

  

  

 275 

  

 729,733 

 0.19 

  

  

 353 

Short-term borrowings

  

 58,845 

 0.10 

  

  

 14 

  

 57,812 

 0.14 

  

  

 21 

Long-term debt

  

 159,233 

 1.56 

  

  

 620 

  

 125,496 

 2.02 

  

  

 632 

Other liabilities

  

 13,589 

 2.73 

  

  

 93 

  

 13,315 

 2.25 

  

  

 75 

  

  

Total interest-bearing liabilities

  

 1,037,265 

 0.39 

  

  

 1,002 

  

 926,356 

 0.47 

  

  

 1,081 

Portion of noninterest-bearing funding sources

  

 365,305 

 -   

  

  

 - 

  

 337,692 

 -   

  

  

 - 

  

  

  

  

  

  

Total funding sources

$

 1,402,570 

 0.28 

  

  

 1,002 

  

 1,264,048 

 0.34 

  

  

 1,081 

Net interest margin and net interest income on

  

  

  

  

  

  

  

  

  

  

  

  

  

a taxable-equivalent basis (5)

  

  

 3.15 

%

$

 11,016 

  

  

 3.47 

%

$

 10,946 

Noninterest-earning assets

  

  

  

  

  

  

  

  

  

  

  

  

Cash and due from banks

$

 15,956 

  

  

  

  

  

 16,214 

  

  

  

  

Goodwill

  

 25,699 

  

  

  

  

  

 25,637 

  

  

  

  

Other

  

 119,778 

  

  

  

  

  

 121,251 

  

  

  

  

  

  

  

  

  

  

Total noninterest-earning assets

$

 161,433 

  

  

  

  

  

 163,102 

  

  

  

  

Noninterest-bearing funding sources

  

  

  

  

  

  

  

  

  

  

  

  

Deposits

$

 295,875 

  

  

  

  

  

 280,029 

  

  

  

  

Other liabilities

  

 51,184 

  

  

  

  

  

 56,104 

  

  

  

  

Total equity

  

 179,679 

  

  

  

  

  

 164,661 

  

  

  

  

Noninterest-bearing funding sources used to fund earning assets

  

 (365,305) 

  

  

  

  

  

 (337,692) 

  

  

  

  

  

  

  

  

  

  

Net noninterest-bearing funding sources

$

 161,433 

  

  

  

  

  

 163,102 

  

  

  

  

  

  

  

  

  

  

  

Total assets

$

 1,564,003 

  

  

  

  

  

 1,427,150 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Our average prime rate was 3.25% for the quarters ended June 30, 2014 and 2013, and 3.25% for the first six months of both 2014 and 2013. The average three-month London Interbank Offered Rate (LIBOR) was 0.23% and 0.28% for the quarters and six months ended June 30, 2014 and 2013, respectively.

(2)

Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.

(3)

Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts represent amortized cost for the periods presented.

(4)

Nonaccrual loans and related income are included in their respective loan categories.

(5)

Includes taxable-equivalent adjustments of $225 million and $196 million for the quarters ended June 30, 2014 and 2013, respectively, and $442 million and $373 million for the first six months of 2014 and 2013, respectively, primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.

6

 


 

Earnings Performance   (continued)  

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

 2014 

  

  

  

  

  

 2013 

  

  

  

  

  

  

  

  

  

  

  

  

  

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

$

 221,573 

 0.28 

%

$

 305 

  

 128,797 

 0.35 

%

$

 221 

Trading assets

  

 51,306 

 3.10 

  

  

 795 

  

 44,388 

 3.07 

  

  

 681 

Investment securities (3):

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities: 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 6,576 

 1.73 

  

  

 57 

  

 6,880 

 1.65 

  

  

 56 

  

  

Securities of U.S. states and political subdivisions

  

 42,661 

 4.32 

  

  

 921 

  

 38,430 

 4.40 

  

  

 844 

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Federal agencies

  

 117,055 

 2.90 

  

  

 1,695 

  

 98,705 

 2.77 

  

  

 1,365 

  

  

  

Residential and commercial

  

 27,641 

 6.12 

  

  

 845 

  

 31,726 

 6.48 

  

  

 1,028 

  

  

  

  

Total mortgage-backed securities

  

 144,696 

 3.51 

  

  

 2,540 

  

 130,431 

 3.67 

  

  

 2,393 

  

  

Other debt and equity securities

  

 48,944 

 3.68 

  

  

 895 

  

 54,634 

 3.71 

  

  

 1,008 

  

  

  

  

  

Total available-for-sale securities

  

 242,877 

 3.64 

  

  

 4,413 

  

 230,375 

 3.74 

  

  

 4,301 

  

Held-to-maturity securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 5,993 

 2.20 

  

  

 65 

  

 - 

 -   

  

  

 - 

  

  

Securities of U.S. states and political subdivisions

  

 4 

 5.97 

  

  

 - 

  

 - 

 -   

  

  

 - 

  

  

Federal agency mortgage-backed securities

  

 6,125 

 2.93 

  

  

 90 

  

 - 

 -   

  

  

 - 

  

  

Other debt securities

  

 5,807 

 1.88 

  

  

 54 

  

 - 

 -   

  

  

 - 

  

  

  

  

  

Total held-to-maturity securities

  

 17,929 

 2.34 

  

  

 209 

  

 - 

 -   

  

  

 - 

  

  

  

  

  

  

Total investment securities

  

 260,806 

 3.55 

  

  

 4,622 

  

 230,375 

 3.74 

  

  

 4,301 

Mortgages held for sale (4)

  

 17,696 

 4.13 

  

  

 365 

  

 43,367 

 3.45 

  

  

 749 

Loans held for sale (4)

  

 134 

 4.08 

  

  

 3 

  

 159 

 8.28 

  

  

 7 

Loans:

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

  

 196,570 

 3.41 

  

  

 3,328 

  

 183,715 

 3.74 

  

  

 3,414 

  

  

Real estate mortgage

  

 107,735 

 3.54 

  

  

 1,892 

  

 105,738 

 3.88 

  

  

 2,035 

  

  

Real estate construction

  

 17,065 

 4.27 

  

  

 361 

  

 16,508 

 4.93 

  

  

 404 

  

  

Lease financing

  

 11,879 

 5.92 

  

  

 352 

  

 12,381 

 6.72 

  

  

 416 

  

  

Foreign

  

 48,364 

 2.30 

  

  

 552 

  

 41,069 

 2.20 

  

  

 448 

  

  

  

Total commercial

  

 381,613 

 3.42 

  

  

 6,485 

  

 359,411 

 3.76 

  

  

 6,717 

  

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 259,727 

 4.19 

  

  

 5,434 

  

 252,305 

 4.26 

  

  

 5,374 

  

  

Real estate 1-4 family junior lien mortgage

  

 64,122 

 4.31 

  

  

 1,372 

  

 72,715 

 4.29 

  

  

 1,548 

  

  

Credit card

  

 26,352 

 12.14 

  

  

 1,587 

  

 24,060 

 12.58 

  

  

 1,502 

  

  

Automobile

  

 52,642 

 6.42 

  

  

 1,676 

  

 47,258 

 7.12 

  

  

 1,668 

  

  

Other revolving credit and installment

  

 42,980 

 5.03 

  

  

 1,073 

  

 41,779 

 4.72 

  

  

 977 

  

  

  

Total consumer

  

 445,823 

 5.02 

  

  

 11,142 

  

 438,117 

 5.08 

  

  

 11,069 

  

  

  

  

Total loans (4)

  

 827,436 

 4.28 

  

  

 17,627 

  

 797,528 

 4.48 

  

  

 17,786 

Other

  

 4,595 

 5.73 

  

  

 131 

  

 4,203 

 5.37 

  

  

 112 

  

  

  

  

  

  

Total earning assets

$

 1,383,546 

 3.46 

%

$

 23,848 

  

 1,248,817 

 3.84 

%

$

 23,857 

Funding sources

  

  

  

  

  

  

  

  

  

  

  

  

Deposits:

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest-bearing checking

$

 38,506 

 0.07 

%

$

 13 

  

 36,316 

 0.06 

%

$

 11 

  

Market rate and other savings

  

 581,489 

 0.07 

  

  

 206 

  

 539,708 

 0.09 

  

  

 233 

  

Savings certificates

  

 39,639 

 0.87 

  

  

 171 

  

 53,887 

 1.23 

  

  

 328 

  

Other time deposits

  

 47,174 

 0.42 

  

  

 98 

  

 21,003 

 0.95 

  

  

 99 

  

Deposits in foreign offices

  

 92,650 

 0.14 

  

  

 66 

  

 69,968 

 0.15 

  

  

 51 

  

  

Total interest-bearing deposits

  

 799,458 

 0.14 

  

  

 554 

  

 720,882 

 0.20 

  

  

 722 

Short-term borrowings

  

 56,686 

 0.10 

  

  

 27 

  

 56,618 

 0.16 

  

  

 44 

Long-term debt

  

 156,528 

 1.59 

  

  

 1,239 

  

 126,299 

 2.11 

  

  

 1,329 

Other liabilities

  

 13,226 

 2.72 

  

  

 180 

  

 12,467 

 2.24 

  

  

 140 

  

  

Total interest-bearing liabilities

  

 1,025,898 

 0.39 

  

  

 2,000 

  

 916,266 

 0.49 

  

  

 2,235 

Portion of noninterest-bearing funding sources

  

 357,648 

 -   

  

  

 - 

  

 332,551 

 -   

  

  

 - 

  

  

  

  

  

  

Total funding sources

$

 1,383,546 

 0.29 

  

  

 2,000 

  

 1,248,817 

 0.36 

  

  

 2,235 

Net interest margin and net interest income on

  

  

  

  

  

  

  

  

  

  

  

  

  

a taxable-equivalent basis (5)

  

  

 3.17 

%

$

 21,848 

  

  

 3.48 

%

$

 21,622 

Noninterest-earning assets

  

  

  

  

  

  

  

  

  

  

  

  

Cash and due from banks

$

 16,159 

  

  

  

  

  

 16,372 

  

  

  

  

Goodwill

  

 25,668 

  

  

  

  

  

 25,637 

  

  

  

  

Other

  

 119,687 

  

  

  

  

  

 124,279 

  

  

  

  

  

  

  

  

  

  

Total noninterest-earning assets

$

 161,514 

  

  

  

  

  

 166,288 

  

  

  

  

Noninterest-bearing funding sources

  

  

  

  

  

  

  

  

  

  

  

  

Deposits

$

 290,004 

  

  

  

  

  

 277,141 

  

  

  

  

Other liabilities

  

 52,065 

  

  

  

  

  

 59,148 

  

  

  

  

Total equity

  

 177,093 

  

  

  

  

  

 162,550 

  

  

  

  

Noninterest-bearing funding sources used to fund earning assets

 (357,648) 

  

  

  

  

  

 (332,551) 

  

  

  

  

  

  

  

  

  

  

Net noninterest-bearing funding sources

$

 161,514 

  

  

  

  

  

 166,288 

  

  

  

  

  

  

  

  

  

  

  

Total assets

$

 1,545,060 

  

  

  

  

  

 1,415,105 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

7

 


 

      

 

Noninterest Income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Table 2:  Noninterest Income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

%

  

  

ended June 30,

%

  

(in millions)

  

 2014 

 2013 

Change

  

  

 2014 

 2013 

Change

  

Service charges on deposit accounts

$

 1,283 

 1,248 

 3 

%

$

 2,498 

 2,462 

 1 

%

Trust and investment fees:

  

  

  

  

  

  

  

  

  

  

  

Brokerage advisory, commissions and other fees

  

 2,280 

 2,127 

 7 

  

  

 4,521 

 4,177 

 8 

  

  

Trust and investment management

  

 838 

 829 

 1 

  

  

 1,682 

 1,628 

 3 

  

  

Investment banking

  

 491 

 538 

 (9) 

  

  

 818 

 891 

 (8) 

  

  

  

Total trust and investment fees

  

 3,609 

 3,494 

 3 

  

  

 7,021 

 6,696 

 5 

  

Card fees

  

 847 

 813 

 4 

  

  

 1,631 

 1,551 

 5 

  

Other fees:

  

  

  

  

  

  

  

  

  

  

  

Charges and fees on loans

  

 342 

 387 

 (12) 

  

  

 709 

 771 

 (8) 

  

  

Merchant processing fees

  

 183 

 174 

 5 

  

  

 355 

 328 

 8 

  

  

Cash network fees

  

 128 

 125 

 2 

  

  

 248 

 242 

 2 

  

  

Commercial real estate brokerage commissions

  

 99 

 73 

 36 

  

  

 171 

 118 

 45 

  

  

Letters of credit fees

  

 92 

 102 

 (10) 

  

  

 188 

 211 

 (11) 

  

  

All other fees

  

 244 

 228 

 7 

  

  

 464 

 453 

 2 

  

  

  

Total other fees

  

 1,088 

 1,089 

 - 

  

  

 2,135 

 2,123 

 1 

  

Mortgage banking:

  

  

  

  

  

  

  

  

  

  

  

Servicing income, net

  

 1,035 

 393 

 163 

  

  

 1,973 

 707 

 179 

  

  

Net gains on mortgage loan origination/sales activities

  

 688 

 2,409 

 (71) 

  

  

 1,260 

 4,889 

 (74) 

  

  

  

Total mortgage banking

  

 1,723 

 2,802 

 (39) 

  

  

 3,233 

 5,596 

 (42) 

  

Insurance

  

 453 

 485 

 (7) 

  

  

 885 

 948 

 (7) 

  

Net gains from trading activities

  

 382 

 331 

 15 

  

  

 814 

 901 

 (10) 

  

Net gains (losses) on debt securities

 71 

 (54) 

NM

  

  

 154 

 (9) 

NM

  

Net gains from equity investments

  

 449 

 203 

 121 

  

  

 1,296 

 316 

 310 

  

Lease income

  

 129 

 225 

 (43) 

  

  

 262 

 355 

 (26) 

  

Life insurance investment income

  

 138 

 142 

 (3) 

  

  

 270 

 287 

 (6) 

  

All other

  

 103 

 (150) 

NM

  

  

 86 

 162 

 (47) 

  

  

  

  

  

  

  

Total

$

 10,275 

10,628 

 (3) 

  

$

 20,285 

 21,388 

 (5) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

NM - Not meaningful

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Noninterest income was $10.3 billion and $10.6 billion for second quarter 2014 and 2013, respectively, and $20.3 billion and $21.4 billion for the first half of 2014 and 2013, respectively. This income represented 49% of revenue for both the second quarter and first half of 2014, compared with 50% for the same periods a year ago. The  decrease  in noninterest income in the second quarter and first half of 2014 from the same periods a year ago reflected a decline in mortgage banking origination volume, partially offset by growth in many of our other businesses, including debit card, merchant card processing, small business lending, equipment finance, corporate trust, international, asset management, wealth management, retail brokerage, and retirement . Excluding mortgage banking, noninterest income increased $726 million and $1.3 billion in the second quarter and first half of 2014, respectively, from the same periods a year ago.

Service charges on deposit accounts increased $35 million in second quarter 2014, or 3%, from second quarter 2013, and $36 million in the first half of 2014, or 1%, from the first half of 2013, due to account growth, new product sales and continued customer adoption of overdraft services.

Brokerage advisory, commissions and other fees are received for providing services to full‑service and discount brokerage customers. Income from these brokerage-related activities include asset‑based fees, which are based on the market value of the customer’s assets, and transactional commissions based on the number of transactions executed at the customer’s direction. These fees increased to $2.3 billion  and $4.5 billion  in  the second quarter and first half of 2014, respectively, from $2.1 billion and $4.2 billion for the same periods in 2013. The increase in brokerage income was predominantly due to higher asset-based fees as a result of higher market values and growth in assets under management, partially offset by a decrease in brokerage transaction revenue. Brokerage client assets totaled $1.4 trillion at June 30, 2014, an increase from $1.3 trillion at June 30, 2013.

We earn trust and investment management fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. Trust and investment management fees are largely based on a tiered scale relative to the market value of the assets under management or administration. These fees increased to $838 million and $1.7   billion in the second quarter and first half of 2014, respectively, from $ 829  million and $ 1.6  billion for the same periods in 2013, primarily due to growth in assets under management reflecting higher market values. At June 30, 2014, these assets totaled $2.5 trillion, an increase from $2.3 trillion at June 30, 2013.

We earn investment banking fees from underwriting debt and equity securities, arranging loan syndications, and performing other related advisory services. Investment banking fees decreased to $491  

8

 


 

Earnings Performance   (continued)  

million and $818 million in the second quarter and first half of 2014, respectively, from $538 million and $891 million for the same periods a year ago, primarily due to lower syndication volume.

Card fees were $847 million in second quarter 2014  compared with $813 million in second quarter 2013 and $1.6 billion  in  both the first half of 2014 and 2013. Card fees increased in second quarter 2014, compared with the same period a year ago, primarily due to account growth and increased purchase activity.

Mortgage banking noninterest income, consisting of net servicing income and net gains on loan origination/sales activities, totaled $1.7 billion in second quarter 2014 compared with $2.8 billion in second quarter 2013, and totaled $3.2 billion for the first half of 2014 compared with $5.6 billion for the same period a year ago.  

Net mortgage loan servicing income includes amortization of commercial mortgage servicing rights (MSRs), changes in the fair value of residential MSRs during the period, as well as changes in the value of derivatives (economic hedges) used to hedge the residential MSRs. Net servicing income for second quarter 2014  included a $475 million net MSR valuation gain ($835   million decrease in the fair value of the MSRs offset by a $1.3 billion hedge gain) and for second quarter 2013 included a $68 million net MSR valuation gain ($1.9 billion increase in the fair value of the MSRs offset by a $1.8 billion hedge loss). For the first half of 2014, net servicing income included an $882 million net MSR valuation gain ($1.3 billion decrease in the fair value of the MSRs offset by a $2.2 billion hedge gain) and for the same period of 2013, included a $197 million net MSR valuation gain ($2.6 billion increase in the fair value of MSRs offset by a $2.4 billion hedge loss).   The increase in net MSR valuation gains in the second quarter and first half of 2014, compared with the same periods in 2013, was attributable to higher valuation adjustments, which reduced the value of MSRs in 2013 primarily associated with higher prepayments and increases in servicing and foreclosure costs. Our portfolio of loans serviced for others was $1.88   trillion at June 30, 2014, and $1.90 trillion at December 31, 2013. At June 30, 2014, the ratio of MSRs to related loans serviced for others was 0.80% compared with 0.88% at December 31, 2013. See the “Risk Management – Mortgage Banking Interest Rate and Market Risk” section of this Report for additional information regarding our MSRs risks and hedging approach.

Net gains on mortgage loan origination/sale activities were $688 million   and $1.3 billion  in the second quarter and first half of 2014, respectively, down from $2.4 billion and $4.9 billion for the same periods a year ago. The year-over-year decreases for both periods were driven by lower margins and origination volumes. Mortgage loan originations were $47 billion for second quarter 2014, of which 74% were for home purchases, compared with $112 billion and 44% for the same period a year ago. Mortgage applications were $72   billion and $132 billion in the second quarter and first half of 2014, respectively, compared with $146 billion and $286 billion for the same periods a year ago. The real estate 1-4 family first mortgage unclosed pipeline was $30 billion at June 30, 2014, and $63 billion at June 30, 2013. For additional information about our mortgage banking activities and results, see the “Risk Management – Mortgage Banking Interest Rate and Market Risk” section and Note 8 (Mortgage Banking Activities) and Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.

Net gains on mortgage loan origination/sales activities include adjustments to the mortgage repurchase liability. Mortgage loans are repurchased from third parties based on standard representations and warranties, and early payment default clauses in mortgage sale contracts. For the first half of 2014, we released a net $20 million from the repurchase liability, including $26 million in second quarter 2014, compared with a provision of $374 million for the first half of 2013, including $65 million in second quarter 2013. For additional information about mortgage loan repurchases, see the “Risk Management – Credit Risk Management – Liability for Mortgage Loan Repurchase Losses” section and Note 8 (Mortgage Banking Activities) to Financial Statements in this Report.

We engage in trading activities primarily to accommodate the investment activities of our customers, execute economic hedging to manage certain of our balance sheet risks and for a very limited amount of proprietary trading for our own account. Net gains from trading activities, which reflect unrealized changes in fair value of our trading positions and realized gains and losses, were $382 million and $814 million in the second quarter and  first half of 2014, respectively, while the same periods a year ago were $331 million and $901 million, respectively. The second quarter year-over-year increase was primarily driven by higher deferred compensation gains (offset in employee benefits expense). The first half year-over-year decrease was largely driven by lower trading from customer accommodation activity within our capital markets business. Net gains from trading activities do not include interest and dividend income and expense on trading securities. Those amounts are reported within interest income from trading assets and other interest expense from trading liabilities. Interest and fees related to proprietary trading are reported in their corresponding income statement line items. Proprietary trading activities are not significant to our client-focused business model. For additional information about proprietary and other trading, see the “Risk Management – Asset and Liability Management – Market Risk – Trading Activities” section in this Report.  

Net gains on debt and equity securities totaled $520   million for second quarter 2014 and $149 million for second quarter 2013 ($1.5 billion and $307 million for the first half of 2014 and 2013, respectively), net of other-than-temporary impairment (OTTI) write-downs of $82 million and $111 million for second quarter 2014 and 2013, respectively, and $217 million and $189 million for the first half of 2014 and 2013, respectively. Net gains from equity investments increased over the past year, reflecting our portfolio’s positive operating performance and the benefit of strong public and private equity markets.

All other income was $103 million for second quarter 2014, compared with a $150 million loss in second quarter 2013 and $86 million for the first half of 2014, compared with $162 million for the same period a year ago. All other income includes ineffectiveness recognized on derivatives that qualify for hedge accounting, losses on low income housing tax credit investments, foreign currency adjustments, and income from investments accounted for under the equity accounting method, any of which can cause other income losses. Higher other income for second quarter 2014, compared with 2013, reflected a gain on sale of 40 insurance offices. Lower other income for the first half of 2014, compared with the same period a year ago, reflected lower income from equity method investments.

 

Noninterest Expense

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Table 3:  Noninterest Expense

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months

  

  

  

  

Quarter ended June 30,

%

  

  

ended June 30,

%

  

(in millions)

  

 2014 

 2013 

Change

  

  

 2014 

 2013 

Change

  

Salaries

$

 3,795 

 3,768 

 1 

%

$

 7,523 

 7,431 

 1 

%

Commission and incentive compensation

  

 2,445 

 2,626 

 (7) 

  

  

 4,861 

 5,203 

 (7) 

  

Employee benefits

  

 1,170 

 1,118 

 5 

  

  

 2,542 

 2,701 

 (6) 

  

Equipment

  

 445 

 418 

 6 

  

  

 935 

 946 

 (1) 

  

Net occupancy

  

 722 

 716 

 1 

  

  

 1,464 

 1,435 

 2 

  

Core deposit and other intangibles

  

 349 

 377 

 (7) 

  

  

 690 

 754 

 (8) 

  

FDIC and other deposit assessments

  

 225 

 259 

 (13) 

  

  

 468 

 551 

 (15) 

  

Outside professional services

  

 646 

 607 

 6 

  

  

 1,205 

 1,142 

 6 

  

Outside data processing

  

 259 

 235 

 10 

  

  

 500 

 468 

 7 

  

Contract services

  

 249 

 226 

 10 

  

  

 483 

 433 

 12 

  

Travel and entertainment

  

 243 

 229 

 6 

  

  

 462 

 442 

 5 

  

Operating losses

  

 364 

 288 

 26 

  

  

 523 

 445 

 18 

  

Postage, stationery and supplies

  

 170 

 184 

 (8) 

  

  

 361 

 383 

 (6) 

  

Advertising and promotion

  

 187 

 183 

 2 

  

  

 305 

 288 

 6 

  

Foreclosed assets

  

 130 

 146 

 (11) 

  

  

 262 

 341 

 (23) 

  

Telecommunications

  

 111 

 125 

 (11) 

  

  

 225 

 248 

 (9) 

  

Insurance

  

 140 

 143 

 (2) 

  

  

 265 

 280 

 (5) 

  

Operating leases

  

 54 

 49 

 10 

  

  

 104 

 97 

 7 

  

All other

  

 490 

 558 

 (12) 

  

  

 964 

 1,067 

 (10) 

  

  

Total

$

 12,194 

 12,255 

 - 

  

$

 24,142 

 24,655 

 (2) 

  

  

  

  

  

  

  

  

  

  

  

  

  

9

 


 

      

Noninterest expense was $12.2 billion in second quarter 2014,  down  slightly from $12.3 billion a year ago, driven predominantly by lower personnel expenses ($7.4 billion, down from $7.5 billion a year ago) and lower Federal Deposit Insurance Corporation (FDIC) and other deposit assessments ($225 million, down from $259 million a year ago), partially offset by higher operating losses ($364 million, up from $288 million a year ago). For the first half of 2014, noninterest expense was down 2% from the same period a year ago, predominantly due to lower personnel expenses ($14.9 billion, down from $15.3 billion a year ago), lower FDIC and other deposit assessments ($468 million, down from $551 million a year ago), and lower foreclosed assets expense ($262 million, down from $341 million a year ago), partially offset by higher operating losses ($523 million, up from $445 million a year ago).

Personnel expenses, which include salaries, commissions, incentive compensation and employee benefits, were down $102 million, or 1%, in second quarter 2014 compared with the same quarter last year, predominantly due to lower volume-related compensation and reduced staffing in our mortgage business. These decreases were partially offset by higher deferred compensation (offset in trading income), annual salary increases and increased staffing in some of our non-mortgage businesses. Personnel expenses were down $409 million, or 3%, for the first half of 2014 compared with the same period in 2013, mostly due to lower volume-related compensation in our mortgage business and lower employee benefit costs, partially offset by annual salary increases.

FDIC and other deposit assessments were down 13% and 15% in the second quarter and first half of 2014, respectively, compared with the same periods a year ago, predominantly due to lower FDIC assessment rates related to improved credit performance and the Company’s liquidity position.

Operating losses were up 26% and 18% in the second quarter and first half of 2014, respectively, compared with the same periods a year ago. The increase for both periods was primarily due to litigation accruals.

Foreclosed assets expense was down 11% in second quarter 2014  compared with the same quarter last year and down 23% in the first half of 2014 compared with the same period in 2013, reflecting lower expenses associated with foreclosed properties and lower write-downs, partially offset by lower gains on sale of foreclosed properties.

The Company continued to operate within its targeted efficiency ratio of 55 to 59%, with a ratio of 57.9% in second quarter 2014, compared with 57.3% in second quarter 2013. We expect to operate within our targeted efficiency ratio range of 55 to 59% in third quarter 2014.

10

 


 

Earnings Performance   (continued)  

 

Income Tax Expense

Our effective tax rate was 33.4% and 34.2% for second quarter 2014 and 2013, respectively. Our effective tax rate was 30.7% in the first half of 2014, down from 33.1% in the first half of 2013. The lower effective tax rate in the first half of 2014 reflects a net $423 million discrete tax benefit recognized in first quarter 2014 primarily from a reduction in the reserve for uncertain tax positions due to the resolution of prior period matters with state taxing authorities.


Operating Segment Results

We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. These segments are defined by product type and customer segment and their results are based on our management accounting process, for which there is no comprehensive, authoritative financial accounting guidance equivalent to generally accepted accounting principles (GAAP). Table 4 and the following discussion present our results by operating segment. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 18 (Operating Segments) to Financial Statements in this Report.

 

Table 4:  Operating Segment Results – Highlights

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wealth, Brokerage

  

  

  

Consolidated

(income/expense in millions,

Community Banking

  

Wholesale Banking

  

and Retirement

  

Other (1)

  

Company

average balances in billions)

  

 2014 

 2013 

  

 2014 

 2013 

  

 2014 

 2013 

  

 2014 

 2013 

  

 2014 

 2013 

Quarter ended June 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Revenue

$

 12,606 

 12,942 

  

 5,946 

 6,135 

  

 3,550 

 3,261 

  

 (1,036) 

 (960) 

  

 21,066 

 21,378 

Provision (reversal of provision)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

for credit losses

 279 

 763 

  

 (49) 

 (118) 

  

 (25) 

 19 

  

 12 

 (12) 

  

 217 

 652 

Noninterest expense

  

 7,020 

 7,213 

  

 3,203 

 3,183 

  

 2,695 

 2,542 

  

 (724) 

 (683) 

  

 12,194 

 12,255 

Net income

  

 3,431 

 3,245 

  

 1,952 

 2,004 

  

 544 

 434 

  

 (201) 

 (164) 

  

 5,726 

 5,519 

Average loans

  

 505.4 

 498.2 

  

 308.1 

 285.1 

  

 51.0 

 45.4 

  

 (33.5) 

 (30.3) 

  

 831.0 

 798.4 

Average core deposits

  

 639.8 

 623.0 

  

 265.8 

 230.5 

  

 153.0 

 146.4 

  

 (66.9) 

 (63.8) 

  

 991.7 

 936.1 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

Revenue

$

 25,199 

 25,841 

  

 11,526 

 12,221 

  

 7,018 

 6,458 

  

 (2,052) 

 (1,883) 

  

 41,691 

 42,637 

Provision (reversal of provision)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

for credit losses

 698 

 2,025 

  

 (142) 

 (176) 

  

 (33) 

 33 

  

 19 

 (11) 

  

 542 

 1,871 

Noninterest expense

  

 13,794 

 14,590 

  

 6,418 

 6,274 

  

 5,406 

 5,181 

  

 (1,476) 

 (1,390) 

  

 24,142 

 24,655 

Net income

  

 7,275 

 6,169 

  

 3,694 

 4,049 

  

 1,019 

 771 

  

 (369) 

 (299) 

  

 11,619 

 10,690 

Average loans

  

 505.2 

 498.5 

  

 305.0 

 284.1 

  

 50.5 

 44.6 

  

 (33.3) 

 (29.7) 

  

 827.4 

 797.5 

Average core deposits

 633.2 

 621.1 

  

 262.4 

 227.3 

  

 154.5 

 147.9 

  

 (67.3) 

 (65.3) 

  

 982.8 

 931.0 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Includes corporate items not specific to a business segment and the elimination of certain items that are included in more than one business segment, substantially all of which represents products and services for wealth management customers provided in Community Banking stores.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Community Banking offers a complete line of diversified financial products and services for consumers and small businesses. These products include investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. through its Regional Banking and Wells Fargo Home Lending business units. Cross-sell of our products is an important part of our strategy to achieve our vision to satisfy all our customers’ financial needs. Our retail bank household cross-sell was 6.17 products per household in May 2014, up from 6.14 in May 2013. We believe there is more opportunity for cross-sell as we continue to earn more business from our customers. Our goal is eight products per household, which is approximately one-half of our estimate of potential demand for an average U.S. household. In May 2014, one of every four of our retail banking households had eight or more of our products.

Community Banking had net income of $3.4 billion, up $186 million, or 6%, from second quarter 2013, and $7.3 billion for the first half of 2014, up $1.1 billion, or 18%, compared with the same period a year ago. Revenue of $12.6 billion, decreased $336 million, or 3%, from second quarter 2013, and was $25.2 billion for the first half of 2014, a decrease of $642 million, or 2%, compared with the same period last year. The decrease in revenue was due to lower mortgage banking revenue, partially offset by higher net interest income, and growth in multiple fee income categories including equity gains, card fees, trust and investment fees, and merchant card processing fees. Average core deposits increased $16.8 billion, or 3%, from second quarter 2013 and $12.1 billion, or 2%, from the first half of 2013. Primary consumer checking customers as of May 2014 (customers who actively use their checking account with transactions such as debit card purchases, online bill payments, and direct deposit) were up a net 4.6% from May 2013. Noninterest expense declined 3% from second quarter 2013 and 5% for the first half of 2013, largely driven by lower mortgage volume-related expenses and lower foreclosed assets expense, partially offset by higher operating losses. The provision for credit losses was $484 million lower than second quarter 2013, and $1.3 billion lower than the first half of 2013, due to lower consumer real estate losses.

  

Wholesale Banking provides financial solutions to businesses across the United States and globally with annual sales generally in excess of $20 million. Products and business segments include Middle Market Commercial Banking, Government and Institutional Banking, Corporate Banking, Commercial Real Estate, Treasury Management,

11

 


 

      

Wells Fargo Capital Finance, Insurance, International, Real Estate Capital Markets, Commercial Mortgage Servicing, Corporate Trust, Equipment Finance, Wells Fargo Securities, Principal Investments, Asset Backed Finance, and Asset Management. Wholesale Banking cross-sell was 7.2 products per relationship in second quarter 2014, up from 6.9 a year ago.

Wholesale Banking had net income of $2.0 billion in second quarter 2014, down $52 million, or 3%, from second quarter 2013. In the first half of 2014, net income of $3.7 billion decreased $355 million, or 9%, from the same period a year ago. The lower results for both second quarter and the first half of 2014 were driven by decreased revenues and increased expenses. Revenue declined $189 million, or 3%, from second quarter of 2013 and $695 million, or 6%, from the first half of 2013 on both lower net interest income and noninterest income. Net interest income declined as the income benefit of strong loan and deposit growth was more than offset by lower PCI resolution income. Noninterest income declined on lower market sensitive revenue driven by lower customer accommodation trading partially offset by the gain on the sale of 40 insurance offices and increased asset management fees. Average loans of $308.1 billion in second quarter 2014 increased $23.0 billion, or 8%, from second quarter 2013, driven by broad based growth across most customer segments. Average core deposits of $265.8 billion increased $35.3 billion, or 15%, from second quarter 2013 reflecting continued customer liquidity. Noninterest expense increased 1% from second quarter 2013 and 2% from the first half of 2013, primarily due to higher non-personnel expenses related to growth initiatives and increased compliance and regulatory requirements. The provision for credit losses remained in a net recovery position for the second quarter and first half of 2014 compared with the same periods for 2013, but the amount of reversal decreased $69 million from second quarter 2013 and $34 million from the first half of 2013 driven by lower net credit recoveries and lower allowance release

 


Wealth, Brokerage and Retirement provides a full range of financial advisory services to clients using a planning approach to meet each client's financial needs. Wealth Management provides affluent and high net worth clients with a complete range of wealth management solutions, including financial planning, private banking, credit, investment management and fiduciary services. Abbot Downing, a Wells Fargo business, provides comprehensive wealth management services to ultra-high net worth families and individuals as well as endowments and foundations. Brokerage serves customers' advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the United States. Retirement is a national leader in providing institutional retirement and trust services (including 401(k) and pension plan record keeping) for businesses, retail retirement solutions for individuals, and reinsurance services for the life insurance industry. Wealth, Brokerage and Retirement cross-sell was 10.44 products per household in May 2014, up from 10.35 in May 2013.

Wealth, Brokerage and Retirement reported net income of $544 million in second quarter 2014, up 25% from second quarter 2013. Net income for the first half of 2014 was $1.0 billion, up 32% compared with the same period a year ago. Net income growth was driven by strong revenue and lower credit losses. Revenue increased 9% from both second quarter 2013 and from the first half of 2013, predominantly due to strong growth in asset-based fees and higher net interest income, partially offset by a decrease in brokerage transaction revenue. Average core deposits of $153.0 billion in second quarter 2014 increased 5% from second quarter 2013. Noninterest expense for second quarter 2014 was up 6% from second quarter 2013 and up 4% from the first half of 2013 largely due to increased broker commissions and other expenses. Total provision for credit losses decreased $44 million and $66 million from the second quarter and first half of 2013, respectively, driven primarily by lower net charge-offs.  

12

 


 

      

Balance Sheet Analysis                                                                                                                                               

At June 30, 2014, our assets totaled $1.6 trillion, up $75.4   billion from December 31, 2013. The predominant areas of asset growth were in federal funds sold and other short-term investments, which increased $24.9 billion, investment securities, which increased $14.7 billion, trading assets, which increased $8.9 billion, and loans, which increased $6.7 billion ($16.4 billion excluding the transfer of $9.7 billion of government guaranteed student loans to loans held for sale at June 30, 2014). Deposit growth of $39.4 billion, an increase in long-term debt of $14.9 billion, total equity growth of $10.5 billion and an increase in short-term borrowings of $8.0 billion from December 31, 2013, were the predominant sources that funded our asset growth for the first half of 2014. Equity growth benefited from $7.6   billion in earnings net of dividends paid. The strength of our business model produced solid earnings and continued internal capital generation as reflected in our capital ratios, all of which improved from December 31, 2013. Tier 1 capital as a percentage of total risk-weighted assets increased to 12.72%, total capital increased to 15.89%, Tier 1 leverage increased to 9.86%, and Common Equity Tier 1 (General Approach) increased to 11.31% at June 30, 2014, compared with 12.33%, 15.43%, 9.60%, and 10.82%, respectively, at December 31, 2013.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and changes in our asset mix is included in the “Earnings Performance – Net Interest Income” and “Capital Management” sections and Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.

 

 

Investment Securities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Table 5:  Investment Securities – Summary

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

Net

  

  

  

Net

  

  

  

  

  

  

  

unrealized

Fair

  

  

unrealized

Fair

(in millions)

  

Cost

gain

value

  

Cost

gain (loss)

value

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

Debt securities

$

 238,809 

 7,037 

 245,846 

  

 246,048 

 2,574 

 248,622 

  

Marketable equity securities

  

 1,935 

 1,180 

 3,115 

  

 2,039 

 1,346 

 3,385 

  

  

Total available-for-sale securities

  

 240,744 

 8,217 

 248,961 

  

 248,087 

 3,920 

 252,007 

Held-to-maturity debt securities

  

 30,108 

 278 

 30,386 

  

 12,346 

 (99) 

 12,247 

  

  

  

Total investment securities (1)

$

 270,852 

 8,495 

 279,347 

  

 260,433 

 3,821 

 264,254 

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Available-for-sale securities are carried on the balance sheet at fair value. Held-to-maturity securities are carried on the balance sheet at amortized cost.

  

  

  

  

  

  

  

  

  

  

  

  

Table 5 presents a summary of our investment securities portfolio, which increased $14.7 billion from December 31, 2013, primarily due to purchases of U.S. Treasury securities for our held-to-maturity portfolio. The total net unrealized gains on available-for-sale securities were $8.2 billion at June 30, 2014, up from net unrealized gains of $3.9 billion at December 31, 2013, due primarily to a decrease in long-term interest rates and modest tightening of credit spreads.

The size and composition of the investment securities portfolio is largely dependent upon the Company’s liquidity and interest rate risk management objectives. Our business generates assets and liabilities, such as loans, deposits and long-term debt, which have different maturities, yields, re-pricing, prepayment characteristics and other provisions that expose us to interest rate and liquidity risk. The available-for-sale securities portfolio consists primarily of liquid, high quality U.S. Treasury and federal agency debt, agency MBS, privately issued residential and commercial MBS, securities issued by U.S. states and political subdivisions, corporate debt securities, and highly rated collateralized loan obligations. Due to its highly liquid nature, the available-for-sale portfolio can be used to meet funding needs that arise in the normal course of business or due to market stress. Changes in our interest rate risk profile may occur due to changes in overall economic or market conditions, which could influence loan origination demand, prepayment speeds, or deposit balances and mix. In response, the available-for-sale securities portfolio can be rebalanced to meet the Company’s interest rate risk management objectives. In addition to meeting liquidity and interest rate risk management objectives, the available-for-sale securities portfolio may provide yield enhancement over other short-term assets. See the “Risk Management – Asset/Liability Management” section in this Report for more information on liquidity and interest rate risk. The held-to-maturity securities portfolio consists primarily of high quality U.S. Treasury debt, agency MBS, ABS primarily collateralized by auto loans and leases, and collateralized loan obligations, where our intent is to hold these securities to maturity and collect the contractual cash flows. The held-to-maturity portfolio may also provide yield enhancement over  short-term assets.

We analyze securities for OTTI quarterly or more often if a potential loss-triggering event occurs. Of the $217 million in OTTI write-downs recognized in earnings in the first half of 2014, $20 million related to debt securities and $2 million related to marketable equity securities, which are each included in available-for-sale securities. Another $195 million in OTTI write-downs was related to nonmarketable equity investments, which are included in other assets. For a discussion of our OTTI accounting policies and underlying considerations and analysis see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2013 Form 10-K and Note 4 (Investment Securities) to Financial Statements in this Report.

At June 30, 2014, investment securities included $44.8 billion of municipal bonds, of which 89% were rated “A-” or better based

13

 


 

      

predominantly on external and, in some cases, internal ratings. Additionally, some of the securities in our total municipal bond portfolio are guaranteed against loss by bond insurers. These guaranteed bonds are predominantly investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee in making the investment decision. Our municipal bond holdings are monitored as part of our ongoing impairment analysis. 

The weighted-average expected maturity of debt securities available-for-sale was 6.9 years at June 30, 2014. Because 60% of this portfolio is MBS, the expected remaining maturity is shorter than the remaining contractual maturity because borrowers generally have the right to prepay obligations before the underlying mortgages mature. The estimated effects of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the MBS available-for-sale portfolio are shown in Table 6.

 

Table 6:  Mortgage-Backed Securities

  

  

  

  

  

  

  

  

  

  

  

  

  

Expected

  

  

  

  

  

Net

remaining

  

  

  

  

Fair

unrealized

maturity

(in billions)

  

value

gain (loss)

(in years)

At June 30, 2014

  

  

  

  

  

Actual

$

 146.3 

 3.7 

 5.6 

  

Assuming a 200 basis point:

  

  

  

  

  

Increase in interest rates

  

 132.3 

 (10.3) 

 7.1 

  

Decrease in interest rates

  

 152.7 

 10.1 

 2.9 

  

  

  

  

  

  

  

The weighted-average expected maturity of held-to-maturity debt securities was 6.0 years at June 30, 2014. See Note 4 (Investment Securities) to Financial Statements in this Report for a summary of investment securities by security type.

14

 


 

Balance Sheet Analysis (continued)  

 

Loan Portfolio

Total loans were $828.9 billion at June 30, 2014, up $6.7   billion from December 31, 2013 . This growth was reduced by the transfer of $9.7 billion of government guaranteed student loans to loans held for sale at the end of the second quarter, which were previously included in the non-strategic/liquidating loan portfolio . Excluding this transfer, total loans would have increased $16.4 billion from December 31, 2013. Table 7 provides a summary of total outstanding loans by non-strategic/liquidating and core loan portfolios. The decrease in the non-strategic/liquidating portfolios including the government guaranteed student loan transfer was $15.5 billion, while loans in the core portfolio grew $22.2 billion from December 31, 2013. Our core loan growth during the first half of 2014 included:

·          a $14.7 billion increase in the commercial segment predominantly due to growth in commercial and industrial and commercial real estate loans; and

·          a $7.5 billion increase in consumer loans, predominantly from growth in the nonconforming mortgage, automobile, credit card and other revolving credit and installment loan portfolios offset by a decrease in the real estate 1-4 family junior lien mortgage portfolio.

 

Additional information on the non-strategic and liquidating loan portfolios is included in Table 12 in the “Risk Management – Credit Risk Management” section in this Report.

 

Table 7:  Loan Portfolios

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

(in millions)

  

Core

Liquidating

Total

  

Core

Liquidating

Total

Commercial

$

 389,905 

 1,499 

 391,404 

  

 375,230 

 2,013 

 377,243 

Consumer

  

 373,693 

 63,845 

 437,538 

  

 366,190 

 78,853 

 445,043 

  

Total loans

$

 763,598 

 65,344 

 828,942 

  

 741,420 

 80,866 

 822,286 

  

  

  

  

  

  

  

  

  

  

  

  

  

A discussion of average loan balances and a comparative detail of average loan balances is included in Table 1 under “Earnings Performance – Net Interest Income” earlier in this Report. Additional information on total loans outstanding by portfolio segment and class of financing receivable is included in the “Risk Management – Credit Risk Management” section in this Report. Period-end balances and other loan related information are in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report

Table 8 shows contractual loan maturities for loan categories normally not subject to regular periodic principal reduction and sensitivities of those loans to changes in interest rates.

 

Table 8:  Maturities for Selected Commercial Loan Categories

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

After

  

  

  

  

After

  

  

  

  

  

  

  

Within

one year

After

  

  

Within

one year

After

  

  

  

  

  

  

one

through

five

  

  

one

through

five

  

(in millions)

  

year

five years

years

Total

  

year

five years

years

Total

Selected loan maturities:

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

$

 43,651 

  

 142,298 

 20,106 

 206,055 

  

 41,402 

 131,745 

 20,664 

 193,811 

  

Real estate mortgage

  

 17,864 

  

 59,768 

 30,786 

 108,418 

  

 17,746 

 60,004 

 29,350 

 107,100 

  

Real estate construction

  

 5,947 

  

 9,807 

 1,302 

 17,056 

  

 6,095 

 9,207 

 1,445 

 16,747 

  

Foreign

  

 32,586 

  

 13,100 

 2,281 

 47,967 

  

 33,567 

 11,602 

 2,382 

 47,551 

  

  

  

Total selected loans

$

 100,048 

  

 224,973 

 54,475 

 379,496 

  

 98,810 

 212,558 

 53,841 

 365,209 

Distribution of loans to

  

  

  

  

  

  

  

  

  

  

  

  

changes in interest rates:

  

  

  

  

  

  

  

  

  

  

  

  

  

Loans at fixed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

interest rates

$

 13,230 

  

 25,131 

 18,039 

 56,400 

  

 14,896 

 23,891 

 14,684 

 53,471 

  

  

Loans at floating/variable

  

  

  

  

  

  

  

  

  

  

  

  

  

  

interest rates

  

 86,818 

  

 199,842 

 36,436 

 323,096 

  

 83,914 

 188,667 

 39,157 

 311,738 

  

  

  

Total selected loans

$

 100,048 

  

 224,973 

 54,475 

 379,496 

  

 98,810 

 212,558 

 53,841 

 365,209 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

15

 


 

      

Deposits

Deposits totaled $1.1 trillion at both June 30, 2014, and December 31, 2013. Table 9 provides additional information regarding deposits. Deposit growth of $39.4 billion from December 31, 2013, reflected continued customer-driven growth as well as liquidity-related issuances of term deposits. Information regarding the impact of deposits on net interest income and a comparison of average deposit balances is provided in “Earnings Performance – Net Interest Income” and Table 1 earlier in this Report. Total core deposits were $1.0 trillion at June 30, 2014, up $27.4 billion from $980.1 billion at December 31, 2013.

 

 

 

Table 9:  Deposits

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

% of

  

  

  

  

% of

  

  

  

  

  

  

June 30,

total

  

  

  

Dec. 31,

total

  

%

($ in millions)

  

 2014 

deposits

  

  

  

 2013 

deposits

  

Change

Noninterest-bearing

$

 308,097 

 28 

%

  

$

 288,116 

 27 

%

 7 

Interest-bearing checking

  

 42,556 

 4 

  

  

  

 37,346 

 3 

  

 14 

Market rate and other savings

  

 563,788 

 50 

  

  

  

 556,763 

 52 

  

 1 

Savings certificates

  

 38,228 

 3 

  

  

  

 41,567 

 4 

  

 (8) 

Foreign deposits (1)

  

 54,816 

 5 

  

  

  

 56,271 

 5 

  

 (3) 

  

Core deposits

  

 1,007,485 

 90 

  

  

  

 980,063 

 91 

  

 3 

Other time and savings deposits

  

 69,815 

 6 

  

  

  

 64,477 

 6 

  

 8 

Other foreign deposits

  

 41,277 

 4 

  

  

  

 34,637 

 3 

  

 19 

  

  

Total deposits

$

 1,118,577 

 100 

%

  

$

 1,079,177 

 100 

%

 4 

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Reflects Eurodollar sweep balances included in core deposits.

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair Value of Financial Instruments

We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. See our 2013 Form 10-K for a description of our critical accounting policy related to fair value of financial instruments and a discussion of our fair value measurement techniques.

Table 10 presents the summary of the fair value of financial instruments recorded at fair value on a recurring basis, and the amounts measured using significant Level 3 inputs (excluding derivative netting adjustments), which are significant assumptions not observable in the market. The fair value of the remaining assets and liabilities were measured using valuation methodologies involving market-based or market-derived information (collectively Level 1 and 2 measurements).

 

Table 10:  Fair Value Level 3 Summary

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

Total

  

  

  

  

Total

  

  

($ in billions)

balance

Level 3 (1)

  

balance

Level 3 (1)

Assets carried

  

  

  

  

  

  

  

  

  

  

at fair value

$

 363.9 

  

  

 34.9 

  

 353.1 

  

 37.2 

As a percentage

  

  

  

  

  

  

  

  

  

  

of total assets

 23 

  

%

 2 

  

 23 

  

 2 

  

  

  

  

  

  

  

  

  

  

  

  

Liabilities carried

  

  

  

  

  

  

  

  

  

  

at fair value

$

 24.2 

  

  

 2.9 

  

 22.7 

  

 3.7 

As a percentage of

  

  

  

  

  

  

  

  

  

  

total liabilities

 2 

  

%

*

  

 2 

  

*

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

*

Less than 1%.

  

  

(1)

Excludes derivative netting adjustments.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

See Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for additional information on fair value measurements.

 

Equity

Total equity was $181.5 billion at June 30, 2014, compared with $171.0 billion at December 31, 2013. The increase was predominantly driven by a $7.6 billion increase in retained earnings from earnings net of dividends paid and a $2.7 billion increase in cumulative other comprehensive income (OCI). The increase in OCI was primarily due to $4.3 billion ($2.6 billion  after tax) increase in net unrealized gains on our investment securities portfolio  resulting from a decrease in long-term interest rates and modest tightening of credit spreads. See  Note 4 (Investment Securities) to Financial Statements in this Report for additional information.

16

 


 

      

Off-Balance Sheet Arrangements                                                                                                                              

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 from the full contract or notional amount of the transaction. Our off-balance sheet arrangements include commitments to lend, transactions with unconsolidated entities, guarantees, derivatives, and other commitments. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, and/or (3) diversify our funding sources.

 

Commitments to Lend

We enter into commitments to lend funds to customers, which are usually at a stated interest rate, if funded, and for specific purposes and time periods. When we make commitments, we are exposed to credit risk. However, the maximum credit risk for these commitments will generally be lower than the contractual amount because a significant portion of these commitments are expected to expire without being used by the customer. For more information on lending commitments, see Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

 

Transactions with Unconsolidated Entities

We routinely enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. Generally, SPEs are formed in connection with securitization transactions. For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 7 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.

 

Guarantees and Certain Contingent Arrangements

Guarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of standby letters of credit, securities lending and other indemnifications, written put options, recourse obligations and other types of guarantee arrangements.

For more information on guarantees and certain contingent arrangements, see Note 10 (Guarantees, Pledged Assets and Collateral) to Financial Statements in this Report.


Derivatives

We primarily use derivatives to manage exposure to market risk, including interest rate risk, credit risk and foreign currency risk, and to assist customers with their risk management objectives. Derivatives are recorded on the balance sheet at fair value and can be measured in terms of the notional amount, which is generally not exchanged, but is used only as the basis on which interest and other payments are determined. The notional amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments.

For more information on derivatives, see Note 12 (Derivatives) to Financial Statements in this Report.

 

Other Commitments

We also have other off-balance sheet transactions, including obligations to make rental payments under noncancelable operating leases and commitments to purchase certain debt and equity securities. Our operating lease obligations are discussed in Note 7 (Premises, Equipment, Lease Commitments and Other Assets) to Financial Statements in our 2013 Form 10-K. For more information on commitments to purchase debt and equity securities, see the “Off-Balance Sheet Arrangements” section in our 2013 Form 10-K.

17

 


 

          

      

Risk Management                                                                                                                                                       

Financial institutions must manage a variety of business risks that can significantly affect their financial performance. Among the key risks that we must manage are operational risks, credit risks, and asset/liability management risks, which include interest rate, market, and liquidity and funding risks. Our risk culture is strongly rooted in our Vision and Values , and in order to succeed in our mission of satisfying all our customers’ financial needs and helping them succeed financially, our business practices and operating model must support prudent risk management practices. For more information about how we manage these risks, see the “Risk Management” section in our 2013 Form 10-K. The discussion that follows provides an update regarding these risks.

 

Operational Risk Management

Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems, or resulting from external events or third parties. Information security is a significant operational risk for financial institutions such as Wells Fargo, and includes the risk of losses resulting from cyber attacks. Wells Fargo and reportedly other financial institutions continue to be the target of various evolving and adaptive cyber attacks, including malware and denial-of-service, as part of an effort to disrupt the operations of financial institutions, potentially test their cybersecurity capabilities, or obtain confidential, proprietary or other information. Wells Fargo has not experienced any material losses relating to these or other cyber attacks. Cybersecurity and the continued development and enhancement of our controls, processes and systems to protect our networks, computers, software, and data from attack, damage or unauthorized access remain a priority for Wells Fargo. See the “Risk Factors” section in our 2013 Form 10-K for additional information regarding the risks associated with a failure or breach of our operational or security systems or infrastructure, including as a result of cyber attacks.


Credit Risk Management

Loans represent the largest component of assets on our balance sheet and their related credit risk is a significant risk we manage. We define credit risk as the risk of loss associated with a borrower or counterparty default (failure to meet obligations in accordance with agreed upon terms). Table 11 presents our total loans outstanding by portfolio segment and class of financing receivable.

 

Table 11:  Total Loans Outstanding by Portfolio Segment and Class of Financing Receivable

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

Dec. 31,

(in millions)

  

 2014 

  

 2013 

Commercial:

  

  

  

  

  

Commercial and industrial

$

 206,055 

  

 193,811 

  

Real estate mortgage

  

 108,418 

  

 107,100 

  

Real estate construction

  

 17,056 

  

 16,747 

  

Lease financing

  

 11,908 

  

 12,034 

  

Foreign (1)

  

 47,967 

  

 47,551 

  

  

Total commercial

  

 391,404 

  

 377,243 

Consumer:

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 260,104 

  

 258,497 

  

Real estate 1-4 family junior lien mortgage

 62,455 

  

 65,914 

  

Credit card

  

 27,215 

  

 26,870 

  

Automobile

  

 54,095 

  

 50,808 

  

Other revolving credit and installment

  

 33,669 

  

 42,954 

  

  

Total consumer

  

 437,538 

  

 445,043 

  

  

  

Total loans

$

 828,942 

  

 822,286 

  

  

  

  

  

  

  

  

  

  

(1)

Substantially all of our foreign loan portfolio is commercial loans. Loans are classified as foreign primarily based on whether the borrower’s primary address is outside of the United States.

  

  

18

 


 

Risk Management – Credit Risk   Management (continued)  

Credit Quality Overview   Credit quality continued to improve during second quarter 2014 due in part to improving economic conditions, in particular the housing market, as well as our proactive credit risk management activities. The improvement occurred for both commercial and consumer portfolios as evidenced by their credit metrics:

·       Nonaccrual loans decreased to $2.8 billion and $11.2 billion in our commercial and consumer portfolios, respectively, at June 30, 2014, from $3.5 billion and $12.2 billion at December 31, 2013. Nonaccrual loans represented 1.69% of total loans at June 30, 2014, compared with 1.91% at December 31, 2013.

·       Net charge-offs (annualized) as a percentage of average total loans improved to 0.35% and 0.38% in second quarter and first half of 2014, respectively, compared with 0.58% and 0.65% respectively, for the same periods a year ago. The net charge-offs (annualized) in our commercial and consumer portfolios were 0.03% and 0.62% in second quarter and 0.02% and 0.68% in the first half of 2014,  respectively, compared with 0.05% and 1.01% in  second quarter, and 0.08% and 1.12%, respectively, in the first half of 2013.

·       Loans that are not government insured/guaranteed and 90 days or more past due and still accruing decreased to $122 million and $775 million in our commercial and consumer portfolios, respectively, at June 30, 2014, from $143 million and $902 million at December 31, 2013.

 

In addition to credit metric improvements, we continued to see improvement in various economic indicators such as home prices that influenced our evaluation of the allowance and provision for credit losses. Accordingly:

·       Our provision for credit losses decreased to $217 million in second quarter 2014 and $542 million during the first half of 2014, compared with $652 million and $1.9 billion, respectively, for the same periods a year ago.

·       The allowance for credit losses decreased to $13.8 billion at June 30, 2014 from $15.0 billion at December 31, 2013.

 

Additional information on our loan portfolios and our credit quality trends follows.

 

Non-Strategic and Liquidating Loan Portfolios   We continually evaluate and, when appropriate, modify our credit policies to address appropriate levels of risk. We may designate certain portfolios and loan products as non-strategic or liquidating after we cease their continued origination and actively work to limit losses and reduce our exposures.

Table 12 identifies our non-strategic and liquidating loan portfolios, which have continued to decline since the 2008 merger with Wachovia. They consist primarily of the Pick-a-Pay mortgage portfolio and PCI loans acquired from Wachovia, certain portfolios from legacy Wells Fargo Home Equity and Wells Fargo Financial, and our Education Finance government guaranteed loan portfolio. We transferred the government guaranteed student loan portfolio to loans held for sale at the end of second quarter 2014.

The home equity portfolio of loans generated through third party channels is designated as liquidating. Additional information regarding this portfolio, as well as the liquidating PCI and Pick-a-Pay loan portfolios, is provided in the discussion of loan portfolios that follows.

 

Table 12:  Non-Strategic and Liquidating Loan Portfolios

  

  

  

  

  

  

  

  

  

  

  

  

  

Outstanding balance

  

  

  

  

  

June 30,

  

December 31,

(in millions)

  

 2014 

  

 2013 

 2008 

Commercial:

  

  

  

  

  

  

Legacy Wachovia commercial and industrial, CRE and foreign PCI loans (1)

$

 1,499 

  

 2,013 

 18,704 

  

  

Total commercial

  

 1,499 

  

 2,013 

 18,704 

Consumer:

  

  

  

  

  

  

Pick-a-Pay mortgage (1)

  

 47,965 

  

 50,971 

 95,315 

  

Liquidating home equity

  

 3,290 

  

 3,695 

 10,309 

  

Legacy Wells Fargo Financial indirect auto

  

 85 

  

 207 

 18,221 

  

Legacy Wells Fargo Financial debt consolidation

  

 12,169 

  

 12,893 

 25,299 

  

Education Finance - government guaranteed (2)

  

 -  

  

 10,712 

 20,465 

  

Legacy Wachovia other PCI loans (1)

  

 336 

  

 375 

 2,478 

  

  

Total consumer

  

 63,845 

  

 78,853 

 172,087 

  

  

  

Total non-strategic and liquidating loan portfolios

$

 65,344 

  

 80,866 

 190,791 

  

  

  

  

  

  

  

  

  

(1)

Net of purchase accounting adjustments related to PCI loans.

(2)

The change from prior quarter was predominantly due to the transfer of government guaranteed student loans to held for sale.

19

 


 

      

PURCHASED CREDIT-IMPAIRED (PCI) Loans   L oans acquired with evidence of credit deterioration since their origination and where it is probable that we will not collect all contractually required principal and interest payments are PCI loans. Substantially all of our PCI loans were acquired in the Wachovia acquisition on December 31, 2008. PCI loans are recorded at fair value at the date of acquisition, and the historical allowance for credit losses related to these loans is not carried over. The carrying value of PCI loans totaled  $25.0 billion at June 30, 2014 , down from $26.7 billion and $58.8 billion at December 31, 2013 and 2008, respectively. Such loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments. For additional information on PCI loans, see the “Risk Management – Credit Risk Management – Purchased Credit-Impaired Loans” section in our 2013 Form 10-K and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

During the first half of 2014, we recognized as income $32 million released from the nonaccretable difference related to commercial PCI loans due to payoffs and other resolutions. We also transferred $2.1 billion from the nonaccretable difference to the accretable yield for PCI loans with improving credit-related cash flows and recovered $37 million primarily related to reversals of write-downs in excess of the respective loan resolution realized losses. Our cash flows expected to be collected have been favorably affected since the Wachovia acquisition by lower than expected defaults and losses as a result of observed economic strengthening, particularly in housing prices, and by our loan modification efforts. See the “Real Estate 1-4 Family First and Junior Lien Mortgage Loans” section in this Report for additional information. Table 13 provides an analysis of changes in the nonaccretable difference.

 

Table 13:  Changes in Nonaccretable Difference for PCI Loans

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other

  

(in millions)  

Commercial

Pick-a-Pay

consumer

Total

Balance, December 31, 2008  

$

 10,410 

 26,485 

 4,069 

 40,964 

Addition of nonaccretable difference due to acquisitions  

  

 213 

 - 

 - 

 213 

Release of nonaccretable difference due to:  

  

  

  

  

  

  

Loans resolved by settlement with borrower (1)

  

 (1,512) 

 - 

 - 

 (1,512) 

  

Loans resolved by sales to third parties (2)

  

 (308) 

 - 

 (85) 

 (393) 

  

Reclassification to accretable yield for loans with improving credit-related cash flows (3)

  

 (1,605) 

 (3,897) 

 (823) 

 (6,325) 

Use of nonaccretable difference due to:  

  

  

  

  

  

  

Losses from loan resolutions and write-downs (4)

  

 (6,933) 

 (17,884) 

 (2,961) 

 (27,778) 

Balance, December 31, 2013  

  

 265 

 4,704 

 200 

 5,169 

Addition of nonaccretable difference due to acquisitions  

  

 13 

 - 

 - 

 13 

Release of nonaccretable difference due to:  

  

  

  

  

  

  

Loans resolved by settlement with borrower (1)

  

 (18) 

 - 

 - 

 (18) 

  

Loans resolved by sales to third parties (2)

  

 (14) 

 - 

 - 

 (14) 

  

Reclassification to accretable yield for loans with improving credit-related cash flows (3)

  

 (103) 

 (1,954) 

 (19) 

 (2,076) 

Use of nonaccretable difference due to:  

  

  

  

  

  

  

Net recoveries (losses) from loan resolutions and write-downs (4)

  

 (3) 

 21 

 19 

 37 

Balance, June 30, 2014  

$

 140 

 2,771 

 200 

 3,111 

  

  

  

  

  

  

  

  

  

  

Balance, March 31, 2014  

$

 145 

 4,704 

 212 

 5,061 

Addition of nonaccretable difference due to acquisitions  

  

 13 

 - 

 - 

 13 

Release of nonaccretable difference due to:  

  

  

  

  

  

  

Loans resolved by settlement with borrower (1)

  

 (13) 

 - 

 - 

 (13) 

  

Loans resolved by sales to third parties (2)

  

 - 

 - 

 - 

 - 

  

Reclassification to accretable yield for loans with improving credit-related cash flows (3)

  

 (2) 

 (1,954) 

 (10) 

 (1,966) 

Use of nonaccretable difference due to:  

  

  

  

  

  

  

Net recoveries (losses) from loan resolutions and write-downs (4)

  

 (3) 

 21 

 (2) 

 16 

Balance, June 30, 2014  

$

 140 

 2,771 

 200 

 3,111 

  

  

  

  

  

  

  

  

  

  

(1)

Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases for settlements with borrowers due to pool accounting for those loans, which assumes that the amount received approximates the pool performance expectations.

(2)

Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.

(3)

Reclassification of nonaccretable difference to accretable yield will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.

(4)

Write-downs to net realizable value of PCI loans are absorbed by the nonaccretable difference when severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan. Also includes foreign exchange adjustments related to underlying principal for which the nonaccretable difference was established.

  

  

20

 


 

Risk Management – Credit Risk   Management (continued)  

Since December 31, 2008, we have released $10.3 billion in nonaccretable difference, including $8.4 billion transferred from the nonaccretable difference to the accretable yield and $1.9 billion released to income through loan resolutions. Also, we have provided $1.7 billion for losses on certain PCI loans or pools of PCI loans that have had credit-related decreases to cash flows expected to be collected. The net result is a $8.6 billion reduction from December 31, 2008, through June 30, 2014 , in our initial projected losses of $41.0 billion on all PCI loans.


At June 30, 2014 , the allowance for credit losses on certain PCI loans was $8 million. The allowance is to absorb credit-related decreases in cash flows expected to be collected and primarily relates to individual PCI commercial loans. Table 14 analyzes the actual and projected loss results on PCI loans since acquisition through June 30, 2014

For additional information on PCI loans, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2013 Form 10-K and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report

 

Table 14:  Actual and Projected Loss Results on PCI Loans Since Acquisition of Wachovia

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other

  

(in millions)

Commercial

Pick-a-Pay

consumer

Total

Release of nonaccretable difference due to:

  

  

  

  

  

  

Loans resolved by settlement with borrower (1)

$

 1,530 

 - 

 - 

 1,530 

  

Loans resolved by sales to third parties (2)

  

 322 

 - 

 85 

 407 

  

Reclassification to accretable yield for loans with improving credit-related cash flows (3)

  

 1,708 

 5,851 

 842 

 8,401 

  

  

Total releases of nonaccretable difference due to better than expected losses

  

 3,560 

 5,851 

 927 

 10,338 

Provision for losses due to credit deterioration (4)

  

 (1,622) 

 - 

 (108) 

 (1,730) 

  

  

  

Actual and projected losses on PCI loans less than originally expected

$

 1,938 

 5,851 

 819 

 8,608 

  

  

(1)

Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases for settlements with borrowers due to pool accounting for those loans, which assumes that the amount received approximates the pool performance expectations.

(2)

Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.

(3)

Reclassification of nonaccretable difference to accretable yield will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.

(4)

Provision for additional losses is recorded as a charge to income when it is estimated that the cash flows expected to be collected for a PCI loan or pool of loans may not support full realization of the carrying value.

  

  

  

  

  

  

  

  

  

  

  

21

 


 

      

Significant Loan Portfolio Reviews     Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, FICO scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to enable early identification of developing risk and to support our determination of an appropriate allowance for credit losses. The following discussion provides additional characteristics and analysis of our significant portfolios. See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information for each of the following portfolios.

 

Commercial AND INDUSTRIAL Loans and Lease Financing   For purposes of portfolio risk management, we aggregate commercial and industrial loans and lease financing according to market segmentation and standard industry codes. Table 15 summarizes commercial and industrial loans and lease financing by industry with the related nonaccrual totals. We generally subject commercial and industrial loans and lease financing to individual risk assessment using our internal borrower and collateral quality ratings. Our ratings are aligned to regulatory definitions of pass and criticized categories with criticized divided between special mention, substandard and doubtful categories.

The commercial and industrial loans and lease financing portfolio, which totaled $218.0   billion, or 26% of total loans, at June 30, 2014, generally experienced credit improvement in second quarter 2014.  The annualized net charge-off rate for this portfolio was 0.10% in second quarter 2014, up slightly from 0.09% in first quarter 2014, and down from 0.19% in second quarter 2013.  At June   30,   2014, 0.33% of this portfolio was nonaccruing compared with 0.37% at December 31,   2013.  In addition, $15.3   billion of this portfolio was rated as criticized in accordance with regulatory guidance at June 30,   2014, compared with $15.5 billion at December   31,   2013. 


A majority of our commercial and industrial loans and lease financing portfolio is secured by short-term assets, such as accounts receivable, inventory and securities, as well as long-lived assets, such as equipment and other business assets. Generally, the collateral securing this portfolio represents a secondary source of repayment.

 

Table 15:  Commercial and Industrial Loans and Lease Financing by Industry

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

% of

  

  

  

  

Nonaccrual

Total

  

total

  

(in millions)

loans

portfolio

(1)

loans

  

Investors

$

 12 

 21,289 

  

 3 

%

Oil and gas

  

 42 

 15,411 

  

 2 

  

Food and beverage

  

 9 

 13,460 

  

 2 

  

Cyclical retailers

  

 26 

 13,001 

  

 1 

  

Financial institutions

  

 35 

 11,783 

  

 1 

  

Healthcare

  

 37 

 11,640 

  

 1 

  

Real estate lessor

  

 21 

 11,541 

  

 1 

  

Industrial equipment

  

 7 

 11,453 

  

 1 

  

Public administration

  

 16 

 7,283 

  

 1 

  

Technology

  

 53 

 7,180 

  

 1 

  

Business services

  

 28 

 6,383 

  

 1 

  

Transportation

  

 4 

 6,286 

  

 1 

  

Other

  

 431 

 81,253 

(2)

 10 

  

  

Total

$

 721 

 217,963 

  

 26 

%

  

  

  

  

  

  

  

  

  

(1)   Includes $192 million PCI loans, which are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.

(2)   No other single category had loans in excess of $5.0 billion. 

 

A t the time of any modification of terms or extensions of maturity, we evaluate whether the loan should be classified as a TDR, and account for it accordingly. For more information on TDRs, see “Troubled Debt Restructurings” later in this section and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

22

 


 

Risk Management – Credit Risk   Management (continued)  

Commercial Real Estate (CRE)  The CRE portfolio totaled $125.5   billion, or 15% of total loans, at June 30, 2014, and consisted of $108.4   billion of mortgage loans and $17.1   billion of construction loans. Table 16 summarizes CRE loans by state and property type with the related nonaccrual totals. The portfolio is diversified both geographically and by property type. The largest geographic concentrations of combined CRE loans are in California (29% of the total CRE portf0lio) and in Texas and Florida (8% in each state). By property type, the largest concentrations are office buildings at 28% and apartments at 13% of the portfolio. CRE nonaccrual loans totaled 1.6% of the CRE outstanding balance at June 30, 2014, compared with 2.2 % at December 31, 2013 At June 30, 2014, we had $9.6 billion of criticized CRE mortgage loans, down from $11.8   billion at December 31, 2013, and $1.4 billion of criticized CRE construction loans, down from $2.0   billion at December 31, 2013.

At June 30, 2014, the recorded investment in PCI CRE loans totaled $1.3   billion, down from $12.3   billion when acquired at December 31, 2008, reflecting principal payments, loan resolutions and write-downs.

 

Table 16:  CRE Loans by State and Property Type

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

Real estate mortgage

  

Real estate construction

  

Total

  

% of

  

  

  

  

  

Nonaccrual

Total

  

Nonaccrual

Total

  

Nonaccrual

Total

  

total

  

(in millions)

  

loans

portfolio

(1)

loans

portfolio

(1)

loans

portfolio

(1)

loans

  

By state:

  

  

  

  

  

  

  

  

  

  

  

  

California

$

 437 

 32,655 

  

 23 

 3,653 

  

 460 

 36,308 

  

 4 

%

Texas

  

 107 

 8,713 

  

 1 

 1,656 

  

 108 

 10,369 

  

 1 

  

Florida

  

 248 

 8,397 

  

 22 

 1,510 

  

 270 

 9,907 

  

 1 

  

New York

  

 45 

 5,813 

  

 5 

 1,178 

  

 50 

 6,991 

  

 1 

  

North Carolina

  

 118 

 4,060 

  

 11 

 890 

  

 129 

 4,950 

  

 1 

  

Arizona

  

 90 

 3,782 

  

 5 

 423 

  

 95 

 4,205 

  

 1 

  

Washington

  

 28 

 3,378 

  

 1 

 483 

  

 29 

 3,861 

  

 1 

  

Virginia

  

 50 

 2,775 

  

 5 

 1,078 

  

 55 

 3,853 

  

*

  

Georgia

  

 121 

 3,116 

  

 34 

 441 

  

 155 

 3,557 

  

*

  

Colorado

  

 33 

 2,865 

  

 6 

 550 

  

 39 

 3,415 

  

*

  

Other

  

 525 

 32,864 

  

 126 

 5,194 

  

 651 

 38,058 

(2)

 5 

  

  

Total

$

 1,802 

 108,418 

  

 239 

 17,056 

  

 2,041 

 125,474 

  

 15 

%

By property:

  

  

  

  

  

  

  

  

  

  

  

  

Office buildings

$

 458 

 32,845 

  

 - 

 2,041 

  

 458 

 34,886 

  

 4 

%

Apartments

  

 91 

 11,545 

  

 2 

 5,183 

  

 93 

 16,728 

  

 2 

  

Industrial/warehouse

  

 293 

 12,122 

  

 - 

 842 

  

 293 

 12,964 

  

 2 

  

Retail (excluding shopping center)

  

 239 

 11,744 

  

 2 

 858 

  

 241 

 12,602 

  

 2 

  

Real estate - other

  

 231 

 10,671 

  

 4 

 370 

  

 235 

 11,041 

  

 1 

  

Hotel/motel

  

 83 

 8,433 

  

 - 

 915 

  

 83 

 9,348 

  

 1 

  

Shopping center

  

 109 

 7,856 

  

 - 

 924 

  

 109 

 8,780 

  

 1 

  

Institutional

  

 77 

 3,315 

  

 - 

 365 

  

 77 

 3,680 

  

 1 

  

Land (excluding 1-4 family)

  

 6 

 93 

  

 66 

 2,807 

  

 72 

 2,900 

  

*

  

Agriculture

  

 36 

 2,283 

  

 - 

 25 

  

 36 

 2,308 

  

*

  

Other

  

 179 

 7,511 

  

 165 

 2,726 

  

 344 

 10,237 

  

 1 

  

  

Total

$

 1,802 

 108,418 

  

 239 

 17,056 

  

 2,041 

 125,474 

  

 15 

%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

*

Less than 1%.

  

(1)

Includes a total of $1.3 billion PCI loans, consisting of $1.0 billion of real estate mortgage and $305 million of real estate construction, which are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.

  

(2)

Includes 40 states; no state had loans in excess of $3.3 billion.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

23

 


 

      

FOREIGN Loans and country risk exposure    We classify loans for financial statement and certain regulatory purposes as foreign primarily based on whether the borrower’s primary address is outside of the United States. At June 30, 2014, foreign loans totaled $48.0 billion, representing approximately 6% of our total consolidated loans outstanding, compared with $47.6 billion, or approximately 6% of total consolidated loans outstanding, at December 31, 2013. Foreign loans were approximately 3% of our consolidated total assets at June 30, 2014 and at December 31, 2013.

Our foreign country risk monitoring process incorporates frequent dialogue with our financial institution customers, counterparties and regulatory agencies, enhanced by centralized monitoring of macroeconomic and capital markets conditions in the respective countries. We establish exposure limits for each country through a centralized oversight process based on customer needs, and in consideration of relevant economic, political, social, legal, and transfer risks. We monitor exposures closely and adjust our country limits in response to changing conditions.

We evaluate our individual country risk exposure on an ultimate country of risk basis, which is normally based on the country of residence of the guarantor or collateral location, and is different from the reporting based on the borrower’s primary address. Our largest single foreign country exposure on an ultimate risk basis at June 30, 2014, was the United Kingdom, which totaled $22.3 billion, or approximately 1% of our total assets, and included $3.5 billion of sovereign claims. Our United Kingdom sovereign claims arise primarily from deposits we have placed with the Bank of England pursuant to regulatory requirements in support of our London branch.


We conduct periodic stress tests of our significant country risk exposures, analyzing the direct and indirect impacts on the risk of loss from various macroeconomic and capital markets scenarios. We do not have significant exposure to foreign country risks because our foreign portfolio is relatively small. However, we have identified exposure to increased loss from U.S. borrowers associated with the potential impact of a regional or worldwide economic downturn on the U.S. economy. We mitigate these potential impacts on the risk of loss through our normal risk management processes which include active monitoring and, if necessary, the application of aggressive loss mitigation strategies.

Table 17 provides information regarding our top 20 exposures by country (excluding the U.S.) and our Eurozone exposure, on an ultimate risk basis.

24

 


 

Risk Management – Credit Risk   Management (continued)  

 

Table 17:  Select Country Exposures

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Lending (1)

  

Securities (2)

  

Derivatives and other (3)

  

Total exposure

  

  

  

  

  

  

  

  

  

Non-

  

  

Non-

  

  

Non-

  

  

  

Non-

  

(in millions)

  

Sovereign

sovereign

  

Sovereign

sovereign

  

Sovereign

sovereign

  

Sovereign

sovereign (4)

Total

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Top 20 country exposures:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

United Kingdom

$

 3,507 

 11,749 

  

 - 

 6,210 

  

 - 

 862 

  

 3,507 

  

 18,821 

 22,328 

Canada

  

 - 

 7,354 

  

 - 

 4,716 

  

 - 

 626 

  

 - 

  

 12,696 

 12,696 

China

  

 - 

 5,207 

  

 - 

 77 

  

 14 

 1 

  

 14 

  

 5,285 

 5,299 

Brazil

  

 - 

 2,515 

  

 - 

 18 

  

 - 

 - 

  

 - 

  

 2,533 

 2,533 

Germany

  

 91 

 1,395 

  

 - 

 632 

  

 - 

 79 

  

 91 

  

 2,106 

 2,197 

Netherlands

  

 - 

 1,682 

  

 - 

 335 

  

 - 

 41 

  

 - 

  

 2,058 

 2,058 

India

  

 - 

 1,920 

  

 - 

 128 

  

 - 

 - 

  

 - 

  

 2,048 

 2,048 

Bermuda

  

 - 

 1,947 

  

 - 

 80 

  

 - 

 17 

  

 - 

  

 2,044 

 2,044 

Switzerland

  

 - 

 1,266 

  

 - 

 365 

  

 - 

 379 

  

 - 

  

 2,010 

 2,010 

France

  

 - 

 378 

  

 - 

 1,209 

  

 - 

 85 

  

 - 

  

 1,672 

 1,672 

Turkey

  

 - 

 1,625 

  

 - 

 - 

  

 - 

 1 

  

 - 

  

 1,626 

 1,626 

Australia

  

 - 

 948 

  

 - 

 597 

  

 - 

 18 

  

 - 

  

 1,563 

 1,563 

Chile

  

 - 

 1,392 

  

 - 

 13 

  

 - 

 45 

  

 - 

  

 1,450 

 1,450 

Cayman Islands

  

 - 

 1,249 

  

 - 

 - 

  

 - 

 63 

  

 - 

  

 1,312 

 1,312 

South Korea

  

 - 

 1,111 

  

 3 

 36 

  

 13 

 - 

  

 16 

  

 1,147 

 1,163 

Ireland

  

 52 

 899 

  

 - 

 162 

  

 - 

 22 

  

 52 

  

 1,083 

 1,135 

Luxembourg

  

 - 

 975 

  

 - 

 127 

  

 - 

 6 

  

 - 

  

 1,108 

 1,108 

Mexico

  

 - 

 1,017 

  

 - 

 30 

  

 2 

 1 

  

 2 

  

 1,048 

 1,050 

Spain

  

 - 

 740 

  

 - 

 63 

  

 - 

 2 

  

 - 

  

 805 

 805 

Taiwan

  

 - 

 795 

  

 - 

 1 

  

 - 

 5 

  

 - 

  

 801 

 801 

  

Total top 20 country exposures

$

 3,650 

 46,164 

  

 3 

 14,799 

  

 29 

 2,253 

  

 3,682 

  

 63,216 

 66,898 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Eurozone exposure:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Eurozone countries included in Top 20 above (5)

$

 143 

 6,069 

  

 - 

 2,528 

  

 - 

 235 

  

 143 

  

 8,832 

 8,975 

Austria

  

 73 

 396 

  

 - 

 - 

  

 - 

 2 

  

 73 

  

 398 

 471 

Belgium

  

 - 

 137 

  

 - 

 26 

  

 - 

 7 

  

 - 

  

 170 

 170 

Italy

  

 - 

 65 

  

 - 

 97 

  

 - 

 - 

  

 - 

  

 162 

 162 

Other Eurozone exposure (6)

  

 23 

 34 

  

 - 

 27 

  

 21 

 1 

  

 44 

  

 62 

 106 

  

Total Eurozone exposure

$

 239 

 6,701 

  

 - 

 2,678 

  

 21 

 245 

  

 260 

  

 9,624 

 9,884 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Lending exposure includes funded loans and unfunded commitments, leveraged leases, and money market placements presented on a gross basis prior to the deduction of impairment allowance and collateral received under the terms of the credit agreements. For the countries listed above, includes $203 million in PCI loans, predominantly to customers in Germany and the United Kingdom, and $1.3 billion in defeased leases secured largely by U.S. Treasury and government agency securities, or government guaranteed.

(2)

Represents issuer exposure on cross-border debt and equity securities.

(3)

Represents counterparty exposure on foreign exchange and derivative contracts, and securities resale and lending agreements. This exposure is presented net of counterparty netting adjustments and reduced by the amount of cash collateral. It includes credit default swaps (CDS) predominantly used to manage our U.S. and London-based cash credit trading businesses, which sometimes results in selling and purchasing protection on the identical reference entity. Generally, we do not use market instruments such as CDS to hedge the credit risk of our investment or loan positions, although we do use them to manage risk in our trading businesses. At June 30, 2014, the gross notional amount of our CDS sold that reference assets in the Top 20 or Eurozone countries was $4.1 billion, which was offset by the notional amount of CDS purchased of $4.2 billion. We did not have any CDS purchased or sold that reference pools of assets that contain sovereign debt or where the reference asset was solely the sovereign debt of a foreign country.

(4)

For countries presented in the table, total non-sovereign exposure comprises $28.9 billion exposure to financial institutions and $35.1 billion to non-financial corporations at June 30, 2014.

(5)

Consists of exposure to Germany, Netherlands, France, Ireland, Luxembourg and Spain included in Top 20.

(6)

Includes non-sovereign exposure to Portugal and Greece in the amount of $51 million and $2 million respectively, and less than $1 million to Cyprus. We had no sovereign debt exposure to these countries at June 30, 2014.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

25

 


 

      

Real Estate 1-4 Family FIRST AND JUNIOR LIEN Mortgage Loans   Our real estate 1-4 family first and junior lien mortgage loans primarily include loans we have made to customers and retained as part of our asset/liability management strategy. These loans, as presented in Table 18, include the Pick-a-Pay portfolio acquired from Wachovia which is discussed later in this Report. These loans also include other purchased loans and loans included on our balance sheet as a result of consolidation of variable interest entities (VIEs).

 

Table 18:  Real Estate 1-4 Family First and Junior Lien Mortgage Loans

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

% of

  

  

  

% of

  

(in millions)

  

Balance

portfolio

  

  

Balance

portfolio

  

Real estate 1-4 family first mortgage

  

  

  

  

  

  

  

  

  

Core portfolio

$

 199,841 

 62 

%

$

 194,488 

 60 

%

  

Non-strategic and liquidating loan portfolios:

  

  

  

  

  

  

  

  

  

  

Pick-a-Pay mortgage

  

 47,965 

 15 

  

  

 50,971 

 16 

  

  

  

Other PCI and liquidating first mortgage

  

 12,298 

 4 

  

  

 13,038 

 4 

  

  

  

  

Total non-strategic and liquidating loan portfolios

  

 60,263 

 19 

  

  

 64,009 

 20 

  

  

  

  

  

Total real estate 1-4 family first mortgage loans

  

 260,104 

 81 

  

  

 258,497 

 80 

  

Real estate 1-4 family junior lien mortgage

  

  

  

  

  

  

  

  

  

Core portfolio

  

 58,969 

 18 

  

  

 62,001 

 19 

  

  

Non-strategic and liquidating loan portfolios

  

 3,486 

 1 

  

  

 3,913 

 1 

  

  

  

  

  

Total real estate 1-4 family junior lien mortgage loans

  

 62,455 

 19 

  

  

 65,914 

 20 

  

  

  

  

  

  

Total real estate 1-4 family mortgage loans

$

 322,559 

 100 

%

$

 324,411 

 100 

%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The portfolio includes some loans with adjustable-rate features and some with an interest-only feature as part of the loan terms. Interest-only loans were approximately 14% and 15% of total loans at June 30, 2014 and December 31, 2013, respectively. We believe we have manageable adjustable-rate mortgage (ARM) reset risk across our owned mortgage loan portfolios. We do not offer option ARM products, nor do we offer variable-rate mortgage products with fixed payment amounts, commonly referred to within the financial services industry as negative amortizing mortgage loans. The option ARMs we do have are included in the Pick-a-Pay portfolio which was acquired from Wachovia and are part of our liquidating loan portfolios. Since our acquisition of the Pick-a-Pay loan portfolio at the end of 2008, the option payment portion of the portfolio has reduced from 86% to 42% at June 30, 2014, as a result of our modification activities and customers exercising their option to convert to fixed payments . For more information, see the “Pick-a-Pay Portfolio” section in this Report. We continue to modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers experiencing financial difficulties. For more information on our participation in the U.S. Treasury’s Making Home Affordable (MHA) programs, see the “Risk Management – Credit Risk Management – Real Estate 1-4 Family First and Junior Lien Mortgage Loans” section in our 2013 Form 10-K.

Part of our credit monitoring includes tracking delinquency, FICO scores and collateral values (LTV/CLTV) on the entire real estate 1-4 family mortgage loan portfolio. These credit risk indicators, which exclude government insured/guaranteed loans, continued to improve in second quarter 2014 on the non-PCI mortgage portfolio. Loans 30 days or more delinquent at June 30, 2014, totaled $10.9 billion, or 4%, of total non-PCI mortgages, compared with $11.9 billion, or 4%, at December 31, 2013. Loans with FICO scores lower than 640 totaled $28.5 billion at June 30, 2014, or 10% of total non-PCI mortgages, compared with $31.5 billion, or 10%, at December 31, 2013. Mortgages with a LTV/CLTV greater than 100% totaled $27.4 billion at June 30, 2014, or 9% of total non-PCI mortgages, compared with $34.3 billion, or 11%, at December 31, 2013. Information regarding credit risk indicators, including PCI credit risk indicators, can be found in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Real estate 1-4 family first and junior lien mortgage loans by state are presented in Table 19. Our real estate 1-4 family mortgage loans to borrowers in California represented approximately 13% of total loans at June 30, 2014, located mostly within the larger metropolitan areas, with no single California metropolitan area consisting of more than 4% of total loans. Our underwriting and periodic review of loans secured by residential real estate collateral includes appraisals or estimates from automated valuation models (AVMs) to support property values. We monitor changes in real estate values and underlying economic or market conditions for all geographic areas of our real estate 1-4 family mortgage portfolio as part of our credit risk management process. Additional information about AVMs and our policy for their use can be found in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report and the “Risk Management – Credit Risk Management – Real Estate 1-4 Family First and Junior Lien Mortgage Loans” section in our 2013 Form 10-K.

26

 


 

Risk Management – Credit Risk   Management (continued)  

 

Table 19:  Real Estate 1-4 Family First and Junior Lien Mortgage Loans by State

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

Real estate

Real estate

Total real

  

  

  

  

  

  

1-4 family

1-4 family

estate 1-4

% of

  

  

  

  

  

first

junior lien

family

total

  

(in millions)

  

mortgage

mortgage

mortgage

loans

  

Real estate 1-4 family

  

  

  

  

  

  

loans (excluding PCI):

  

  

  

  

California

$

 75,973 

 17,291 

 93,264 

 11 

%

Florida

 14,600 

 5,615 

 20,215 

 3 

  

New York

 15,806 

 2,722 

 18,528 

 2 

  

New Jersey

 10,497 

 4,920 

 15,417 

 2 

  

Virginia

 7,055 

 3,391 

 10,446 

 1 

  

Pennsylvania

 5,912 

 3,031 

 8,943 

 1 

  

Texas

 7,898 

 894 

 8,792 

 1 

  

North Carolina

 6,001 

 2,710 

 8,711 

 1 

  

Georgia

 4,881 

 2,472 

 7,353 

 1 

  

Other (2)

 62,146 

 19,297 

 81,443 

 10 

  

Government insured/

  

  

  

  

  

  

guaranteed loans (3)

 26,447 

 - 

 26,447 

 3 

  

  

Total

$

 237,216 

 62,343 

 299,559 

 36 

%

Real estate 1-4

  

  

  

  

  

  

family PCI loans:

  

  

  

  

  

California

$

 15,686 

 29 

 15,715 

 2 

%

Florida

 1,755 

 18 

 1,773 

 - 

  

New Jersey

 863 

 15 

 878 

 - 

  

Other (1)

 4,584 

 50 

 4,634 

 1 

  

  

Total

$

 22,888 

 112 

 23,000 

 3 

%

  

  

Total

$

 260,104 

 62,455 

 322,559 

 39 

%

  

  

  

  

  

  

  

  

  

*      Less than 1%.

(1)   Consists of 45 states; no state had loans in excess of $553 million.

(2)   Consists of 41 states; no state had loans in excess of $7.2 billion.

(3)   Represents loans whose repayments are predominantly insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).

 

First Lien Mortgage Portfolio     The credit performance associated with our real estate 1-4 family first lien mortgage portfolio continued to improve in second quarter 2014, as measured through net charge-offs and nonaccrual loans. Net charge-offs (annualized) as a percentage of average total loans improved to 0.21% and 0.24% in the second quarter and first half of 2014, respectively, compared with 0.52% and 0.61%, respectively, for the same periods a year ago. Nonaccrual loans were $9.0 billion at June 30, 2014, compared with $9.8 billion at December 31, 2013. Improvement in the credit performance was driven by both an improving economic and housing environment and declining balances in non-strategic and liquidating loans, which have been replaced with higher quality assets originated after 2008 utilizing tighter  underwriting standards. Real estate 1-4 family first lien mortgage loans originated after 2008 have resulted in minimal losses to date and are approximately 55% of our total real estate 1-4 family first lien mortgage portfolio as of June 30, 2014.

In second quarter 2014, we continued to grow our real estate 1-4 family first lien mortgage portfolio through the retention of high-quality non-conforming mortgages. Substantially all non-conforming loans originated in second quarter 2014 were classified as non-conforming due to the loan amount exceeding conventional conforming loan amount limits established by the GSEs. Our total real estate 1-4 family first lien mortgage portfolio increased $626 million in second quarter 2014 and $1.6 billion in the first half of 2014. The growth in this portfolio has been largely offset by runoff in our real estate 1-4 family first lien mortgage non-strategic and liquidating portfolios. Excluding this runoff, our core real estate 1-4 family first lien mortgage portfolio increased $2.6 billion in second quarter 2014 and $5.4 billion in the first half of 2014 as we retained $11.0 billion and $19.2 billion in non-conforming originations in the second quarter and first half of 2014, respectively.  

27

 


 

      

Pick‑a‑Pay Portfolio   The Pick-a-Pay portfolio was one of the consumer residential first mortgage portfolios we acquired from Wachovia and a majority of the portfolio was identified as PCI loans.

The Pick-a-Pay portfolio includes loans that offer payment options (Pick-a-Pay option payment loans), and also includes loans that were originated without the option payment feature, loans that no longer offer the option feature as a result of our modification efforts since the acquisition, and loans where the customer voluntarily converted to a fixed-rate product. The Pick-a-Pay portfolio is included in the consumer real estate 1-4 family first mortgage class of loans throughout this Report. Table 20 provides balances by types of loans as of June 30, 2014, as a result of modification efforts, compared to the types of loans included in the portfolio at acquisition. Total adjusted unpaid principal balance of PCI Pick-a-Pay loans was $27.6   billion at June 30, 2014, compared with $61.0 billion at acquisition. Primarily due to modification efforts, the adjusted unpaid principal balance of option payment PCI loans has declined to 16% of the total Pick-a-Pay portfolio at June 30, 2014, compared with 51% at acquisition.

 

 

 

Table 20:  Pick-a-Pay Portfolio - Comparison to Acquisition Date

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31,

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

 2013 

  

  

  

 2008 

  

  

  

  

  

  

  

  

  

Adjusted

  

  

  

  

Adjusted

  

  

  

  

Adjusted

  

  

  

  

  

  

  

  

  

  

unpaid

  

  

  

  

unpaid

  

  

  

  

unpaid

  

  

  

  

  

  

  

  

  

  

principal

% of

  

  

  

principal

% of

  

  

  

principal

% of

  

(in millions)

  

balance (1)

total

  

  

  

balance (1)

total

  

  

  

balance (1)

total

  

Option payment loans

  

$

 22,228 

 42 

%

  

$

 24,420 

 44 

%

  

$

 99,937 

 86 

%

Non-option payment adjustable-rate

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

and fixed-rate loans

  

  

 7,331 

 14 

  

  

  

 7,892 

 14 

  

  

  

 15,763 

 14 

  

Full-term loan modifications

  

  

 23,250 

 44 

  

  

  

 23,509 

 42 

  

  

  

 - 

 - 

  

  

  

Total adjusted unpaid principal balance

  

$

 52,809 

 100 

%

  

$

 55,821 

 100 

%

  

$

 115,700 

 100 

%

  

  

Total carrying value

  

$

 47,965 

  

  

  

  

 50,971 

  

  

  

  

 95,315 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Adjusted unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Pick-a-Pay loans may have fixed or adjustable rates with payment options that include a minimum payment, an interest-only payment or fully amortizing payment (both 15 and 30 year options). Total interest deferred due to negative amortization on Pick-a-Pay loans was $736   million at June 30, 2014 , and $902 million at December 31, 2013. Approximately 94% of the Pick-a-Pay customers making a minimum payment in June 2014 did not defer interest, compared with 93% in December 2013

Deferral of interest on a Pick-a-Pay loan may continue as long as the loan balance remains below a pre-defined principal cap, which is based on the percentage that the current loan balance represents to the original loan balance. A significant portion of the Pick-a-Pay portfolio has a cap of 125% of the original loan balance. Most of the Pick-a-Pay loans on which there is a deferred interest balance re-amortize (the monthly payment amount is reset or “recast”) on the earlier of the date when the loan balance reaches its principal cap, or generally the 10-year anniversary of the loan. After a recast, the customers’ new payment terms are reset to the amount necessary to repay the balance over the remainder of the original loan term.

Due to the terms of the Pick-a-Pay portfolio, there is little recast risk in the near term where borrowers will have a payment change over 7.5%. Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balances of loans to recast based on reaching the principal cap and also experiencing a payment change over the annual 7.5% reset: $25 million for the remainder of 2014, $54 million in 2015 and $24 million in 2016. In addition, in a flat rate environment, we would expect the following balances of loans to start fully amortizing due to reaching their recast anniversary date and also having a payment change over the annual 7.5% reset: $117 million for the remainder of 2014, $358 million in 2015 and $410 million in 2016. In second quarter 2014, the amount of loans reaching their recast anniversary date and also having a payment change over the annual 7.5% reset was $22 million. 

Table 21 reflects the geographic distribution of the Pick-a-Pay portfolio broken out between PCI loans and all other loans. The LTV ratio is a useful metric in evaluating future real estate 1-4 family first mortgage loan performance, including potential charge-offs. Because PCI loans were initially recorded at fair value, including write-downs for expected credit losses, the ratio of the carrying value to the current collateral value will be lower compared with the LTV based on the adjusted unpaid principal balance. For informational purposes, we have included both ratios for PCI loans in the following table.

28

 


 

Risk Management – Credit Risk   Management (continued)  

 

Table 21:  Pick-a-Pay Portfolio (1)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

PCI loans

  

All other loans

  

  

  

  

  

  

  

  

  

Ratio of

  

  

  

Ratio of

  

  

  

  

Adjusted

  

  

  

  

carrying

  

  

  

carrying

  

  

  

  

unpaid

Current

  

  

  

value to

  

  

  

value to

  

  

  

principal

LTV

  

Carrying

current

  

  

Carrying

current

  

(in millions)

balance (2)

ratio (3)

  

value (4)

value (5)

  

  

value (4)

value (5)

  

California

$

 19,078 

 85 

%

$

 15,673 

 69 

%

$

 12,317 

 62 

%

Florida

  

 2,253 

 94 

  

  

 1,705 

 66 

  

  

 2,561 

 76 

  

New Jersey

  

 953 

 85 

  

  

 832 

 67 

  

  

 1,650 

 73 

  

New York

  

 585 

 80 

  

  

 534 

 66 

  

  

 753 

 70 

  

Texas

  

 250 

 67 

  

  

 222 

 59 

  

  

 998 

 53 

  

Other states

  

 4,483 

 86 

  

  

 3,698 

 69 

  

  

 7,022 

 72 

  

  

Total Pick-a-Pay loans

$

 27,602 

  

  

$

 22,664 

  

  

$

 25,301 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

The individual states shown in this table represent the top five states based on the total net carrying value of the Pick-a-Pay loans at the beginning of 2014.

  

(2)

Adjusted unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.

  

(3)

The current LTV ratio is calculated as the adjusted unpaid principal balance divided by the collateral value. Collateral values are generally determined using automated valuation models (AVM) and are updated quarterly. AVMs are computer-based tools used to estimate market values of homes based on processing large volumes of market data including market comparables and price trends for local market areas.

  

(4)

Carrying value, which does not reflect the allowance for loan losses, includes remaining purchase accounting adjustments, which, for PCI loans may include the nonaccretable difference and the accretable yield and, for all other loans, an adjustment to mark the loans to a market yield at date of merger less any subsequent charge-offs.

  

(5)

The ratio of carrying value to current value is calculated as the carrying value divided by the collateral value.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

To maximize return and allow flexibility for customers to avoid foreclosure, we have in place several loss mitigation strategies for our Pick-a-Pay loan portfolio. We contact customers who are experiencing financial difficulty and may in certain cases modify the terms of a loan based on a customer’s documented income and other circumstances.

We also have taken steps to work with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at risk, we offer combinations of term extensions of up to 40 years (from 30 years), interest rate reductions, forbearance of principal, and, in certain cases we may offer principal forgiveness to customers with substantial property value declines based on affordability needs.

In second quarter 2014, we completed more than 1,200 proprietary and Home Affordability Modification Program (HAMP) Pick-a-Pay loan modifications. We have completed more than 126,800 modifications since the Wachovia acquisition, resulting in $6.0 billion of principal forgiveness to our Pick-a-Pay customers as well as an additional $123 million of conditional forgiveness that can be earned by borrowers through performance over a three year period.

Due to better than expected performance observed on the Pick-a-Pay PCI portfolio compared with the original acquisition estimates, we have reclassified $5.9 billion from the nonaccretable difference to the accretable yield since acquisition. Our cash flows expected to be collected have been favorably affected by lower expected defaults and losses as a result of observed and forecasted economic strengthening, particularly in housing prices, and our loan modification efforts. These factors are expected to reduce the frequency and severity of defaults and keep these loans performing for a longer period, thus increasing future principal and interest cash flows. The resulting increase in the accretable yield will be realized over the remaining life of the portfolio, which is estimated to have a weighted-average remaining life of approximately 12.1   years at June 30, 2014 . The weighted average remaining life decreased slightly from December 31, 2013 due to updated expectations for prepayments.  The accretable yield percentage at June 30, 2014, was 4.98%, unchanged from the end of 2013. The accretable yield balance increased to $17.6 billion during second quarter 2014 as a result of a $2.0 billion reclassification from the nonaccretable difference due to favorable changes in the expected timing and composition of cash flows resulting from improving credit and prepayment expectations.  Accordingly, the accretable yield percentage is expected to be 6.15% for third quarter 2014.  Fluctuations in the accretable yield are driven by changes in interest rate indices for variable rate PCI loans, prepayment assumptions, and expected principal and interest payments over the estimated life of the portfolio, which will be affected by the pace and degree of improvements in the U.S. economy and housing markets and projected lifetime performance resulting from loan modification activity. Changes in the projected timing of cash flow events, including loan liquidations, modifications and short sales, can also affect the accretable yield and the estimated weighted-average life of the portfolio.

The predominant portion of our PCI loans is included in the Pick-a-Pay portfolio. For further information on the judgment involved in estimating expected cash flows for PCI loans, see the “Critical Accounting Policies – Purchased Credit-Impaired Loans” section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2013 Form 10-K.

29

 


 

      

Junior Lien Mortgage Portfolio   The junior lien mortgage portfolio consists of residential mortgage lines and loans that are subordinate in rights to an existing lien on the same property. It is not unusual for these lines and loans to have draw periods, interest only payments, balloon payments, adjustable rates and similar features. The majority of our junior lien loan products are amortizing payment loans with fixed interest rates and repayment periods between five to 30 years. 

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 the frequency of delinquency is typically lower when we own or service the first lien mortgage. In general, we have limited information available on the delinquency status of the third party owned or serviced senior lien where we also hold a junior lien. To capture this inherent loss content, we use the experience of our junior lien mortgages behind delinquent first liens that are owned or serviced by us adjusted for any observed differences in delinquency and loss rates associated with junior lien mortgages behind third party first mortgages. We incorporate this inherent loss content into our allowance for loan losses. Our allowance process for junior liens ensures appropriate consideration of the relative difference in loss experience for junior liens behind first lien mortgage loans we own or service, compared with those behind first lien mortgage loans owned or serviced by third parties. In addition, our allowance process for junior liens that are current, but are in their revolving period, appropriately reflects the inherent loss where the borrower is delinquent on the corresponding first lien mortgage loans.

Table 22 summarizes delinquency and loss rates for our junior lien mortgages by the holder of the first lien.

 

 

 

 

 

Table 22:  Junior Lien Mortgage Portfolios Performance by Holder of 1st Lien (1)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

% of loans

  

Loss rate

  

  

  

  

  

  

  

  

two payments

  

(annualized)

  

  

  

  

Outstanding balance

  

or more past due

  

quarter  ended

  

  

  

  

  

June 30,

Dec. 31,

  

June 30,

  

Dec. 31,

  

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

  

 2013 

  

 2014 

 2014 

 2013 

 2013 

 2013 

Junior lien mortgages behind:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo owned or

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

serviced first lien

$

 30,787 

 32,681 

  

 2.21 

%

 2.37 

  

 1.08 

 1.16 

 1.34 

 1.59 

 2.07 

  

Third party first lien

 31,556 

 33,110 

  

 2.46 

  

 2.53 

  

 0.96 

 1.23 

 1.35 

 1.58 

 1.95 

  

  

Total junior lien mortgages

$

 62,343 

 65,791 

  

 2.33 

  

 2.45 

  

 1.02 

 1.20 

 1.35 

 1.58 

 2.01 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Excludes PCI loans because their losses were generally reflected in PCI accounting adjustments at the date of acquisition.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

We monitor the number of borrowers paying the minimum amount due on a monthly basis. In June 2014, approximately 94% of our borrowers with a junior lien mortgage outstanding balance paid the minimum amount due or more, including approximately 47% who paid only the minimum amount due.

 

30

 


 

Risk Management – Credit Risk   Management (continued)  

Table 23 shows the credit attributes of the core and liquidating junior lien mortgage portfolios and lists the top five states by outstanding balance for the core portfolio. Loans to California borrowers represent the largest state concentration in each of these portfolios. The decrease in outstanding balances since December 31, 2013 primarily reflects loan paydowns and charge-offs. As of June 30, 2014, 24% of the outstanding balance of the junior lien mortgage portfolio was associated with loans that had a combined loan to value (CLTV) ratio in excess of 100%. CLTV means the ratio of the total loan balance of first mortgages and junior lien mortgages (including unused line amounts for credit line products) to property collateral value. The unsecured portion (the outstanding amount that was in excess of the most recent property collateral value) of the outstanding balances of these loans totaled 11% of the junior lien mortgage portfolio at June 30, 2014.

 

Table 23:  Junior Lien Mortgage Portfolios (1)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

% of loans

  

Loss rate

  

  

  

  

  

  

  

  

two payments

  

(annualized)

  

  

  

  

  

Outstanding balance

  

or more past due

  

quarter ended

  

  

  

  

  

June 30,

Dec. 31,

  

June 30,

  

Dec. 31,

  

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

  

 2013 

  

 2014 

 2014 

 2013 

 2013 

 2013 

Core portfolio

  

  

  

  

  

  

  

  

  

  

  

  

  

California

$

 16,167 

 17,003 

  

 1.96 

%

 2.03 

  

 0.47 

 0.67 

 0.86 

 1.20 

 1.68 

Florida

  

 5,510 

 5,811 

  

 2.84 

  

 3.16 

  

 1.23 

 1.86 

 1.85 

 2.12 

 2.82 

New Jersey

  

 4,837 

 5,019 

  

 3.26 

  

 3.43 

  

 1.45 

 1.49 

 1.50 

 1.81 

 1.68 

Virginia

  

 3,256 

 3,378 

  

 1.98 

  

 2.02 

  

 0.86 

 0.87 

 0.93 

 0.93 

 1.26 

Pennsylvania

  

 3,018 

 3,137 

  

 2.52 

  

 2.64 

  

 1.24 

 1.01 

 0.96 

 1.17 

 1.43 

Other

  

 26,181 

 27,653 

  

 2.04 

  

 2.18 

  

 1.05 

 1.15 

 1.34 

 1.43 

 1.87 

  

Total

  

 58,969 

 62,001 

  

 2.22 

  

 2.35 

  

 0.94 

 1.09 

 1.23 

 1.42 

 1.84 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Liquidating portfolio

  

 3,374 

 3,790 

  

 4.32 

  

 4.10 

  

 2.46 

 2.94 

 3.20 

 4.12 

 4.65 

  

  

Total core and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

liquidating portfolios

$

 62,343 

 65,791 

  

 2.33 

  

 2.45 

  

 1.02 

 1.20 

 1.35 

 1.58 

 2.01 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Excludes PCI loans because their losses were generally reflected in PCI accounting adjustments at the date of acquisition.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

31

 


 

      

Our junior lien, as well as first lien, lines of credit products generally have a draw period of 10 years (with some up to 15 or 20 years) with variable interest rate and payment options during the draw period of (1) interest only or (2) 1.5% of outstanding principal balance plus accrued interest. During the draw period, the borrower has the option of converting all or a portion of the line from a variable interest rate to a fixed rate with terms including interest-only payments for a fixed period between three to seven years or a fully amortizing payment with a fixed period between five to 30 years. At the end of the draw period, a line of credit generally converts to an amortizing payment schedule with repayment terms of up to 30 years based on the balance at time of conversion. Certain lines and loans have been structured with a balloon payment, which requires full repayment of the outstanding balance at the end of the term period. The conversion of lines or loans to fully amortizing or balloon payoff may result in a significant payment increase, which can affect some borrowers’ ability to repay the outstanding balance.

The lines that enter their amortization period may experience higher delinquencies and higher loss rates than the ones in their draw or term period. We have considered this increased inherent risk in our allowance for credit loss estimate.

In anticipation of our borrowers reaching the end of their contractual commitment, we have created a program to inform, educate and help these borrowers transition from interest-only to fully-amortizing payments or full repayment. We monitor the performance of the borrowers moving through the program in an effort to refine our ongoing program strategy.

Table 24 reflects the outstanding balance of our portfolio of junior lien lines and loans and senior lien lines segregated into scheduled end of draw or end of term periods and products that are currently amortizing, or in balloon repayment status. It excludes real estate 1-4 family first lien line reverse mortgages, which total $2.4  billion,  because they are predominantly insured by the FHA, and it excludes PCI loans, which total $145 million, because their losses were generally reflected in our nonaccretable difference established at the date of acquisition.

 

Table 24:  Junior Lien Mortgage Line and Loan and Senior Lien Mortgage Line Portfolios Payment Schedule

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Scheduled end of draw / term

  

  

  

  

  

  

Outstanding balance

Remainder of

  

  

  

  

2019 and

  

  

(in millions)

June 30, 2014

  

2014 

2015 

2016 

2017 

2018 

thereafter (1)

  

Amortizing

Junior residential lines

$

 54,716 

  

 1,755 

 5,559 

 7,084 

 7,197 

 3,914 

 25,424 

  

 3,783 

Junior loans (2)

  

 7,627 

  

 5 

 83 

 117 

 121 

 13 

 1,323 

  

 5,966 

  

Total junior lien (3)(4)

  

 62,343 

  

 1,760 

 5,642 

 7,201 

 7,318 

 3,927 

 26,747 

  

 9,749 

First lien lines

  

 17,721 

  

 540 

 1,267 

 1,015 

 1,002 

 1,135 

 11,839 

  

 924 

  

  

Total (3)(4)

$

 80,065 

  

 2,300 

 6,909 

 8,216 

 8,320 

 5,062 

 38,586 

  

 10,672 

  

  

% of portfolios

  

 100 

%

 3 

 9 

 10 

 10 

 6 

 48 

  

 13 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

The annual scheduled end of draw or term ranges from $1.9 billion to $10.4 billion and averages $5.5 billion per year for 2019 and thereafter. Loans that convert in 2025 and thereafter have draw periods that generally extend to 15 or 20 years.

(2)

Junior loans within the term period predominantly represent principal and interest products that require a balloon payment upon the end of the loan term. Amortizing junior loans include $60 million of balloon loans that have reached end of term and are now past due.

(3)

Lines in their draw period are predominantly interest-only. The unfunded credit commitments for junior and first lien lines totaled $71.7 billion at June 30, 2014.

(4)

Includes scheduled end-of-term balloon payments totaling $399 million, $557 million, $438 million, $541 million, $570 million and $2.6 billion for 2014, 2015, 2016, 2017, 2018, 2019 and thereafter, respectively. Amortizing lines include $157 million of end-of-term balloon payments, which are past due. At June 30, 2014, $318 million, or 7% of outstanding lines of credit that are amortizing, are 30 or more days past due compared to $1.3 billion, or 2% for lines in their draw period.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Credit Cards   Our credit card portfolio totaled $27.2 billion at June 30, 2014, which represented 3% of our total outstanding loans. The net charge-off rate (annualized) for our credit card portfolio was 3.20% for second quarter 2014, compared with 3.90% for second quarter 2013 and 3.39% and 3.93% for the first half of 2014 and 2013, respectively.

 

AUTOmobile   Our automobile portfolio, predominantly composed of indirect loans, totaled $54.1 billion at June 30, 2014. The net charge-off rate (annualized) for our automobile portfolio was 0.35% for second quarter 2014, compared with 0.35% for second quarter 2013 and 0.52% and

0.50% for the first half of 2014 and 2013, respectively.
Other revolving Credit and installment   Other revolving credit and installment loans totaled $33.7 billion at June 30, 2014, and primarily included student and security-based margin loans. Student loans totaled $11.6 billion at June 30, 2014 . Government guaranteed student loans of $9.7 billion were transferred to loans held for sale at June 30, 2014. The  net charge-off rate (annualized) for other revolving credit and installment loans was 1.22 % for second quarter 2014, compared with 1.38 % for second quarter 2013 and 1.26 % and 1.38 % for the first half of 2014 and 2013, respectively.  

32

 


 

Risk Management – Credit Risk   Management (continued)  

nonperforming assets (Nonaccrual Loans and Foreclosed assets)     Table 25 summarizes nonperforming assets (NPAs) for each of the last four quarters.  We generally place loans on nonaccrual status when:

·          the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrower’s financial condition and the adequacy of collateral, if any);

·          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;

·          part of the principal balance has been charged off (including loans discharged in bankruptcy);

·          for junior lien mortgages, we have evidence that the related first lien mortgage may be 120 days past due or in the process of foreclosure regardless of the junior lien delinquency status ; or

·          performing consumer loans are discharged in bankruptcy, regardless of their delinquency status.

 

Table 25:  Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

March 31, 2014

  

December 31, 2013

  

September 30, 2013

  

  

  

  

  

  

  

  

  

% of

  

  

  

% of

  

  

  

% of

  

  

  

% of

  

  

  

  

  

  

  

  

  

total

  

  

  

total

  

  

  

total

  

  

  

total

  

($ in millions)

  

Balance

loans

  

  

Balance

loans

  

  

Balance

loans

  

  

Balance

loans

  

Nonaccrual loans:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

$

 693 

 0.34 

%

$

 630 

 0.32 

%

$

 738 

 0.38 

%

$

 809 

 0.43 

%

  

  

Real estate mortgage

  

 1,802 

 1.66 

  

  

 2,030 

 1.88 

  

  

 2,252 

 2.10 

  

  

 2,496 

 2.36 

  

  

  

Real estate construction

  

 239 

 1.40 

  

  

 296 

 1.78 

  

  

 416 

 2.48 

  

  

 517 

 3.15 

  

  

  

Lease financing

  

 28 

 0.24 

  

  

 31 

 0.26 

  

  

 29 

 0.24 

  

  

 17 

 0.15 

  

  

  

Foreign

  

 36 

 0.08 

  

  

 40 

 0.08 

  

  

 40 

 0.08 

  

  

 47 

 0.10 

  

  

  

  

Total commercial (1)

  

 2,798 

 0.71 

  

  

 3,027 

 0.79 

  

  

 3,475 

 0.92 

  

  

 3,886 

 1.05 

  

  

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

first mortgage (2)

  

 9,026 

 3.47 

  

  

 9,357 

 3.61 

  

  

 9,799 

 3.79 

  

  

 10,450 

 4.10 

  

  

  

Real estate 1-4 family

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

junior lien mortgage

  

 1,964 

 3.14 

  

  

 2,072 

 3.24 

  

  

 2,188 

 3.32 

  

  

 2,333 

 3.45 

  

  

  

Automobile

  

 150 

 0.28 

  

  

 161 

 0.31 

  

  

 173 

 0.34 

  

  

 188 

 0.38 

  

  

  

Other revolving credit and installment

  

 34 

 0.10 

  

  

 33 

 0.08 

  

  

 33 

 0.08 

  

  

 36 

 0.08 

  

  

  

  

Total consumer

  

 11,174 

 2.55 

  

  

 11,623 

 2.61 

  

  

 12,193 

 2.74 

  

  

 13,007 

 2.95 

  

  

  

  

  

Total nonaccrual

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

loans (3)(4)(5)

  

 13,972 

 1.69 

  

  

 14,650 

 1.77 

  

  

 15,668 

 1.91 

  

  

 16,893 

 2.09 

  

Foreclosed assets:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Government insured/guaranteed (6)

  

 2,359 

  

  

  

 2,302 

  

  

  

 2,093 

  

  

  

 1,781 

  

  

  

Non-government insured/guaranteed

  

 1,748 

  

  

  

 1,813 

  

  

  

 1,844 

  

  

  

 2,021 

  

  

  

  

  

Total foreclosed assets

  

 4,107 

  

  

  

 4,115 

  

  

  

 3,937 

  

  

  

 3,802 

  

  

  

  

  

  

Total nonperforming assets

$

 18,079 

 2.18 

%

$

 18,765 

 2.27 

%

$

 19,605 

 2.38 

%

$

 20,695 

 2.56 

%

Change in NPAs from prior quarter

$

 (686) 

  

  

  

 (840) 

  

  

  

 (1,090) 

  

  

  

 (360) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Includes LHFS of $1 million at June 30, 2014, March 31, 2014 and December 31, 2013, and $26 million at September 30, 2013.

  

(2)

Includes MHFS of $238 million, $227 million, $227 million and $288 million at June 30 and March 31, 2014, and December 31, and September 30, 2013, respectively.

  

(3)

Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.

  

(4)

Real estate 1-4 family mortgage loans predominantly insured by the FHA or guaranteed by the VA and student loans predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the Federal Family Education Loan Program are not placed on nonaccrual status because they are insured or guaranteed.

  

(5)

See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans and loans in process of foreclosure.

  

(6)

Consistent with regulatory reporting requirements, foreclosed real estate resulting from government insured/guaranteed loans are classified as nonperforming. Both principal and interest related to these foreclosed real estate assets are collectible because the loans were predominantly insured by the FHA or guaranteed by the VA. Foreclosed assets in the latter half of 2013 were elevated due to an increase in completed foreclosures, as enhancements to loan modification programs and an FHA foreclosure moratorium, which previously slowed new foreclosures, were resolved. The increase in balance at June 30, 2014, reflects a slowdown in processing the elevated levels of foreclosed properties through the U.S. Department of Housing and Urban Development (HUD) conveyance requirements as a result of industry resource constraints to deal with the elevated levels, as well as other factors, including an increase in foreclosures in states with longer redemption periods, longer occupant evacuation periods, increased maintenance required for aging foreclosures and longer repair authorization periods.

  

33

 


 

      

Table 26 provides an analysis of the changes in nonaccrual loans.

 

 

Table 26:  Analysis of Changes in Nonaccrual Loans

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended

  

  

  

  

  

  

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

June 30,

(in millions)

  

 2014 

 2014 

 2013 

 2013 

 2013 

Commercial nonaccrual loans

  

  

  

  

  

  

Balance, beginning of quarter

$

 3,027 

 3,475 

 3,886 

 4,455 

 5,242 

  

Inflows

  

 433 

 367 

 520 

 490 

 557 

  

Outflows:

  

  

  

  

  

  

  

  

Returned to accruing

  

 (81) 

 (98) 

 (67) 

 (192) 

 (128) 

  

  

Foreclosures

  

 (32) 

 (79) 

 (34) 

 (77) 

 (120) 

  

  

Charge-offs

  

 (120) 

 (116) 

 (191) 

 (150) 

 (193) 

  

  

Payments, sales and other (1)

  

 (429) 

 (522) 

 (639) 

 (640) 

 (903) 

  

  

  

Total outflows

  

 (662) 

 (815) 

 (931) 

 (1,059) 

 (1,344) 

Balance, end of quarter

  

 2,798 

 3,027 

 3,475 

 3,886 

 4,455 

Consumer nonaccrual loans

  

  

  

  

  

  

Balance, beginning of quarter

  

 11,623 

 12,193 

 13,007 

 13,460 

 14,284 

  

Inflows

  

 1,673 

 1,650 

 1,691 

 2,015 

 2,071 

  

Outflows:

  

  

  

  

  

  

  

  

Returned to accruing

  

 (1,107) 

 (1,104) 

 (953) 

 (997) 

 (1,156) 

  

  

Foreclosures

  

 (132) 

 (146) 

 (162) 

 (167) 

 (95) 

  

  

Charge-offs

  

 (348) 

 (400) 

 (437) 

 (480) 

 (651) 

  

  

Payments, sales and other (1)

  

 (535) 

 (570) 

 (953) 

 (824) 

 (993) 

  

  

  

Total outflows

  

 (2,122) 

 (2,220) 

 (2,505) 

 (2,468) 

 (2,895) 

Balance, end of quarter

  

 11,174 

 11,623 

 12,193 

 13,007 

 13,460 

  

  

Total nonaccrual loans

$

 13,972 

 14,650 

 15,668 

 16,893 

 17,915 

  

  

  

  

  

  

  

  

  

  

  

(1)

Other outflows include the effects of VIE deconsolidations and adjustments for loans carried at fair value.

  

  

  

  

  

  

  

  

  

  

  

Typically, changes to nonaccrual loans period-over-period represent inflows for loans that are placed on nonaccrual status in accordance with our policy, offset by reductions for loans that are paid down, charged off, sold, transferred to foreclosed properties, or are no longer classified as nonaccrual as a result of continued performance and an improvement in the borrower’s financial condition and loan repayment capabilities. Also, reductions can come from borrower repayments even if the loan remains on nonaccrual.

While nonaccrual loans are not free of loss content, we believe exposure to loss is significantly mitigated by the following factors at June 30, 2014:

·       96% of total commercial nonaccrual loans and 99% of total consumer nonaccrual loans are secured. Of the consumer nonaccrual loans, 98% are secured by real estate and 68% have a combined LTV (CLTV) ratio of 80% or less.

·       losses of $751 million and $3.7 billion  have already been recognized on 31% of commercial nonaccrual loans and 55% of consumer nonaccrual loans, respectively. Generally, when a consumer real estate loan is 120 days past due (except when required earlier by the Interagency or OCC Guidance), we transfer it to nonaccrual status. When the loan reaches 180 days past due, or is discharged in bankruptcy, it is our policy to write these loans down to net realizable value (fair value of collateral less estimated costs to sell), except for modifications in their trial period that are not written down as long as trial payments are made on time. Thereafter, we reevaluate each loan regularly and record additional write-downs if needed.

·       68% of commercial nonaccrual loans were current on interest.

·       the risk of loss of all nonaccrual loans has been considered and we believe is adequately covered by the allowance for loan losses.  

·       $2.2  billion of consumer loans discharged in bankruptcy and classified as nonaccrual were 60 days or less past due, of which $2.0 billion were current.

 

We continue to work with our customers experiencing financial difficulty to determine if they can qualify for a loan modification so that they can stay in their homes. Under both our proprietary modification programs and the MHA programs, customers may be required to provide updated documentation, and some programs require completion of payment during trial periods to demonstrate sustained performance before the loan can be removed from nonaccrual status. In addition, for loans in foreclosure in certain states, including New York, New Jersey and Florida, the foreclosure timeline has significantly increased due to backlogs in an already complex process. Therefore, loans remain on nonaccrual status for longer periods.  

Table 27 provides a summary and an analysis of changes in foreclosed assets.

 

 

Table 27:  Foreclosed Assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

June 30,

(in millions)

  

 2014 

 2014 

 2013 

 2013 

 2013 

Summary by loan segment

  

  

  

  

  

  

Government insured/guaranteed (1)

$

2,359 

2,302 

2,093 

1,781 

1,026 

PCI loans:

  

  

  

  

  

  

  

Commercial

  

457 

461 

497 

559 

597 

  

Consumer

  

208 

177 

149 

125 

127 

  

  

Total PCI loans

  

665 

638 

646 

684 

724 

All other loans:

  

  

  

  

  

  

  

Commercial

  

634 

736 

759 

944 

1,012 

  

Consumer

  

449 

439 

439 

393 

378 

  

  

Total all other loans

  

1,083 

1,175 

1,198 

1,337 

1,390 

  

  

  

Total foreclosed assets

$

4,107 

4,115 

3,937 

3,802 

3,140 

Analysis of changes in foreclosed assets

  

  

  

  

  

  

Balance, beginning of quarter

$

4,115 

3,937 

3,802 

3,140 

3,350 

  

Net change in government insured/guaranteed (1)(2)

  

57 

209 

312 

755 

57 

  

Additions to foreclosed assets (3)

  

421 

448 

428 

459 

406 

  

Reductions:

  

  

  

  

  

  

  

  

Sales

  

(493)

(490)

(823)

(545)

(647)

  

  

Write-downs and gains (losses) on sales

  

11 

218 

(7)

(26)

  

  

  

Total reductions

  

(486)

(479)

(605)

(552)

(673)

Balance, end of quarter

$

4,107 

4,115 

3,937 

3,802 

3,140 

  

  

  

  

  

  

  

  

  

  

  

(1)

Consistent with regulatory reporting requirements, foreclosed real estate resulting from government insured/guaranteed loans are classified as nonperforming. Both principal and interest related to these foreclosed real estate assets are collectible because the loans were predominantly insured by the FHA or guaranteed by the VA. Foreclosed assets in the latter half of 2013 were elevated due to an increase in completed foreclosures, as enhancements to loan modification programs and an FHA foreclosure moratorium, which previously slowed new foreclosures, were resolved. The increase in balance at June 30, 2014, reflects a continued slowdown in processing the elevated levels of foreclosed properties through the HUD conveyance requirements as a result of industry resource constraints to deal with the elevated levels, as well as other factors, including an increase in foreclosures in states with longer redemption periods, longer occupant evacuation periods, increased maintenance required for aging foreclosures and longer repair authorization periods.

(2)

Foreclosed government insured/guaranteed loans are temporarily transferred to and held by us as servicer, until reimbursement is received from FHA or VA. The net change in government insured/guaranteed foreclosed assets is made up of inflows from mortgages held for investment and MHFS, and outflows when we are reimbursed by FHA/VA. Transfers from government insured/guaranteed loans to foreclosed assets amounted to $654 million, $801 million, $892 million, $1.3 billion, and $639 million for the quarter ended June 30 and March 31, 2014 and December 31, September 30 and June 30, 2013, respectively.

(3)

Predominantly include loans moved into foreclosure from nonaccrual status, PCI loans transitioned directly to foreclosed assets and repossessed automobiles.

  

  

  

  

  

  

  

  

  

  

  

34

 


 

Risk Management – Credit Risk   Management (continued)  

Foreclosed assets at June 30, 2014, included $3.0   billion of foreclosed residential real estate that had collateralized commercial and consumer loans, of which 79% is predominantly FHA insured or VA guaranteed and expected to have minimal or no loss content. The remaining foreclosed assets balance of $1.1 billion has been written down to estimated net realizable value. Foreclosed assets at June 30, 2014 have increased slightly, compared with December 31, 2013. At June 30, 2014, 69%  of foreclosed assets of $4.1 billion have been in the foreclosed assets portfolio one year or less.

Given the industry resource constraints and other factors affecting our ability to meet HUD conveyance requirements, we anticipate continuing to hold an elevated level of foreclosed assets on our balance sheet.

35

 


 

      

 

TROUBLED DEBT RESTRUCTURINGS (TDRs)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Table 28:  Troubled Debt Restructurings (TDRs)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

June 30,

(in millions)

  

 2014 

 2014 

 2013 

 2013 

 2013 

Commercial TDRs

  

  

  

  

  

  

  

Commercial and industrial

$

 948 

 1,081 

 1,032 

 1,153 

 1,238 

  

Real estate mortgage

  

 2,179 

 2,233 

 2,248 

 2,457 

 2,605 

  

Real estate construction

  

 391 

 454 

 475 

 598 

 680 

  

Lease financing

  

 5 

 6 

 8 

 9 

 11 

  

Foreign

  

 2 

 7 

 2 

 2 

 17 

  

  

Total commercial TDRs

  

 3,525 

 3,781 

 3,765 

 4,219 

 4,551 

Consumer TDRs

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 18,582 

 19,043 

 18,925 

 18,974 

 19,093 

  

Real estate 1-4 family junior lien mortgage

  

 2,463 

 2,460 

 2,468 

 2,399 

 2,408 

  

Credit Card

  

 379 

 399 

 431 

 455 

 477 

  

Automobile

  

 151 

 169 

 189 

 212 

 246 

  

Other revolving credit and installment

  

 38 

 34 

 33 

 32 

 29 

  

Trial modifications

  

 469 

 593 

 650 

 717 

 716 

  

  

Total consumer TDRs (1)

  

 22,082 

 22,698 

 22,696 

 22,789 

 22,969 

  

  

  

Total TDRs

$

 25,607 

 26,479 

 26,461 

 27,008 

 27,520 

  

  

  

  

  

  

  

  

  

  

  

TDRs on nonaccrual status

$

 7,638 

 7,774 

 8,172 

 8,609 

 9,030 

TDRs on accrual status (1)

  

 17,969 

 18,705 

 18,289 

 18,399 

 18,490 

  

  

  

Total TDRs

$

 25,607 

 26,479 

 26,461 

 27,008 

 27,520 

  

  

  

  

  

  

  

  

  

  

  

(1)

TDR loans include $2.2 billion, $2.6 billion, $2.5 billion, $2.4 billion and $2.5 billion at June 30, and March 31, 2014, and December 31, September 30, June 30 and March 31, 2013, respectively, of government insured/guaranteed loans that are predominantly insured by the FHA or guaranteed by the VA and are accruing.

  

  

  

  

  

  

  

  

  

  

  

Table 28 provides information regarding the recorded investment of loans modified in TDRs. The allowance for loan losses for TDRs was $4.0 billion and $4.5 billion at June 30, 2014 and December 31, 2013, respectively. See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for additional information regarding TDRs. In those situations where principal is forgiven, the entire amount of such forgiveness is immediately charged off to the extent not done so prior to the modification. We sometimes delay the timing on the repayment of a portion of principal (principal forbearance) and charge off the amount of forbearance if that amount is not considered fully collectible.

Our nonaccrual policies are generally the same for all loan types when a restructuring is involved. We re-underwrite loans at the time of restructuring to determine whether there is sufficient evidence of sustained repayment capacity based on the borrower’s documented income, debt to income ratios, and other factors. Loans lacking sufficient evidence of sustained repayment capacity at the time of modification are charged down to the fair value of the collateral, if applicable. For an accruing loan that has been modified, if the borrower has demonstrated performance under the previous terms and the underwriting process shows the capacity to continue to perform under the restructured terms, the loan will generally remain in accruing status. Otherwise, the loan will be placed in nonaccrual status until the borrower demonstrates a sustained period of performance, generally six consecutive months of payments, or equivalent, inclusive of consecutive payments made prior to modification. Loans will also be placed on nonaccrual, and a corresponding charge-off is recorded to the loan balance, when we believe that principal and interest contractually due under the modified agreement will not be collectible.

Table 29 provides an analysis of the changes in TDRs. Loans that may be modified more than once are reported as TDR inflows only in the period they are first modified. Other than resolutions such as foreclosures, sales and transfers to held for sale, we may remove loans held for investment from TDR classification, but only if they have been refinanced or restructured at market terms and qualify as a new loan.  

36

 


 

Risk Management – Credit Risk   Management (continued)  

 

Table 29:  Analysis of Changes in TDRs

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended

  

  

  

  

  

  

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

June 30,

(in millions)

  

 2014 

 2014 

 2013 

 2013 

 2013 

Commercial TDRs

  

  

  

  

  

  

Balance, beginning of quarter

$

 3,781 

 3,765 

 4,219 

 4,551 

 4,818 

  

Inflows

  

 276 

 442 

 292 

 534 

 468 

  

Outflows

  

  

  

  

  

  

  

  

Charge-offs

  

 (28) 

 (23) 

 (44) 

 (24) 

 (24) 

  

  

Foreclosures

  

 (8) 

 (3) 

 (16) 

 (16) 

 (26) 

  

  

Payments, sales and other (1)

  

 (496) 

 (400) 

 (686) 

 (826) 

 (685) 

Balance, end of quarter

  

 3,525 

 3,781 

 3,765 

 4,219 

 4,551 

Consumer TDRs

  

  

  

  

  

  

Balance, beginning of quarter

  

 22,698 

 22,696 

 22,789 

 22,969 

 22,889 

  

Inflows

  

 1,003 

 1,104 

 1,248 

 1,282 

 1,352 

  

Outflows

  

  

  

  

  

  

  

  

Charge-offs

  

 (139) 

 (157) 

 (155) 

 (183) 

 (241) 

  

  

Foreclosures

  

 (283) 

 (325) 

 (417) 

 (519) 

 (240) 

  

  

Payments, sales and other (1)

  

 (1,073) 

 (563) 

 (701) 

 (761) 

 (785) 

  

Net change in trial modifications (2)

  

 (124) 

 (57) 

 (68) 

 1 

 (6) 

Balance, end of quarter

  

 22,082 

 22,698 

 22,696 

 22,789 

 22,969 

  

  

Total TDRs

$

 25,607 

 26,479 

 26,461 

 27,008 

 27,520 

  

  

  

  

  

  

  

  

  

  

  

(1)

Other outflows include normal amortization/accretion of loan basis adjustments and loans transferred to held-for-sale. It also includes $1 million, $29 million and $40 million of loans refinanced or restructured as new loans and removed from TDR classification for the quarters ended March 31, 2014, and September 30 and June 30, 2013, respectively. No loans were removed from TDR classification for the quarters ended June 30, 2014 and December 31, 2013, as a result of being refinanced or restructured as new loans.

(2)

Net change in trial modifications includes: inflows of new TDRs entering the trial payment period, net of outflows for modifications that either (i) successfully perform and enter into a permanent modification, or (ii) did not successfully perform according to the terms of the trial period plan and are subsequently charged-off, foreclosed upon or otherwise resolved. Our experience is that most of the mortgages that enter a trial payment period program are successful in completing the program requirements.

  

  

  

  

  

  

  

  

  

  

  

37

 


 

      

Loans 90 Days or More Past Due and Still AccruinG  Loans 90 days or more past due as to interest or principal are still accruing if they are (1) well-secured and in the process of collection or (2) real estate 1‑4 family mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans are not included in past due and still accruing loans even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing because they continue to earn interest from accretable yield, independent of performance in accordance with their contractual terms.

Excluding insured/guaranteed loans, loans 90 days or more past due and still accruing at June 30, 2014, were down $148 million, or 14%, from December 31, 2013, due to payoffs, modifications and other loss mitigation activities, decline in non-strategic and liquidating portfolios, and credit stabilization.

Loans 90 days or more past due and still accruing whose repayments are predominantly insured by the FHA or guaranteed by the VA for mortgages and the U.S. Department of Education for student loans under the Federal Family Education Loan Program (FFELP) were $17.7 billion at June 30, 2014, down from $22.2 billion  at December 31, 2013. The decrease since December 31, 2013, reflected the effects of modification activities and improving delinquency trends.

Table 30 reflects non-PCI loans 90 days or more past due and still accruing by class for loans not government insured/guaranteed. For additional information on delinquencies by loan class, see Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

 

Table 30:  Loans 90 Days or More Past Due and Still Accruing

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

June 30,

(in millions)

  

 2014 

2014

2013

2013

2013

Loans 90 days or more past due and still accruing:

  

  

  

  

  

  

  

Total (excluding PCI (1)):

$

 18,582 

 21,215 

 23,219 

 22,181 

 22,197 

  

  

Less: FHA insured/VA guaranteed (2)(3)

  

 16,978 

 19,405 

 21,274 

 20,214 

 20,112 

  

  

Less: Student loans guaranteed under the FFELP (4)

  

 707 

 860 

 900 

 917 

 931 

  

  

  

  

Total, not government insured/guaranteed

$

 897 

 950 

 1,045 

 1,050 

 1,154 

  

  

  

  

  

  

  

  

  

  

  

By segment and class, not government insured/guaranteed:

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

Commercial and industrial

$

 51 

 11 

 11 

 125 

 37 

  

  

Real estate mortgage

  

 53 

 13 

 35 

 40 

 175 

  

  

Real estate construction

  

 16 

 69 

 97 

 1 

 4 

  

  

Foreign

  

 2 

 2 

 - 

 1 

 - 

  

  

  

Total commercial

  

 122 

 95 

 143 

 167 

 216 

  

Consumer:

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage (3)

  

 311 

 333 

 354 

 383 

 476 

  

  

Real estate 1-4 family junior lien mortgage (3)

  

 70 

 88 

 86 

 89 

 92 

  

  

Credit card

  

 266 

 308 

 321 

 285 

 263 

  

  

Automobile

  

 48 

 41 

 55 

 48 

 32 

  

  

Other revolving credit and installment

  

 80 

 85 

 86 

 78 

 75 

  

  

  

Total consumer

  

 775 

 855 

 902 

 883 

 938 

  

  

  

  

Total, not government insured/guaranteed

$

 897 

 950 

 1,045 

 1,050 

 1,154 

  

  

  

  

  

  

  

  

  

  

  

(1)

PCI loans totaled $4.0 billion, $4.3 billion, $4.5 billion, $4.9 billion, and $5.4 billion at June 30 and March 31, 2014 and December 31, September 30, and June 30, 2013, respectively.

(2)

Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.

(3)

Includes mortgages held for sale 90 days or more past due and still accruing.

(4)

Represents loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the FFELP. In second quarter 2014, all government guaranteed student loans were transferred to loans held for sale.

38

 


 

Risk Management – Credit Risk   Management (continued)  

 

NET CHARGE-OFFS

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Table 31:  Net Charge-offs  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended  

  

  

  

  

  

  

June 30, 2014  

  

Mar. 31, 2014  

  

Dec. 31, 2013  

  

Sept. 30, 2013  

  

June 30, 2013  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net loan

% of  

  

Net loan

% of  

  

Net loan

% of  

  

Net loan

% of  

  

Net loan

% of  

  

  

  

  

  

charge-

avg.  

  

charge-

avg.  

  

charge-

avg.  

  

charge-

avg.  

  

charge-

avg.  

  

($ in millions)

offs

loans (1) 

  

offs

loans (1)

  

offs

loans (1)

  

offs

loans (1)

  

offs

loans (1)

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

industrial

$

 54 

 0.11   

%

$

 45 

 0.09   

%

$

 107 

 0.22   

%

$

 58 

 0.12   

%

$

 77 

 0.17   

%

  

Real estate mortgage

 (10) 

 (0.04)   

  

  

 (22) 

 (0.08)   

  

  

 (41) 

 (0.15)   

  

  

 (20) 

 (0.08)   

  

  

 (5) 

 (0.02)   

  

  

Real estate construction

 (20) 

 (0.47)   

  

  

 (23) 

 (0.55)   

  

  

 (13) 

 (0.32)   

  

  

 (17) 

 (0.41)   

  

  

 (45) 

 (1.10)   

  

  

Lease financing

  

 1 

 0.05   

  

  

 1 

 0.03   

  

  

 -   

 -   

  

  

 -   

 -   

  

  

 18 

 0.57   

  

  

Foreign

  

 6 

 0.05   

  

  

 4 

 0.03   

  

  

 -   

 -   

  

  

 (2) 

 (0.02)   

  

  

 (1) 

 (0.01)   

  

Total commercial

  

 31 

 0.03   

  

  

 5 

 0.01   

  

  

 53 

 0.06   

  

  

 19 

 0.02   

  

  

 44 

 0.05   

  

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

first mortgage

  

 137 

 0.21   

  

  

 170 

 0.27   

  

  

 195 

 0.30   

  

  

 242 

 0.38   

  

  

 328 

 0.52   

  

  

Real estate 1-4 family

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

junior lien mortgage

 160 

 1.02   

  

  

 192 

 1.20   

  

  

 226 

 1.34   

  

  

 275 

 1.58   

  

  

 359 

 2.02   

  

  

Credit card

  

 211 

 3.20   

  

  

 231 

 3.57   

  

  

 220 

 3.38   

  

  

 207 

 3.28   

  

  

 234 

 3.90   

  

  

Automobile

  

 46 

 0.35   

  

  

 90 

 0.70   

  

  

 108 

 0.85   

  

  

 78 

 0.63   

  

  

 42 

 0.35   

  

  

Other revolving credit

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

and installment

 132 

 1.22   

  

  

 137 

 1.29   

  

  

 161 

 1.50   

  

  

 154 

 1.46   

  

  

 145 

 1.38   

  

Total consumer

  

 686 

 0.62   

  

  

 820 

 0.75   

  

  

 910 

 0.82   

  

  

 956 

 0.86   

  

  

 1,108 

 1.01   

  

  

  

  

Total

$

 717 

 0.35   

%

$

 825 

 0.41   

%

$

 963 

 0.47   

%

$

 975 

 0.48   

%

$

 1,152 

 0.58   

%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Quarterly net charge-offs (recoveries) as a percentage of average respective loans are annualized.  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Table 31 presents net charge-offs for second quarter 2014 and the previous four quarters. Net charge-offs in second quarter 2014 were $717 million (0.35% of average total loans outstanding) compared with $1.2 billion (0.58%) in second quarter 2013.

Due to higher dollar amounts associated with individual commercial and industrial and CRE loans, loss recognition tends to be irregular and varies more, compared with consumer loan portfolios. We continued to have improvement in our residential real estate secured portfolios.

 

Allowance for Credit Losses   The allowance for credit losses, which consists of the allowance for loan losses and the allowance for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio and unfunded credit commitments at the balance sheet date, excluding loans carried at fair value. The detail of the changes in the allowance for credit losses by portfolio segment (including charge-offs and recoveries by loan class) is in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

We apply a disciplined process and methodology to establish our allowance for credit losses each quarter. This process takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade-specific characteristics. The process involves subjective and complex judgments. In addition, we review a variety of credit metrics and trends. These credit metrics and trends, however, do not solely determine the amount of the allowance as we use several analytical tools. Our estimation approach for the commercial portfolio reflects the estimated probability of default in accordance with the borrower’s financial strength, and the severity of loss in the event of default, considering the quality of any underlying collateral. Probability of default and severity at the time of default are statistically derived through historical observations of defaults and losses after default within each credit risk rating. Our estimation approach for the consumer portfolio uses forecasted losses that represent our best estimate of inherent loss based on historical experience, quantitative and other mathematical techniques over the loss emergence period. For additional information on our allowance for credit losses, see the “Critical Accounting Policies – Allowance for Credit Losses” section in our 2013 Form 10-K and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Table 32 presents the allocation of the allowance for credit losses by loan segment and class for the most recent quarter end and last four year ends.

39

 


 

      

 

Table 32:  Allocation of the Allowance for Credit Losses (ACL)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

Dec. 31, 2013

  

  

Dec. 31, 2012

  

  

Dec. 31, 2011

  

  

Dec. 31, 2010

  

  

  

  

  

  

  

Loans

  

  

Loans

  

  

Loans

  

  

Loans

  

  

Loans

  

  

  

  

  

  

  

  

as %

  

  

  

as %

  

  

  

as %

  

  

  

as %

  

  

  

as %

  

  

  

  

  

  

  

  

of total

  

  

  

of total

  

  

  

of total

  

  

  

of total

  

  

  

of total

  

(in millions)

ACL

loans

  

  

ACL

loans

  

  

ACL

loans

  

  

ACL

loans

  

  

ACL

loans

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

$

 3,069 

 25 

%

$

 2,775 

 24 

%

$

 2,543 

 23 

%

$

 2,649 

 22 

%

$

 3,299 

 20 

%

  

Real estate mortgage

  

 1,767 

 13 

  

  

 2,102 

 13 

  

  

 2,283 

 13 

  

  

 2,550 

 14 

  

  

 3,072 

 13 

  

  

Real estate construction

  

 1,041 

 2 

  

  

 770 

 2 

  

  

 552 

 2 

  

  

 893 

 2 

  

  

 1,387 

 4 

  

  

Lease financing

  

 162 

 1 

  

  

 127 

 1 

  

  

 85 

 2 

  

  

 82 

 2 

  

  

 173 

 2 

  

  

Foreign

  

 361 

 6 

  

  

 329 

 6 

  

  

 251 

 5 

  

  

 184 

 5 

  

  

 238 

 4 

  

  

  

Total commercial

  

 6,400 

 47 

  

  

 6,103 

 46 

  

  

 5,714 

 45 

  

  

 6,358 

 45 

  

  

 8,169 

 43 

  

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

 3,348 

 31 

  

  

 4,087 

 32 

  

  

 6,100 

 31 

  

  

 6,934 

 30 

  

  

 7,603 

 30 

  

  

Real estate 1-4 family

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

junior lien mortgage

  

 1,827 

 8 

  

  

 2,534 

 8 

  

  

 3,462 

 10 

  

  

 3,897 

 11 

  

  

 4,557 

 13 

  

  

Credit card

  

 1,240 

 3 

  

  

 1,224 

 3 

  

  

 1,234 

 3 

  

  

 1,294 

 3 

  

  

 1,945 

 3 

  

  

Automobile

  

 478 

 7 

  

  

 475 

 6 

  

  

 417 

 6 

  

  

 555 

 6 

  

  

 771 

 6 

  

  

Other revolving credit and installment

 541 

 4 

  

  

 548 

 5 

  

  

 550 

 5 

  

  

 630 

 5 

  

  

 418 

 5 

  

  

  

Total consumer

  

 7,434 

 53 

  

  

 8,868 

 54 

  

  

 11,763 

 55 

  

  

 13,310 

 55 

  

  

 15,294 

 57 

  

  

  

  

Total

$

 13,834 

 100 

%

$

 14,971 

 100 

%

$

 17,477 

 100 

%

$

 19,668 

 100 

%

$

 23,463 

 100 

%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

Dec. 31, 2013

  

  

Dec. 31, 2012

  

  

Dec. 31, 2011

  

  

Dec. 31, 2010

  

Components:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Allowance for loan losses

$

 13,101 

  

  

 14,502 

  

  

 17,060 

  

  

 19,372 

  

  

 23,022 

  

  

Allowance for unfunded

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

credit commitments

  

 733 

  

  

 469 

  

  

 417 

  

  

 296 

  

  

 441 

  

  

  

Allowance for credit losses

$

 13,834 

  

  

 14,971 

  

  

 17,477 

  

  

 19,668 

  

  

 23,463 

  

Allowance for loan losses as a percentage

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

of total loans

  

 1.58 

%

  

 1.76 

  

  

 2.13 

  

  

 2.52 

  

  

 3.04 

  

Allowance for loan losses as a percentage

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

of total net charge-offs (1)

  

 456 

  

  

 322 

  

  

 189 

  

  

 171 

  

  

 130 

  

Allowance for credit losses as a percentage

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

of total loans

  

 1.67 

  

  

 1.82 

  

  

 2.19 

  

  

 2.56 

  

  

 3.10 

  

Allowance for credit losses as a percentage

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

of total nonaccrual loans

  

 99 

  

  

 96 

  

  

 85 

  

  

 92 

  

  

 89 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Total net charge-offs are annualized for quarter ended June 30, 2014.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

In addition to the allowance for credit losses, there was $3.1   billion at June 30,   2014, and $5.2   billion at December   31,   2013, of nonaccretable difference to absorb losses for PCI loans. The allowance for credit losses is lower than otherwise would have been required without PCI loan accounting. As a result of PCI loans, certain ratios of the Company may not be directly comparable with credit-related metrics for other financial institutions. For additional information on PCI loans, see the “Risk Management – Credit Risk Management – Purchased Credit-Impaired Loans” section and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.  

The ratio of the allowance for credit losses to total nonaccrual loans may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, borrower credit strength and the value and marketability of collateral. Over one-half of nonaccrual loans were real estate 1-4 family first and junior lien mortgage loans at June 30, 2014.

Total provision for credit losses was $217   million in second quarter 2014, compared with $652   million in second quarter 2013. The decline in the allowance for credit losses in second quarter 2014 reflected continued improvement, particularly in residential real estate portfolios primarily associated with continued improvement in the housing market.

We believe the allowance for credit losses of $13.8   billion at June 30,   2014, was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at that date. The allowance for credit losses is subject to change and reflects existing factors as of the date of determination, including economic or market conditions and ongoing internal and external examination processes. Due to the sensitivity of the allowance for credit losses to changes in the economic and business environment, it is possible that we will incur incremental credit losses not anticipated as of the balance sheet date. We continue to expect future allowance releases absent a significant deterioration in the economy, but expect a lower level of future releases as the rate of credit improvement slows and the loan portfolio continues to grow. Our process for determining the allowance for credit losses is discussed in the “Critical Accounting Policies – Allowance for Credit Losses” section and Note 1 (Summary of

40

 


 

Risk Management – Credit Risk   Management (continued)  

Significant Accounting Policies) to Financial Statements in our 2013 Form 10-K.

 

LIABILITY for Mortgage Loan Repurchase Losses   In connection with our sales and securitization of residential mortgage loans to various parties, we have established a mortgage repurchase liability, initially at fair value, related to various representations and warranties that reflect management’s estimate of losses for loans for which we could have a repurchase obligation, whether or not we currently service those loans, based on a combination of factors. Our mortgage repurchase liability estimation process also incorporates a forecast of repurchase demands associated with mortgage insurance rescission activity.

Because we retain the servicing for most of the mortgage loans we sell or securitize, we believe the quality of our residential mortgage loan servicing portfolio provides helpful information in evaluating our repurchase liability. Of the $1.8   trillion in the residential mortgage loan servicing portfolio at June 30, 2014, 94% was current and less than 2% was subprime at origination. Our combined delinquency and foreclosure rate on this portfolio was 5.64% at June 30, 2014, compared with 5.56% at March 31, 2014, and 6.40% at December 31, 2013. Three percent of this portfolio is private label securitizations for which we originated the loans and therefore have some repurchase risk.

The overall level of unresolved repurchase demands and mortgage insurance rescissions outstanding at June 30, 2014, was down from a year ago both in number of outstanding loans and in total dollar balances as we continued to work through the new demands and mortgage insurance rescissions and as we announced settlements with both FHLMC and FNMA in 2013, that resolved substantially all repurchase liabilities associated with loans sold to FHLMC prior to January 1, 2009, and loans sold to FNMA that were originated prior to January   1, 2009. Demands from private investors declined from December 31, 2013, primarily due to settlements with two private investors in first quarter 2014 that resolved many of the increased demands we experienced from 2012 through 2013, with a significant increase experienced in fourth quarter 2013.

Table 33 provides the number of unresolved repurchase demands and mortgage insurance rescissions.

 

Table 33:  Unresolved Repurchase Demands and Mortgage Insurance Rescissions

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Government

  

  

  

  

  

Mortgage insurance

  

  

  

  

  

  

  

sponsored entities (1)

  

Private

  

rescissions with no demand (2)

  

Total

  

  

  

Number of

  

Original loan

  

Number of

  

Original loan

  

Number of

  

Original loan

  

Number of

  

Original loan

($ in millions)

loans

  

balance (3)

  

loans

  

balance (3)

  

loans

  

balance (3)

  

loans

  

balance (3)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

2014 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

 678 

$

 149 

  

 362 

$

 80 

  

 305 

$

 66 

  

 1345 

$

 295 

March 31,

 599 

  

 126 

  

 391 

  

 89 

  

 409 

  

 90 

  

 1,399 

  

 305 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

2013 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31,

 674 

  

 124 

  

 2,260 

  

 497 

  

 394 

  

 87 

  

 3,328 

  

 708 

September 30,

 4,422 

  

 958 

  

 1,240 

  

 264 

  

 385 

  

 87 

  

 6,047 

  

 1,309 

June 30,

 6,313 

  

 1,413 

  

 1,206 

  

 258 

  

 561 

  

 127 

  

 8,080 

  

 1,798 

March 31,

 5,910 

  

 1,371 

  

 1,278 

  

 278 

  

 652 

  

 145 

  

 7,840 

  

 1,794 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Includes unresolved repurchase demands of 14 and $3 million, 25 and $3 million, 42 and $6 million, 1,247 and $225 million, and 942 and $190 million at June 30 and March 31, 2014, and December 31, September 30, and June 30, 2013, respectively, received from investors on mortgage servicing rights acquired from other originators. We generally have the right of recourse against the seller and may be able to recover losses related to such repurchase demands subject to counterparty risk associated with the seller.

(2)

As part of our representations and warranties in our loan sales contracts, we typically represent to GSEs and private investors that certain loans have mortgage insurance to the extent there are loans that have loan to value ratios in excess of 80% that require mortgage insurance. If the mortgage insurance is rescinded by the mortgage insurer due to a claim of breach of a contractual representation or warranty, the lack of insurance may result in a repurchase demand from an investor. Similar to repurchase demands, we evaluate mortgage insurance rescission notices for validity and appeal for reinstatement if the rescission was not based on a contractual breach. When investor demands are received due to lack of mortgage insurance, they are reported as unresolved repurchase demands based on the applicable investor category for the loan (GSE or private).

(3)

While the original loan balances related to these demands are presented above, the establishment of the repurchase liability is based on a combination of factors, such as our appeals success rates, reimbursement by correspondent and other third party originators, and projected loss severity, which is driven by the difference between the current loan balance and the estimated collateral value less costs to sell the property.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

41

 


 

      

Table 34 summarizes the changes in our mortgage repurchase liability. We incurred net losses on repurchased loans and investor reimbursements totaling $7 million in second quarter 2014, compared with $160 million a year ago.  

 

 

 

 

Table 34:  Changes in Mortgage Repurchase Liability

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended

  

Six months ended

  

  

  

  

  

  

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

June 30,

  

June 30,

June 30,

(in millions)

  

 2014 

 2014 

 2013 

 2013 

 2013 

  

 2014 

 2013 

Balance, beginning of period

$

 799 

 899 

 1,421 

 2,222 

 2,317 

  

 899 

 2,206 

  

Provision for repurchase losses:

  

  

  

  

  

  

  

  

  

  

  

Loan sales

  

 12 

 10 

 16 

 28 

 40 

  

 22 

 99 

  

  

Change in estimate (1)

  

 (38) 

 (4) 

 10 

 - 

 25 

  

 (42) 

 275 

  

  

  

Total additions (reductions)

  

 (26) 

 6 

 26 

 28 

 65 

  

 (20) 

 374 

  

Losses (2)

  

 (7) 

 (106) 

 (548) 

 (829) 

 (160) 

  

 (113) 

 (358) 

Balance, end of period

$

 766 

 799 

 899 

 1,421 

 2,222 

  

 766 

 2,222 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Results from changes in investor demand and mortgage insurer practices, credit deterioration and changes in the financial stability of correspondent lenders.

(2)

Quarter ended September 30, 2013, reflect $746 million as a result of the agreement with FHLMC that resolves substantially all repurchase liabilities related to loans sold to FHLMC prior to January 1, 2009. Quarter ended December 31, 2013, reflects $508 million as a result of the agreement with FNMA that substantially resolves all repurchase liabilities related to loans sold to FNMA that were originated prior to January 1, 2009.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Our liability for mortgage repurchases, included in “Accrued expenses and other liabilities” in our consolidated balance sheet, represents our best estimate of the probable loss that we expect to incur for various representations and warranties in the contractual provisions of our sales of mortgage loans. The liability was $766 million at June 30, 2014 and $2.2 billion at June 30, 2013. In second  quarter 2014, we released $26 million, which increased net gains on mortgage loan origination/sales activities, compared with a provision of $65 million for second quarter 2013. The  release in second quarter 2014 was primarily due to a re-estimation of our liability based on recently observed trends.  

Because of the uncertainty in the various estimates underlying the mortgage repurchase liability, there is a range of losses in excess of the recorded mortgage repurchase liability that are reasonably possible. The estimate of the range of possible loss for representations and warranties does not represent a probable loss, and is based on currently available information, significant judgment, and a number of assumptions that are subject to change. The high end of this range of reasonably possible losses in excess of our recorded liability was $975 million at June 30, 2014, and was determined based upon modifying the assumptions (particularly to assume significant changes in investor repurchase demand practices) used in our best estimate of probable loss to reflect what we believe to be the high end of reasonably possible adverse assumptions.

For additional information on our repurchase liability, see the “Risk Management –Credit Risk Management –Liability For Mortgage Loan Repurchase Losses” and the “Critical Accounting Policies Liability for Mortgage Loan Repurchase Losses” sections in our 2013 Form 10-K and Note 8 (Mortgage Banking Activities) to Financial Statements in this Report.

42

 


 

Risk Management – Credit Risk   Management (continued)  

 

RISKS RELATING TO SERVICING ACTIVITIES   In addition to servicing loans in our portfolio, we act as servicer and/or master servicer of residential mortgage loans included in GSE-guaranteed mortgage securitizations, GNMA-guaranteed mortgage securitizations of FHA-insured/VA-guaranteed mortgages and private label mortgage securitizations, as well as for unsecuritized loans owned by institutional investors. In connection with our servicing activities we have entered into various settlements with federal and state regulators to resolve certain alleged servicing issues and practices. In general, these settlements require us to provide customers with loan modification relief, refinancing relief, and foreclosure prevention and assistance, as well as imposed certain monetary penalties on us.

In particular, on February 28, 2013, we entered into amendments to the April 2011 Consent Order with both the Office of the Comptroller of the Currency (OCC) and the FRB, which effectively ceased the Independent Foreclosure Review program created by such Consent Order and replaced it with an accelerated remediation process to be administered by the OCC and the FRB. We are required to meet the commitment to provide foreclosure prevention actions on $1.2 billion of loans under this accelerated remediation process by January 7, 2015. As of April 30, 2014, we believe we reported sufficient foreclosure prevention actions to the monitor of the accelerated remediation process to meet the $1.2 billion commitment, but are awaiting monitor approval.
On February 9, 2012, a federal/state settlement was announced among the DOJ, HUD, the Department of the Treasury, the Department of Veteran Affairs, the Federal Trade Commission, the Executive Office of the U.S. Trustee, the Consumer Financial Protection Bureau, a task force of Attorneys General, Wells Fargo, and four other servicers related to investigations of mortgage industry servicing and foreclosure practices.
Under the terms of this settlement, which will remain in effect for three and a half years (subject to a trailing review period) we have agreed to the following programmatic commitments, consisting of three components totaling approximately $5.3 billion:

·       Consumer Relief Program commitment of $3.4 billion

·       Refinance Program commitment of $900 million

·       Foreclosure Assistance Program of $1 billion

 

Additionally and simultaneously, the OCC and FRB announced the imposition of civil money penalties of $83 million and $87 million, respectively, pursuant to the Consent Orders. While still subject to FRB confirmation, we believe the civil money obligations were satisfied through payments made under the Foreclosure Assistance Program to the federal government and participating states for their use to address the impact of foreclosure challenges as they determine and which may include direct payments to consumers.

As announced on March 18, 2014, we have successfully fulfilled our commitments under both the Consumer Relief (and state-level sub-commitments) and the Refinance Programs in accordance with the terms of our commitments.  

For additional information about the risks and various settlements related to our servicing activities see “Risk Management – Credit Risk Management – Risks Relating to Servicing Activities” in our 2013 Form 10-K.

43

 


 

   

Asset/Liability Management

Asset/liability management involves evaluating, monitoring and managing interest rate risk, market risk, liquidity and funding. Primary oversight of these risks resides with the Finance Committee of our Board of Directors (Board), which oversees the administration and effectiveness of financial risk management policies and processes used to assess and manage these risks. At the management level we utilize a Corporate Asset/Liability Management Committee (Corporate ALCO), which consists of senior financial, risk, and business executives, to oversee these risks and report on them periodically to the Board’s Finance Committee. Each of our principal lines of business has its own asset/liability management committee and process linked to the Corporate ALCO process. As discussed in more detail for trading activities below, we employ separate management level oversight specific to market risk. Market risk, in its broadest sense, refers to the possibility that losses will result from the impact of adverse changes in market rates and prices on our trading and non-trading portfolios and financial instruments.

 

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);  

·          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, MBS held in the investment securities portfolio may prepay significantly earlier than anticipated, which could reduce portfolio income); or

·          interest rates may also have a direct or indirect effect on loan demand, collateral values, credit losses, mortgage origination volume, the fair value of MSRs and other financial instruments, the value of the pension liability and other items affecting earnings.

 

We assess interest rate risk by comparing outcomes under 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. These simulations require assumptions regarding how changes in interest rates and related market conditions could influence drivers of earnings and balance sheet composition such as loan origination demand, prepayment speeds, deposit balances and mix, as well as pricing strategies.

Our risk measures include both net interest income sensitivity and interest rate sensitive noninterest income and expense impacts. We refer to the combination of these exposures as interest rate sensitive earnings. In general, the Company is positioned to benefit from higher interest rates. Currently, our profile is such that net interest income will benefit from higher interest rates as our assets reprice faster and to a greater degree than our liabilities, and, in response to lower market rates, our assets will reprice downward and to a greater degree than our liabilities. Our interest rate sensitive noninterest income and expense is largely driven by mortgage activity, and tends to move in the opposite direction of our net interest income. So, in response to higher interest rates, mortgage activity, primarily refinancing activity, generally declines. And in response to lower rates, mortgage activity generally increases. Mortgage results are also impacted by the valuation of MSRs and related hedge positions. See the “Risk Management – Mortgage Banking Interest Rate and Market Risk” section in this Report for more information.

The degree to which these sensitivities offset each other is dependent upon the timing and magnitude of changes in interest rates, and the slope of the yield curve. During a transition to a higher or lower interest rate environment, a reduction or increase in interest-sensitive earnings from the mortgage banking business could occur quickly, while the benefit or detriment from balance sheet repricing could take more time to develop. For example, our lower rate scenarios  (scenario 1 and scenario 2) in the following table initially measure a decline in long-term interest rates versus our most likely scenario. Although the performance in these rate scenarios contain initial benefit from increased mortgage banking activity, the result is lower earnings relative to the most likely scenario over time given pressure on net interest income. The higher rate scenarios (scenario 3 and scenario 4) measure the impact of varying degrees of rising short-term and long-term interest rates over the course of the forecast horizon relative to the most likely scenario, both resulting in positive earnings sensitivity.

As of June 30, 2014, our most recent simulations estimate earnings at risk over the next 24 months under a range of both lower and higher interest rates. The results of the simulations are summarized in Table 35, indicating cumulative net income after tax earnings sensitivity relative to the most likely earnings plan over the 24 month horizon (a positive range indicates a beneficial earnings sensitivity measurement relative to the most likely earnings plan and a negative range indicates a detrimental earnings sensitivity relative to the most likely earnings plan ). 

44

 


 

Risk Management – Asset/Liability Management   (continued)  

 

Table 35:  Earnings Sensitivity Over 24 Month Horizon Relative to Most Likely Earnings Plan

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Most

  

Lower rates

  

Higher rates

  

  

  

  

likely

  

Scenario 1

Scenario 2

  

Scenario 3

Scenario 4

Ending rates:

  

  

  

  

  

  

  

  

  

Federal funds

 1.50 

%

 0.25 

  

 0.75 

  

 2.00 

 4.75 

  

10-year treasury (1)

 3.64 

  

 1.70 

  

 3.07 

  

 4.14 

 5.75 

  

  

  

  

  

  

  

  

  

  

  

  

Earnings relative to

  

  

  

  

  

  

  

  

  

most likely

N/A

  

(4)-(5)

%

(2)-(3)

  

0 - 5

>5

  

  

  

  

  

  

  

  

  

  

  

  

(1)

 U.S. Constant Maturity Treasury Rate

  

  

  

  

  

  

  

  

  

  

  

  

We use the investment securities portfolio and exchange-traded and over-the-counter (OTC) interest rate derivatives to hedge our interest rate exposures. See the “Balance Sheet Analysis – Investment Securities” section in this Report for more information on the use of the available-for-sale and held-to-maturity securities portfolios. The notional or contractual amount, credit risk amount and fair value of the derivatives used to hedge our interest rate risk exposures as of June 30, 2014, and December 31, 2013, are presented in Note 12 (Derivatives) to Financial Statements in this Report. We use derivatives for asset/liability management in two main ways:

·          to convert the cash flows from selected asset and/or liability instruments/portfolios including a major portion of our long-term debt, from fixed-rate payments to floating-rate payments, or vice versa; and

·          to economically hedge our mortgage origination pipeline, funded mortgage loans and MSRs using interest rate swaps, swaptions, futures, forwards and options.

 

Mortgage Banking Interest Rate and Market Risk   We originate, fund and service mortgage loans, which subjects us to various risks, including credit, liquidity and interest rate risks. For a discussion of mortgage banking interest rate and market risk, see pages 85-87 of our 2013 Form 10-K.

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 the value of ARM 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. Additionally, hedge-carry income on our economic hedges for the MSRs may not continue if the spread between short-term and long-term rates decreases, we shift composition of the hedge to more interest rate swaps, or there are other changes in the market for mortgage forwards that affect the implied carry.

The total carrying value of our residential and commercial MSRs was $15.1 billion at June 30, 2014, and $16.8 billion at December 31, 2013. The weighted-average note rate on our portfolio of loans serviced for others was 4.49% at June 30, 2014, and 4.52% at December 31, 2013. The carrying value of our total MSRs represented 0.80% of mortgage loans serviced for others at June 30, 2014, and 0.88% at December 31, 2013.

 

Market Risk – Trading Activities   The Finance Committee of our Board of Directors reviews the acceptable market risk appetite for our trading activities. We engage in trading activities primarily to accommodate the investment and risk management activities of our customers, execute economic hedging to manage certain balance sheet risks and, to a very limited degree, for proprietary trading for our own account. These activities primarily occur within our Wholesale businesses and include entering into transactions with our customers that are recorded as trading assets and liabilities on our balance sheet. All of our trading assets and liabilities, including securities, foreign exchange transactions, commodity transactions, and derivatives are carried at fair value. Income earned related to these trading activities include net interest income and changes in fair value related to trading assets and liabilities. Net interest income earned on trading assets and liabilities is reflected in the interest income and interest expense components of our income statement. Changes in fair value of trading assets and liabilities are reflected in net gains on trading activities, a component of noninterest income in our income statement.

Table 36 presents total revenue from trading activities.

 

Table 36:  Income from Trading Activities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months

  

  

  

  

  

Quarter ended June 30,

  

ended June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

 2013 

Interest income (1)

$

 407 

 340 

  

 781 

 667 

Less: Interest expense (2)

  

 93 

 75 

  

 180 

 140 

  

Net interest income

  

 314 

 265 

  

 601 

 527 

  

  

  

  

  

  

  

  

  

  

  

Noninterest income:

  

  

  

  

  

  

  

Net gains from trading

  

  

  

  

  

  

  

activities (3):

  

  

  

  

  

  

  

Customer accommodation

 242 

 337 

  

 602 

 804 

  

  

Economic hedges and other (4)

 142 

 (11) 

  

 208 

 88 

  

  

Proprietary trading

  

 (2) 

 5 

  

 4 

 9 

  

  

  

Total net trading gains

 382 

 331 

  

 814 

 901 

Total trading-related net interest

  

  

  

  

  

  

and noninterest income

$

 696 

 596 

  

 1,415 

 1,428 

  

  

  

  

  

  

  

  

  

  

  

(1)

Represents interest and dividend income earned on trading securities.

(2)

Represents interest and dividend expense incurred on trading securities we have sold but have not yet purchased.

(3)

Represents realized gains (losses) from our trading activity and unrealized gains (losses) due to changes in fair value of our trading positions, attributable to the type of business activity.

(4)

Excludes economic hedging of mortgage banking and asset/liability management activities, for which hedge results (realized and unrealized) are reported with the respective hedged activities.

  

  

  

  

  

  

  

  

  

  

  

Customer accommodation  Customer accommodation activities are conducted to help customers manage their investment and risk management needs. We engage in market-making activities or act as an intermediary to purchase or sell financial instruments in anticipation of or in response to customer needs. This category also includes positions we use to manage our exposure to customer transactions.

For the majority of our customer accommodation trading, we serve as intermediary between buyer and seller. For example, we may purchase or sell a derivative to a customer who wants to manage interest rate risk exposure. We typically enter into offsetting derivative or security positions with a separate counterparty or exchange to manage our exposure to the derivative with our customer. We earn income on this activity based on the transaction price difference between the customer and offsetting derivative or security positions, which is reflected in the fair value changes of the positions recorded in net gains on trading activities.

Customer accommodation trading also includes net gains related to market-making activities in which we take positions to facilitate customer order flow. For example, we may own securities recorded as trading assets (long positions) or sold securities we have not yet purchased, recorded as trading liabilities (short positions), typically on a short-term basis, to facilitate support of buying and selling demand

45

 


 

      

from our customers. As market-maker in these securities, we earn income due to: (1) the difference between the price paid or received for the purchase and sale of the security (bid-ask spread), (2) the net interest income, and (3) the change in fair value of the long or short positions during the short-term period held on our balance sheet. Additionally, we may enter into separate derivative or security positions to manage our exposure related to our long or short security positions. Collectively, income earned on this type of market-making activity is reflected in the fair value changes of these positions recorded in net gain on trading activities.

  

Economic hedges and other  Economic hedges in trading are not designated in a hedge accounting relationship and exclude economic hedging related to our asset/liability risk management and substantially all mortgage banking risk management activities. Economic hedging activities include the use of trading securities to economically hedge risk exposures related to non-trading activities or derivatives to hedge risk exposures related to trading assets or trading liabilities. Economic hedges are unrelated to our customer accommodation activities. Other activities include financial assets held for investment purposes that we elected to carry at fair value with changes in fair value recorded to earnings in order to mitigate accounting measurement mismatches or avoid embedded derivative accounting complexities.

 


Proprietary trading  Proprietary trading consists of security or derivative positions executed for our own account based upon market expectations or to benefit from price differences between financial instruments and markets. Proprietary trading activity has been substantially restricted by the Dodd-Frank Act provisions known as the “Volcker Rule.” Accordingly, we reduced and are exiting certain business activities in anticipation of the rule’s compliance date . As discussed within this section and the noninterest income section of our financial results, proprietary trading activity is insignificant to our business and financial results. For more details on the Volcker Rule, see the “Regulatory Reform” section in this Report and in our 2013 Form 10-K.

 

Daily Trading Revenue  Table 37 provides information on the distribution of daily trading-related revenues for the Company’s trading portfolio. This trading-related revenue is defined as the change in value of the trading assets and trading liabilities, trading-related net interest income, and trading-related intra-day gains and losses. Net trading-related revenue does not include activity related to long-term positions held for economic hedging purposes, period-end adjustments, and other activity not representative of daily price changes driven by market factors.

46

 


 

Risk Management – Asset/Liability Management   (continued)  

Table 37:  Distribution of Daily Trading-Related Revenues  

 

 

Market risk is the risk of adverse changes in the fair value of the trading portfolios and financial instruments held by the Company due to changes in market risk factors such as interest rates, credit spreads, foreign exchange rates, equity, and commodity prices. Market risk is intrinsic to the Company’s sales and trading, market making, investing, and risk management activities.

The Company uses VaR metrics complemented with sensitivity analysis and stress testing in measuring and monitoring market risk. These market risk measures are monitored at both the business unit level and at aggregated levels on a daily basis. Our corporate market risk management function aggregates and monitors all exposures to ensure risk measures are within our established risk appetite. Changes to the market risk profile are analyzed and reported on a daily basis. The Company monitors various market risk exposure measures from a variety of perspectives, which include line of business, product, risk type, and legal entity.

 

Value-at-Risk (VaR) is a statistical risk measure used to estimate the potential loss from adverse moves in the financial markets. The VaR measures assume that historical changes in market values (historical simulation analysis) are representative of the potential future outcomes and measure the expected loss over a given time interval (for example, 1 day or 10 days) within a given confidence level. Our historical simulation analysis approach uses historical changes of the risk factors from each trading day in the previous 12 months. The risk drivers of each trading position associated with interest rates, credit spreads, foreign exchange rates, and equity and commodity prices are updated on a daily basis. We measure and report VaR for a 1-day holding period at a 99% confidence level. This means that we would expect to incur single day losses greater than predicted by VaR estimates for the measured positions one time in every 100 trading days. We treat data from all historical periods as equally relevant and consider using data for the previous 12 months as appropriate for determining VaR. We believe using a 12-month look back period helps ensure the Company’s VaR is responsive to current market conditions.

VaR measurement between different financial institutions is not readily comparable due to modeling and assumption differences from company to company. VaR measures are more useful when interpreted as an indication of trends rather than an absolute measure to be compared across financial institutions.

VaR models are subject to limitations which include, but are not limited to, the use of historical changes in market factors that may not accurately reflect future changes in market factors, and the inability to predict market liquidity in extreme market conditions. All limitations such as model inputs, model assumptions, and calculation methodology risk are monitored by the Corporate Market Risk Group and the Corporate Model Risk Group.  

47

 


 

      

Trading VaR is the measure used to provide insight into the market risk exhibited by the Company’s trading positions. The Company calculates Trading VaR for risk management purposes to establish line of business risk limits. Trading VaR is calculated based on all trading positions classified as trading assets or trading liabilities on our balance sheet.

Table 38 shows the results of the Company’s Trading VaR by risk category. As presented in the table, average Trading VaR was $24 million for the quarter ended June 30, 2014 , compared with $23 million for the quarter ended March 31, 2014 . The increase was primarily driven by changes in portfolio composition.

 

Table 38:  Trading 1-Day 99% VaR Metrics

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended

  

  

  

  

  

June 30, 2014

  

March 31, 2014

  

  

  

  

Period

  

  

  

  

  

  

Period

  

  

  

  

  

(in millions)

end

Average

  

Low

High

  

end

Average

  

Low

High

VaR Risk Categories

  

  

  

  

  

  

  

  

  

  

  

  

Credit

$

 20 

  

 34 

  

 19 

 38 

  

 33 

  

 32 

  

 31 

 35 

Interest rate

  

 28 

  

 24 

  

 12 

 31 

  

 23 

  

 24 

  

 16 

 32 

Equity

  

 7 

  

 7 

  

 5 

 8 

  

 7 

  

 7 

  

 7 

 9 

Commodity

  

 1 

  

 1 

  

 1 

 2 

  

 1 

  

 1 

  

 1 

 2 

Foreign exchange

  

 - 

  

 1 

  

 - 

 3 

  

 2 

  

 2 

  

 1 

 3 

Diversification benefit (1)

  

 (41) 

  

 (43) 

  

  

  

  

 (44) 

  

 (43) 

  

  

  

  

Total VaR

$

 15 

  

 24 

  

  

  

  

 22 

  

 23 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

The period-end VaR was less than the sum of the VaR components described above, which is due to portfolio diversification. The diversification effect arises because the risks are not perfectly correlated causing a portfolio of positions to usually be less risky than the sum of the risks of the positions alone. The diversification benefit is not meaningful for low and high metrics since they may occur on different days.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Sensitivity Analysis   Given the inherent limitations of the VaR models, the Company uses other measures, including sensitivity analysis, to measure and monitor risk. Sensitivity analysis is the measure of exposure to a single risk factor, such as a 0.01% increase in interest rates or a 1% increase in equity prices. We conduct and monitor sensitivity on interest rates, credit spreads, volatility, equity, commodity, and foreign exchange exposure. Sensitivity analysis complements VaR as it provides an indication of risk relative to each factor irrespective of historical market moves.

 

Stress Testing   While VaR captures the risk of loss due to adverse changes in markets using recent historical market data, stress testing captures the Company’s exposure to extreme but low probability market movements. Stress scenarios estimate the risk of losses based on management’s assumptions of abnormal but severe market movements such as severe credit spread widening or a large decline in equity prices. These scenarios assume that the market moves happen instantaneously and no repositioning or hedging activity takes place to mitigate losses as events unfold (a conservative approach since experience demonstrates otherwise).

An inventory of scenarios is maintained representing both historical and hypothetical stress events that affect a broad range of market risk factors with varying degrees of correlation and differing time horizons. Hypothetical scenarios assess the impact of large movements in financial variables on portfolio values. Typical examples include a 100 basis point increase across the yield curve or a 10% decline in stock market indexes. Historical scenarios utilize an event-driven approach: the stress scenarios are based on plausible but rare events, and the analysis addresses how these events might affect the risk factors relevant to a portfolio.

The Company’s stress testing framework is also used in calculating results in support of the Federal Reserve Board’s Comprehensive Capital Analysis & Review (CCAR) and internal stress tests. Stress scenarios are regularly reviewed and updated to address potential market events or concerns. For more detail on the CCAR process, see the “Capital Management” section in this Report.

 

Regulatory Market Risk Capital   is based on the Basel Committee Capital Accord. Prior to January 1, 2013, U.S. banking regulators’ market risk capital requirements were subject to Basel I and thereafter based on Basel 2.5. Effective January 1, 2014, the Company must calculate regulatory capital based on the Basel III market risk capital rule, which integrated Basel 2.5, and requires banking organizations with significant trading activities to adjust their capital requirements to better account for the market risks of those activities.

 

Composition of Material Portfolio of Covered Positions  The market risk capital rule substantially modified the determination of market risk RWA, and implemented a more risk-sensitive methodology for the risks inherent in certain “covered” trading positions. The positions that are “covered” by the market risk capital rule are generally a subset of our trading assets and trading liabilities, specifically those held by the Company for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.

The material portfolio of the Company’s “covered” positions is predominantly concentrated in the trading assets and trading liabilities managed within Wholesale Banking, which is the predominant contributor to the Company’s overall VaR. Wholesale Banking engages in the fixed income, traded credit, foreign exchange, equities, and commodities markets businesses. Other business segments hold small additional trading positions covered under the market risk capital rule.

Table 39 summarizes the market risk-based capital requirements charge and market RWAs in accordance with the Basel III market risk capital rule as of June 30, 2014, and in accordance with the Basel 2.5 market risk capital rule as of December 31, 2013.  

 

48

 


 

Risk Management – Asset/Liability Management   (continued)  

 

Table 39:  Market Risk Regulatory Capital and RWAs

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

Risk-

  

Risk-

  

Risk-

  

Risk-

  

  

  

  

  

based

  

weighted

  

based

  

weighted

(in millions)

  

capital

  

assets

  

capital

  

assets

Total VaR

$

 208 

  

 2,600 

  

 252 

  

 3,149 

Total Stressed VaR

 1,167 

  

 14,589 

  

 921 

  

 11,512 

Incremental Risk Charge

 308 

  

 3,852 

  

 393 

  

 4,913 

Securitized Products Charge

 729 

  

 9,107 

  

 633 

  

 7,913 

Standardized Specific Risk Charge

 1,270 

  

 15,879 

  

 583 

  

 7,289 

De minimus Charges

 61 

  

 755 

  

 125 

  

 1,563 

  

Total

$

 3,743 

  

 46,782 

  

 2,907 

  

 36,339 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

RWA Rollforward   Table 40 depicts the changes in the market risk regulatory capital and RWAs under Basel III for the first half and second quarter of 2014.

 

Table 40:  Analysis of Changes in Market Risk Regulatory Capital and RWAs

  

  

  

  

  

  

  

  

  

  

  

  

Risk-

Risk-

  

  

  

  

based

weighted

(in millions)

capital

assets

Balance, December 31, 2013

$

 2,907 

  

 36,339 

  

Total VaR

  

 (44) 

  

 (549) 

  

Total Stressed VaR

  

 246 

  

 3,077 

  

Incremental Risk Charge

  

 (85) 

  

 (1,061) 

  

Securitized Products Charge

  

 96 

  

 1,194 

  

Standardized Specific Risk Charge

  

 687 

  

 8,590 

  

De minimus Charges

  

 (64) 

  

 (808) 

Balance, June 30, 2014

$

 3,743 

  

 46,782 

  

  

  

  

  

  

  

  

Balance, March 31, 2014

$

 3,850 

  

 48,127 

  

Total VaR

  

 35 

  

 436 

  

Total Stressed VaR

  

 108 

  

 1,351 

  

Incremental Risk Charge

  

 (68) 

  

 (840) 

  

Securitized Products Charge

  

 (70) 

  

 (883) 

  

Standardized Specific Risk Charge

  

 (18) 

  

 (225) 

  

De minimus Charges

  

 (94) 

  

 (1,184) 

Balance, June 30, 2014

$

 3,743 

  

 46,782 

  

  

  

  

  

  

  

  

The increase in standardized specific risk charge for risk-based capital and RWAs in the first half of 2014 resulted primarily from a change during the quarter ended March 31, 2014, in positions now subject to standardized specific risk charges. All changes to market risk regulatory capital and RWAs in the quarter ended June 30, 2014, were associated with changes in positions due to normal trading activity.

49

 


 

      

Regulatory Market Risk Capital Components   The capital required for market risk on the Company’s “covered” positions is determined by internally developed models or standardized specific risk charges. The market risk regulatory capital models are subject to internal model risk management and validation. The models are continuously monitored and enhanced in response to changes in market conditions, improvements in system capabilities, and changes in the Company’s market risk exposure. The Company is required to obtain and has received prior written approval from its regulators before using its internally developed models to calculate the market risk capital charge.

Basel III prescribes various VaR measures in the determination of regulatory capital and risk-weighted assets. The Company uses the same VaR models for both market risk management purposes as well as regulatory capital calculations. For regulatory purposes, market risk uses the following metrics to determine the Company’s capital requirements:

 

General VaR measures the risk of broad market movements such as changes in the level of credit spreads, interest rates, equity prices, commodity prices, and foreign exchange rates. General VaR uses historical simulation analysis based on 99% confidence level and a 10-day time horizon.

Table 41 shows the General VaR measure categorized by major risk categories. Average 10-day General VaR was $58 million for the quarter ended June 30, 2014 , compared with $48 million for the quarter ended March 31, 2014  

 

Table 41:  10-Day 99% Regulatory General VaR by Risk Category

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended

  

  

  

  

  

June 30, 2014

  

March 31, 2014

  

  

  

  

Period

  

  

  

  

  

  

Period

  

  

  

  

  

(in millions)

end

Average

  

Low

High

  

end

Average

  

Low

High

Wholesale General VaR by Risk Category

  

  

  

  

  

  

  

  

  

  

  

  

Credit

$

 125 

  

 111 

  

 96 

 132 

  

 108 

  

 113 

  

 97 

 132 

Interest rate

  

 71 

  

 61 

  

 28 

 80 

  

 54 

  

 58 

  

 36 

 78 

Equity

  

 6 

  

 4 

  

 3 

 6 

  

 4 

  

 4 

  

 1 

 8 

Commodity

  

 3 

  

 6 

  

 2 

 21 

  

 3 

  

 3 

  

 2 

 4 

Foreign exchange

  

 3 

  

 4 

  

 2 

 12 

  

 2 

  

 4 

  

 1 

 7 

Diversification benefit (1)

  

 (153) 

  

 (132) 

  

 - 

 - 

  

 (127) 

  

 (138) 

  

 - 

 - 

Wholesale General VaR

$

 55 

  

 54 

  

 29 

 63 

  

 44 

  

 44 

  

 33 

 62 

Company General VaR

$

 60 

  

 58 

  

 32 

 68 

  

 47 

  

 48 

  

 37 

 66 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

The period-end VaR was less than the sum of the VaR components described above, which is due to portfolio diversification. The diversification effect arises because the risks are not perfectly correlated causing a portfolio of positions to usually be less risky than the sum of the risks of the positions alone. The diversification benefit is not meaningful for low and high metrics since they may occur on different days.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

50

 


 

Risk Management – Asset/Liability Management   (continued)  

Specific Risk measures  the risk of loss that could result from factors other than broad market movement or name-specific market risk. Specific Risk uses Monte Carlo simulation analysis based on a 99% confidence level and a 10-day time horizon.

 

Total VaR (as presented in Table 42) is composed of General VaR and Specific Risk and uses the previous 12 months of historical market data to comply with regulatory requirements.

 

Table 42:  Total VaR

  

  

  

  

  

  

  

  

  

  

  

(in millions)

Quarter ended June 30, 2014

  

  

  

  

  

  

Period

  

  

  

  

  

  

  

  

Average

  

end

  

Low

  

High

Total VaR

$

 69 

  

 74 

  

 50 

  

 80 

  

  

  

  

  

  

  

  

  

  

  

  

  

Capital

  

RWAs

Total VaR

$

 208 

  

 2,600 

  

  

  

  

  

  

  

  

  

  

  

 

Total Stressed VaR (as presented in Table 43) uses a historical period of significant financial stress over a continuous 12 month period using historically available market data and is composed of Stressed General VaR and Stressed Specific Risk. Total Stressed VaR uses the same methodology and models as Total VaR.

 

Table 43:  Total Stressed VaR

  

  

  

  

  

  

  

  

  

  

  

(in millions)

Quarter ended June 30, 2014

  

  

  

  

  

  

Period

  

  

  

  

  

  

  

  

Average

  

end

  

Low

  

High

Total Stressed VaR

$

 389 

  

 380 

  

 295 

  

 483 

  

  

  

  

  

  

  

  

  

  

  

  

  

Capital

  

RWAs

Total Stressed VaR

$

 1,167 

  

 14,589 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 


Incremental Risk Charge according to the market risk capital rule, must capture losses due to both issuer default and migration risk at the 99.9% confidence level over the one-year capital horizon under the assumption of constant level of risk or a constant position assumption. The model covers all non-securitized credit-sensitive products.

The Company calculates Incremental Risk by generating a portfolio loss distribution using Monte Carlo simulation, which assumes numerous scenarios, where an assumption is made that the portfolio’s composition remains constant for a one-year time horizon. Individual issuer credit grade migration and issuer default risk is modeled through generation of the issuer’s credit rating transition based upon statistical modeling. Correlation between credit grade migration and default is captured by a multifactor proprietary model which takes into account industry classifications as well as regional effects. Additionally, the impact of market and issuer specific concentrations is reflected in the modeling framework by assignment of a higher charge for portfolios that have increasing concentrations in particular issuers or sectors. Lastly, the model captures product basis risk; that is, it reflects the material disparity between a position and its hedge.

Table 44 provides information on the Incremental Risk Charge results for the quarter ended June 30, 2014. For this charge, the required capital at quarter end equals the average for the quarter.

 

Table 44:  Incremental Risk Charge

  

  

  

  

  

  

  

  

  

  

  

(in millions)

Quarter ended June 30, 2014

  

  

  

  

  

  

Period

  

  

  

  

  

  

  

  

Average

  

end

  

Low

  

High

Incremental

  

  

  

  

  

  

  

  

  

Risk Charge

$

 308 

  

 283 

  

 273 

  

 373 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Capital

  

RWAs

Incremental Risk Charge

  

  

$

 308 

  

 3,852 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

51

 


 

      

 

Securitized Products Charge   Basel III requires a separate market risk capital charge for positions classified as a securitization or re-securitization. The primary criteria for classification as a securitization are whether there is a transfer of risk and whether the credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority. Covered trading securitizations positions include consumer and commercial asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), and collateralized loan and other debt obligations (CLO/CDO) positions. The securitization capital requirements are the greater of the capital requirements of the net long or short exposure, and are capped at the maximum loss that could be incurred on any given transaction. Table 45 shows the aggregate net fair market value of securities and derivative securitization positions by exposure type that meet the regulatory definition of a covered trading securitization position at June 30, 2014, and December 31, 2013

 

Table 45:  Covered Securitization Positions by Exposure Type (Market Value)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in millions)

ABS

CMBS

RMBS

CLO/CDO

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securitization exposure:

  

  

  

  

Securities

$

 941 

 592 

 594 

 439 

Derivatives

  

 3 

 (4) 

 9 

 (47) 

  

Total

$

 944 

 588 

 603 

 392 

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securitization exposure:

  

  

  

  

Securities

$

 604 

 559 

 479 

 561 

Derivatives

  

 (2) 

 2 

 16 

 (72) 

  

Total

$

 602 

 561 

 495 

 489 

  

  

  

  

  

  

  

  

  

SECURITIZATION DUE DILIGENCE AND RISK MONITORING   The market risk capital rule requires that the Company conduct due diligence on the risk of each position within three days of the purchase of a securitization position. The Company’s due diligence provides an understanding of the features that would materially affect the performance of a securitization or re-securitization. The due diligence analysis is performed again on a quarterly basis for each securitization and re-securitization position. The Company manages the risks associated with securitization and re-securitization positions through the use of offsetting positions and portfolio diversification. The Company uses an automated solution to track the due diligence associated with securitization activity.

Standardized Specific Risk Charge    For positions that are not evaluated by the approved internal specific risk models, a regulatory prescribed standard specific risk charge is applied. The standard specific risk add-on for sovereign entities, public sector entities, and depository institutions is based on the Organization for Economic Co-operation and Development (OECD) country risk classifications (CRC) and the remaining contractual maturity of the position. These risk add-ons for debt positions range from 0.25% to 12%. The add-on for corporate debt is based on credit spreads and the remaining contractual maturity of the position. All other types of debt positions are subject to an 8% add-on. The standard specific risk add-on for equity positions is generally 8%.

 

Comprehensive Risk Charge / Correlation Trading   The market risk capital rule requires capital for correlation trading positions. The net market value of correlation trading positions that meet the definition of a covered position at June 30, 2014 was a net gain of less than $1 million. Correlation trading is a discontinued business in which the Company is no longer active, with current positions hedged and maturing over time. Given the immaterial aspect of this discontinued activity, the Company has elected not to develop an internal model based approach but will instead use standard specific risk charges for these positions.

52

 


 

Risk Management – Asset/Liability Management   (continued)  

 

VaR Backtesting   The market risk capital rule requires backtesting as one form of validation of the VaR model. Backtesting is a comparison of the daily VaR estimate with the actual clean profit and loss (clean P&L) as defined by the market risk capital rule. Clean P&L is the change in the value of the Company’s covered trading positions that would have occurred had previous end-of-day covered trading positions remained unchanged (therefore, excluding fees, commissions, net interest income, and intraday trading gains and losses). The backtesting analysis compares the daily Total VaR for each of the trading days in the preceding 12 months with the net clean P&L. Clean P&L does not include credit adjustments and other activity not representative of daily price changes driven by market risk factors. The clean P&L measure of revenue is used to evaluate the performance of the Total VaR and is not comparable to our actual daily trading net revenues, as reported elsewhere in this Report.

Any observed clean P&L loss in excess of the Total VaR is considered a market risk regulatory capital backtesting exception. The actual number of exceptions (that is, the number of business days for which the clean P&L losses exceed the corresponding 1-day, 99% Total VaR measure) over the preceding 12 months is used to determine the capital multiplier for the capital calculation. The number of actual backtesting exceptions is dependent on current market performance relative to historic market volatility. This capital multiplier increases from a minimum of three to a maximum of four, depending on the number of exceptions. No backtesting exceptions occurred over the preceding 12 months.  

Table 46 shows daily Total VaR (1-day, 99%) for the 12 months ended June 30, 2014. The Company’s average Total VaR for second quarter 2014 was $24 million with a low of $19 million and a high of $28 million.

  

 

Table 46:  Daily Total VaR Measure (Rolling 12 Months)

 

 

Market Risk Governance   The Finance Committee of our Board has primary oversight over market risk-taking activities of the Company and reviews the acceptable market risk appetite. The Corporate Risk Group’s Market Risk Committee, which reports to the Finance Committee of the Board, is responsible for governance and oversight over market risk-taking activities across the Company as well as the establishment of market risk appetite and associated limits. The Corporate Market Risk Group, which is part of the Corporate Risk Group, administers and monitors compliance with the requirements established by the Market Risk Committee. The Corporate Market Risk Group has oversight responsibilities in identifying, measuring and monitoring the Company’s market risk. The group is responsible for developing a quantitative market risk model, establishing independent risk limits, calculating and analyzing market risk capital, and reporting aggregated and line-of-business market risk information. Limits are regularly reviewed to ensure they remain relevant and within the market risk appetite for the Company. An automated limits-monitoring system enables a daily comprehensive review of multiple limits mandated across businesses. Limits are set with inner boundaries that will be periodically breached to promote an ongoing dialogue of risk exposure within the Company. Each line of business that exposes the Company to market risk has direct responsibility for managing market risk in accordance with defined risk tolerances and approved market risk mandates and hedging strategies. We measure and monitor market risk for both management and regulatory capital purposes.

 

Model Risk Management   Internal market risk models are governed by our Corporate Model Risk Committee (CMoR) policies and procedures, which include model validation. The purpose of model validation includes ensuring the model is appropriate for its intended use and that appropriate controls exist to help mitigate the risk of invalid results. Model validation assesses the adequacy and appropriateness of the model, including reviewing its key components such as inputs, processing components, logic or theory, output results

53

 


 

      

and supporting model documentation. Validation also includes ensuring significant unobservable model inputs are appropriate given observable market transactions or other market data within the same or similar asset classes. This ensures modeled approaches are appropriate given similar product valuation techniques and are in line with their intended purpose. The Corporate Model Risk group provides oversight of model validation and assessment processes.

All internal valuation models are subject to ongoing review by business-unit-level management, and all models are subject to additional oversight by a corporate-level risk management department. Corporate oversight responsibilities include evaluating the adequacy of business unit risk management programs, maintaining company-wide model validation policies and standards, and reporting the results of these activities to management.

 

Market Risk – Equity INVESTMENTS   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. The Board’s policy is to review business developments, key risks and historical returns for the private equity investment portfolio at least annually. Management reviews these investments at least quarterly and assesses them for possible OTTI. For nonmarketable investments, the analysis is based on facts and circumstances of each individual investment and the expectations for that investment’s cash flows and capital needs, the viability of its business model and our exit strategy. Nonmarketable investments include private equity investments accounted for under the cost method, equity method and fair value option.

As part of our business to support our customers, we trade public equities, listed/OTC equity derivatives and convertible bonds. We have parameters that govern these activities. We also have marketable equity securities in the available-for-sale securities 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 periodically include OTTI charges.

Changes in equity market prices may also indirectly affect our net income by (1) the value of third party assets under management and, hence, fee income, (2) borrowers whose ability to repay principal and/or interest may be affected by the stock market, or (3) brokerage activity, related commission income and other business activities. Each business line monitors and manages these indirect risks.

Table 47 provides information regarding our marketable and nonmarketable equity investments as of June 30, 2014, and December 31, 2013.

 

Table 47:  Nonmarketable and Marketable Equity Investments

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

Dec. 31,

(in millions)

  

 2014 

 2013 

Nonmarketable equity investments:

  

  

  

  

Cost method:

  

  

  

  

  

Private equity investments

$

 2,310 

 2,308 

  

  

Federal bank stock

  

 4,546 

 4,670 

  

  

  

Total cost method

  

 6,856 

 6,978 

  

Equity method and other:

  

  

  

  

  

LIHTC investments (1)

  

 6,347 

 6,209 

  

  

Private equity and other

  

 5,386 

 5,782 

  

  

  

Total equity method and other

  

 11,733 

 11,991 

  

Fair value (2)

  

 1,902 

 1,386 

  

  

  

  

Total nonmarketable

  

  

  

  

  

  

  

  

equity investments (3)

$

 20,491 

 20,355 

Marketable equity securities:

  

  

  

  

Cost

$

 1,935 

 2,039 

  

Net unrealized gains

  

 1,180 

 1,346 

  

  

  

  

Total marketable

  

  

  

  

  

  

  

  

equity securities (4)

$

 3,115 

 3,385 

  

  

  

  

  

  

  

  

  

(1)

Represents low income housing tax credit investments.

(2)

Represents nonmarketable equity investments for which we have elected the fair value option. See Note 6 (Other Assets) and Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for additional information.

(3)

Included in other assets on the balance sheet. See Note 6 (Other Assets) to Financial Statements in this Report for additional information.

(4)

Included in available-for-sale securities. See Note 4 (Investment Securities) to Financial Statements in this Report for additional information.

54

 


 

Risk Management – Asset/Liability Management   (continued)  

 

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 periods of Wells Fargo-specific and/or market stress . To achieve this objective, the Board of Directors establishes liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. These guidelines are monitored on a monthly basis by the Corporate ALCO and on a quarterly basis by the Board of Directors. These guidelines are established and monitored for both the consolidated company and for the Parent on a stand-alone basis to ensure that the Parent is a source of strength for its regulated, deposit-taking banking subsidiaries.

We maintain liquidity in the form of cash, cash equivalents and unencumbered high-quality, liquid securities. These assets make up our primary sources of liquidity, which are presented in Table 48. Our cash is primarily on deposit with the Federal Reserve. Securities included as part of our primary sources of liquidity are comprised of U.S. Treasury and federal agency debt, and mortgage-backed securities issued by federal agencies within our investment securities portfolio. We believe these securities provide quick sources of liquidity through sales or by pledging to obtain financing, regardless of market conditions. Some of these securities are within the held-to-maturity portion of our investment securities portfolio and as such are not intended for sale but may be pledged to obtain financing. Some of the legal entities within our consolidated group of companies are subject to various regulatory, tax, legal and other restrictions that can limit the transferability of their funds. Accordingly, we believe we maintain adequate liquidity at these entities in consideration of such funds transfer restrictions.

 

 

 

 

Table 48:  Primary Sources of Liquidity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

(in millions)

  

Total

Encumbered

Unencumbered

  

  

Total

Encumbered

Unencumbered

Interest-earning deposits

$

 207,080 

 - 

 207,080 

  

$

 186,249 

 - 

 186,249 

Securities of U.S. Treasury and federal agencies (1)

  

 24,328 

 882 

 23,446 

  

  

 6,280 

 571 

 5,709 

Mortgage-backed securities of federal agencies (2)

  

 123,050 

 60,975 

 62,075 

  

  

 123,796 

 60,605 

 63,191 

  

Total

$

 354,458 

 61,857 

 292,601 

  

$

 316,325 

 61,176 

 255,149 

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Included in encumbered securities at June 30, 2014, were securities with a fair value of $300 million which were purchased in June, but settled in July 2014.

(2)

Included in encumbered securities at June 30, 2014, were securities with a fair value of $230 million, which were purchased in June, but settled in July 2014. Included in encumbered securities at December 31, 2013, were securities with a fair value of $653 million, which were purchased in December 2013, but settled in January 2014.

  

  

  

  

  

  

  

  

  

  

  

  

Other than our primary sources of liquidity shown in Table 48, liquidity is also available through the sale or financing of other securities including trading and/or available-for-sale securities, as well as through the sale, securitization or financing of loans, to the extent such securities and loans are not encumbered. In addition, other securities in our held-to-maturity portfolio, to the extent not encumbered, may be pledged to obtain financing.

Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. At June 30, 2014, core deposits were 122% of total loans compared with 119% at December 31, 2013. Additional funding is provided by long-term debt, other foreign deposits, and short-term borrowings.

Table 49 shows selected information for short-term borrowings, which generally mature in less than 30 days.

55

 


 

      

 

Table 49:  Short-Term Borrowings

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended

  

  

  

  

  

  

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

June 30,

(in millions)

  

2014

2014

2013

2013

2013

Balance, period end

  

  

  

  

  

  

Federal funds purchased and securities sold under agreements to repurchase

$

 45,379 

 39,254 

 36,263 

 36,881 

 38,486 

Commercial paper

  

 4,261 

 6,070 

 5,162 

 5,116 

 4,132 

Other short-term borrowings

  

 12,209 

 11,737 

 12,458 

 11,854 

 14,365 

  

Total

  

$

 61,849 

 57,061 

 53,883 

 53,851 

 56,983 

Average daily balance for period

  

  

  

  

  

  

Federal funds purchased and securities sold under agreements to repurchase

$

 42,233 

 37,711 

 36,232 

 35,894 

 38,206 

Commercial paper

  

 5,221 

 5,713 

 4,731 

 4,610 

 4,855 

Other short-term borrowings

  

 11,391 

 11,078 

 11,323 

 12,899 

 14,751 

  

Total

  

$

 58,845 

 54,502 

 52,286 

 53,403 

 57,812 

Maximum month-end balance for period

  

  

  

  

  

  

Federal funds purchased and securities sold under agreements to repurchase (1)

$

 45,379 

 39,589 

 36,263 

 36,881 

 39,451 

Commercial paper (2)

  

 5,175 

 6,070 

 5,162 

 5,116 

 5,500 

Other short-term borrowings (3)

  

 12,209 

 11,737 

 12,458 

 13,384 

 14,916 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Highest month-end balance in each of the last five quarters was in June and February 2014 and December, September and May 2013.

  

(2)

Highest month-end balance in each of the last five quarters was in April and March 2014 and December, September and May 2013.

  

(3)

Highest month-end balance in each of the last five quarters was in June and March 2014 and December, July and April 2013.

  

  

  

  

  

  

  

  

  

  

  

  

We access domestic and international capital markets for long-term funding (generally greater than one year) through issuances of registered debt securities, private placements and asset-backed secured funding. Investors in the long-term capital markets, as well as other market participants, generally will consider, among other factors, a company’s debt rating in making investment decisions. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, the level and quality of earnings, and rating agency assumptions regarding the probability and extent of federal financial assistance or support for certain large financial institutions. Adverse changes in these factors could result in a reduction of our credit rating; however, our debt securities do not contain credit rating covenants.

Generally, rating agencies review a firm’s ratings at least annually. There were no changes to our credit ratings in second quarter 2014, and both the Parent and Wells Fargo Bank, N.A. remain among the top-rated financial firms in the U.S. On June 24, 2014, DBRS confirmed all the ratings of Wells Fargo and its rated subsidiaries. Also, Standard and Poor’s Rating Services (S&P) is continuing its reassessment of whether to incorporate the likelihood of extraordinary government support into the ratings of certain bank holding companies, including the Parent, in light of regulatory developments related to the Title II Orderly Liquidation Authority of the Dodd-Frank Act that could make federal support less certain and predictable. S&P has not specified a timeframe for completion of their review.

See the “Risk Factors” section in our 2013 Form 10-K for additional information on the potential impact a credit rating downgrade would have on our liquidity and operations, as well as Note 12 (Derivatives) to Financial Statements in this Report for information regarding additional collateral and funding obligations required for certain derivative instruments in the event our credit ratings were to fall below investment grade.

The credit ratings of the Parent and Wells Fargo Bank, N.A. as of June 30, 2014, are presented in Table 50.

56

 


 

Risk Management – Asset/Liability Management   (continued)  

 

Table 50:  Credit Ratings

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo & Company

  

Wells Fargo Bank, N.A.

  

  

  

  

  

Short-term

  

Long-term

  

Short-term

  

Senior debt

  

 borrowings 

  

 deposits 

  

 borrowings 

Moody's

A2

  

P-1

  

Aa3

  

P-1

S&P

A+

  

A-1

  

AA-

  

A-1+

Fitch Ratings

AA-

  

F1+

  

AA

  

F1+

DBRS

AA

  

R-1*

  

AA**

  

R-1**

  

  

  

  

  

  

  

  

  

  

* middle    **high

  

  

  

  

  

  

  

  

  

  

On January 6, 2013, the Basel Committee on Bank Supervision (BCBS) endorsed a revised Basel III liquidity framework for banks. In October 2013, a Notice of Proposed Rulemaking (NPR) regarding the U.S. implementation of the Basel III liquidity coverage ratio (LCR) was issued by the FRB, OCC and FDIC. The NPR’s public comment period closed on January 31, 2014, and the agencies will review and take into consideration the comments filed on the proposal before adopting a final rule . The FRB recently finalized rules imposing enhanced liquidity management standards on large bank holding companies (BHC) such as Wells Fargo. We will continue to analyze these proposed and recently finalized rules and other regulatory proposals that may affect liquidity risk management to determine the level of operational or compliance impact to Wells Fargo. For additional information see the “Capital Management” and “Regulatory Reform” sections in this Report and in our 2013 Form 10-K.

 

Parent Under SEC rules, our 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. In May 2014, the Parent filed a registration statement with the SEC for the issuance of senior and subordinated notes, preferred stock and other securities. The Parent’s ability to issue debt and other securities under this registration statement is limited by the debt issuance authority granted by the Board. The Parent is currently authorized by the Board to issue $60 billion in outstanding short-term debt and $170 billion in outstanding long-term debt. At June 30, 2014, the Parent had available $43.4 billion in short-term debt issuance authority and $73.5 billion in long-term debt issuance authority. The Parent’s debt issuance authority granted by the Board includes short-term and long-term debt issued to affiliates. During the first half of 2014, the Parent issued $9.0 billion of senior notes, of which $6.2 billion were registered with the SEC. In addition, during the first half of 2014, the Parent issued $2.5 billion of subordinated notes, all of which were registered with the SEC. In addition, in July 2014, the Parent issued $250 million of registered senior notes.

The Parent’s proceeds from securities issued were used for general corporate purposes, and, unless otherwise specified in the applicable prospectus or prospectus supplement, we expect the proceeds from securities issued in the future will be used for the same purposes. Depending on market conditions, we may purchase our outstanding debt securities from time to time in privately negotiated or open market transactions, by tender offer, or otherwise.

Table 51 provides information regarding the Parent’s medium-term note (MTN) programs. The Parent may issue senior and subordinated debt securities under Series L & M, Series N & O, and the European and Australian programmes. Under Series K, the Parent may issue senior debt securities linked to one or more indices or bearing interest at a fixed or floating rate.

 

Table 51:  Medium-Term Note (MTN) Programs

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

Debt

Available

  

  

  

Date

  

  

issuance

for

(in billions)

established

  

  

authority

issuance

MTN program:

  

  

  

  

  

  

Series L & M (1)

May 2012

$

 25.0 

 0.9 

  

Series N & O (1) (2)

May 2014

  

  

 - 

 - 

  

Series K (1) (3)

April 2010

  

  

 25.0 

 22.1 

  

European (4) (5)

December 2009

  

  

 25.0 

 13.9 

  

European (4) (6)

August 2013

  

  

 10.0 

 10.0 

  

Australian (4) (7)

June 2005

AUD

 10.0 

 5.7 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

SEC registered.

(2)

The Parent can issue an indeterminate amount of debt securities, subject to the debt issuance authority granted by the Board described above.

(3)

As amended in April 2012.

(4)

Not registered with the SEC. May not be offered in the United States without applicable exemptions from registration.

(5)

As amended in April 2012, April 2013 and April 2014. For securities to be admitted to listing on the Official List of the United Kingdom Financial Conduct Authority and to trade on the Regulated Market of the London Stock Exchange.

(6)

As amended in May 2014, for securities that will not be admitted to listing, trading and/or quotation by any stock exchange or quotation system, or will be admitted to listing, trading and/or quotation by a stock exchange or quotation system that is not considered to be a regulated market.

(7)

As amended in October 2005, March 2010 and September 2013.

  

  

  

  

  

  

  

  

Wells Fargo Bank, N.A. Wells Fargo Bank, N.A. is authorized by its board of directors to issue $100 billion in outstanding short-term debt and $125 billion in outstanding long-term debt. At June 30, 2014, Wells Fargo Bank, N.A. had available $99.7 billion in short-term debt issuance authority and $74.4 billion in long-term debt issuance authority. In March 2012, Wells Fargo Bank, N.A. established a $100 billion bank note program under which, subject to any other debt outstanding under the limits described above, it may issue $50 billion in outstanding short-term senior notes and $50 billion in outstanding long-term senior or subordinated notes. During the first half of 2014, Wells Fargo Bank, N.A. issued $2.8 billion of senior notes under the bank note program. At June 30, 2014, Wells Fargo Bank, N.A. had remaining issuance capacity under the bank note program of $50 billion in short-term senior notes and $33.8 billion in long-term senior or subordinated notes. In July 2014, Wells Fargo Bank, N.A. issued $350 million of senior notes. In addition, during the first half of 2014, Wells Fargo Bank, N.A. executed advances of $3.0 billion with the Federal Home Loan Bank of Des Moines and as of June 30, 2014, Wells Fargo Bank, N.A. had outstanding advances of $22.0 billion with the Federal Home Loan Bank of Des Moines.

 

Wells Fargo Canada Corporation In February 2014, Wells Fargo Canada Corporation (WFCC), an indirect wholly owned Canadian subsidiary of the Parent, qualified with the Canadian provincial securities commissions a base shelf prospectus for the distribution from

57

 


 

      

time to time in Canada of up to CAD $7.0 billion in medium-term notes. At June 30, 2014, CAD $7.0 billion still remained available for future issuance under this prospectus. During the first half of 2014 , WFCC issued CAD $1.3 billion in medium-term notes under a prior base shelf prospectus. All medium-term notes issued by WFCC are unconditionally guaranteed by the Parent.

 

Federal Home Loan Bank Membership The Federal Home Loan Banks (the FHLBs) are a group of cooperatives that lending institutions use to finance housing and economic development in local communities. We are a member of the FHLBs based in Dallas, Des Moines and San Francisco. Each member of the FHLBs is required to maintain a minimum investment in capital stock of the applicable FHLB. The board of directors of each FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends entirely upon the occurrence of a future event, potential future payments to the FHLBs are not determinable.

58

 


 

      

Capital Management                                                                                                                                                  

We have an active program for managing capital  through a comprehensive process for assessing the Company’s overall capital adequacy. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, and to meet both regulatory and market expectations. Our potential sources of capital primarily include retention of earnings net of dividends, as well as issuances of common and preferred stock. Retained earnings increased $7.6 billion from December 31, 2013, predominantly from Wells Fargo net income of $11.6 billion, less common and preferred stock dividends of $4.0 billion. During second quarter 2014, we issued approximately 24 million shares of common stock. We also issued 2 million Depositary Shares, each representing 1/25 th interest in a share of the Company’s newly issued 5.9% Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series S, for an aggregate public offering price of $2.0   billion.  In July 2014, we issued 32 million Depositary Shares, each representing 1/1000 th interest in a share of the Company’s newly issued Non-Cumulative Perpetual Class A Preferred Stock, Series T, for an aggregate public offering price of $800 million. During second quarter 2014, we repurchased approximately 24 million shares of common stock in open market transactions and from employee benefit plans, at a net cost of $1.2 billion, and 15   million  shares of common stock in settlement of a $750   million forward purchase contract entered into in April 2014. In addition, the Company entered into a $1.0 billion forward purchase contract in June 2014 with an unrelated third party that settled in July 2014 for 19.5 million shares and, in July 2014, entered into a $1.0 billion forward purchase contract with an unrelated third party that is expected to settle in fourth quarter 2014 for approximately 21 million shares. For additional information about our forward repurchase agreements, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.

 

Regulatory Capital Guidelines

The Company and each of our insured depository institutions are subject to various regulatory capital adequacy requirements administered by the FRB and the OCC. Risk-based capital (RBC) guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. At June 30, 2014, the Company and each of our insured depository institutions were “well-capitalized” under applicable regulatory capital adequacy guidelines. See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.

The RBC guidelines, which have their roots in the 1988 capital accord of the Basel Committee on Banking Supervision (BCBS) establishing international guidelines for determining regulatory capital, reflect broad credit risk considerations and market-related risks, but do not take into account other types of risk facing a financial services company. Our capital adequacy assessment process contemplates a wide range of risks that the Company is exposed to and also takes into consideration our performance under a variety of stressed economic conditions, as well as regulatory expectations and guidance, rating agency viewpoints and the view of capital markets participants.

The market risk capital rule, effective January 1, 2013, is reflected in the Company’s calculation of RWAs to address the market risks of significant trading activities. In December 2013, the FRB approved a final rule, effective April 1, 2014, revising the market risk capital rule to, among other things, conform to the FRB’s new capital framework finalized in July 2013 and discussed below. For additional information see the “Risk Management – Asset/Liability Management” section in this Report.

In 2007, federal banking regulators approved a final rule adopting revised international guidelines for determining regulatory capital known as “Basel II.” Basel II incorporates three pillars that address (a) capital adequacy, (b) supervisory review, which relates to the computation of capital and internal assessment processes, and (c) market discipline, through increased disclosure requirements. We entered the “parallel run phase” of Basel II in July 2012. During the “parallel run phase,” banking organizations must successfully complete an evaluation period under supervision from regulatory agencies in order to receive approval to calculate risk-based capital requirements under the Advanced Approach guidelines. The parallel run phase will continue until we receive regulatory approval to exit parallel reporting and subsequently begin publicly reporting our Advanced Approach regulatory capital results and related disclosures.

In December 2010, the BCBS finalized a set of further revised international guidelines for determining regulatory capital known as “Basel III.” These guidelines were developed in response to the 2008 financial crisis and were intended to address many of the weaknesses identified in the previous Basel standards, as well as in the banking sector that contributed to the crisis including excessive leverage, inadequate and low quality capital and insufficient liquidity buffers.

In July 2013, federal banking regulators approved final and interim final rules to implement the BCBS Basel III capital guidelines for U.S. banking organizations. These final capital rules, among other things:

·          implement in the United States the Basel III regulatory capital reforms including those that revise the definition of capital, increase minimum capital ratios, and introduce a minimum Common Equity Tier 1 (CET1) ratio of 4.5% and a capital conservation buffer of 2.5% (for a total minimum CET1 ratio of 7.0%) and a potential countercyclical buffer of up to 2.5%, which would be imposed by regulators at their discretion if it is determined that a period of excessive credit growth is contributing to an increase in systemic risk;

·          require a Tier 1 capital to average total consolidated assets ratio of 4% and introduce, for large and internationally active bank holding companies (BHCs), a Tier 1 supplementary leverage ratio of 3% that incorporates off-balance sheet exposures;

·          revise Basel I rules for calculating RWA to enhance risk sensitivity under a standardized approach;

·          modify the existing Basel II advanced approaches rules for calculating RWA to implement Basel III;

·          deduct certain assets from CET1, such as deferred tax assets that could not be realized through net operating loss carry-backs, significant investments in non-consolidated financial entities, and MSRs, to the extent any one category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1;

·          eliminate the accumulated other comprehensive income or loss filter that applies under RBC rules over a five-year phase in beginning in 2014; and

·          comply with the Dodd-Frank Act provision prohibiting the reliance on external credit ratings.  

59

 


 

      

 

We were required to comply with the final Basel III capital rules beginning January 2014, with certain provisions subject to phase-in periods. The Basel III capital rules are scheduled to be fully phased-in by January 1, 2022. Based on the final capital rules, we estimate that our CET1 ratio under the final Basel III capital rules using the Advanced Approach (fully phased-in) exceeded the minimum of 7.0% by 314 basis points at June 30, 2014.

Consistent with the Collins Amendment to the Dodd-Frank Act, banking organizations that have completed their parallel run process and have been approved by the FRB to use the Advanced Approach methodology to determine applicable minimum risk-weighted capital ratios and additional buffers must use the higher of their RWA as calculated under (i) the Advanced Approach rules, and (ii) from January 1, 2014, to December 31, 2014, the general Basel I RBC rules and, commencing on January 1, 2015, and thereafter, the risk weightings under the standardized approach.

In April 2014, federal banking regulators finalized a rule that enhances the supplementary leverage ratio requirements for large BHCs, like Wells Fargo, and their insured depository institutions. The rule, which becomes effective on January 1, 2018, will require a covered BHC to maintain a supplementary leverage ratio of at least 5% to avoid restrictions on capital distributions and discretionary bonus payments. The rule will also require that all of our insured depository institutions maintain a supplementary leverage ratio of 6% in order to be considered well capitalized. Based on our review, our current leverage levels would exceed the applicable requirements for the holding company and each of our insured  depository institutions. Federal banking regulators, however, have recently proposed additional changes to the supplementary leverage ratio requirements to implement revisions to the Basel III leverage framework finalized by the BCBS in January 2014. In addition, as discussed in the “ Risk Management – Asset/Liability Management – Liquidity and Funding” section in this Report, a Notice of Proposed Rulemaking regarding the U.S. implementation of the Basel III LCR was issued by the FRB, OCC and FDIC in October 2013. The proposal, which has not been finalized, was substantially similar to the BCBS proposal but differed in some respects that may be viewed as a stricter version of the LCR, such as proposing a more aggressive phase-in period.

The FRB has also indicated that it is in the process of considering new rules to address the amount of equity and unsecured debt a company must hold to facilitate its orderly liquidation and to address risks related to banking organizations that are substantially reliant on short-term wholesale funding. In addition, the FRB is developing rules to implement an additional CET1 capital surcharge on those U.S. banking organizations, such as the Company, that have been designated by the Financial Stability Board (FSB) as global systemically important banks (G-SIBs). The G-SIB surcharge would be in addition to the minimum Basel III 7.0% CET1 requirement and ranges from 1.0% to 3.5% of RWA, depending on the bank’s systemic importance, which would be determined under an indicator-based approach that considers five broad categories: cross-jurisdictional activity; size; inter-connectedness; substitutability/financial institution infrastructure; and complexity. The G-SIB surcharge is expected to be phased in  beginning in January 2016 and become fully effective on January 1, 2019. The FSB, in an updated listing published in November 2013 based on year-end 2012 data, identified the Company as one of the 29 G-SIBs and provisionally determined that the Company’s surcharge would be 1.0%. The FSB is expected to update the list of G-SIBs and their required surcharges prior to implementation based on additional or future data.

 

Capital Planning and Stress Testing  

Under the FRB’s capital plan rule, large BHCs are required to submit capital plans annually for review to determine if the FRB has any objections before making any capital distributions. The rule requires updates to capital plans in the event of material changes in a BHC’s risk profile, including as a result of any significant acquisitions.

  Our 2014 CCAR, which was submitted on January 3, 2014, included a comprehensive capital plan supported by an assessment of expected uses and sources of capital over a given planning horizon under a range of expected and stress scenarios, similar to the process the FRB used to conduct the CCAR in 2013. As part of the 2014 CCAR, the FRB also generated a supervisory stress test, which assumed a sharp decline in the economy and significant decline in asset pricing using the information provided by the Company to estimate performance. The FRB reviewed the supervisory stress results both as required under the Dodd-Frank Act using a common set of capital actions for all large BHCs and by taking into account the Company’s proposed capital actions. The FRB published its supervisory stress test results as required under the Dodd-Frank Act on March 20, 2014. On March 26, 2014, the FRB notified us that it did not object to our capital plan included in the 2014 CCAR. The capital plan included an increase in our second quarter 2014 common stock dividend rate to $0.35 per share, which was approved by the Board on April 29, 2014.

In addition to CCAR, federal banking regulators also require stress tests to evaluate whether an institution has sufficient capital to continue to operate during periods of adverse economic and financial conditions. These stress testing requirements set forth the timing and type of stress test activities large BHCs and banks must undertake as well as rules governing stress testing controls, oversight and disclosure requirements. The FRB recently proposed, but has not yet finalized, rules amending the existing capital plan and stress testing rules. The proposal would modify the start date of capital plan and stress testing cycles and would limit a large BHCs ability to make capital distributions to the extent its actual capital issuances were less than amounts indicated in its capital plan. As required under the FRB’s stress testing rule, we completed a mid-cycle stress test based on March 31, 2014, data and scenarios developed by the Company. We submitted the results of the mid-cycle stress test to the FRB in July 2014 and expect to disclose a summary of the results in September 2014.

 

Securities Repurchases

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. Future stock repurchases may be private or open-market repurchases, including block transactions, accelerated or delayed block transactions, forward transactions, and similar transactions. Additionally, we may enter into plans to purchase stock that satisfy the conditions of Rule 10b5-1 of the Securities Exchange Act of 1934. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for employee benefit plans and

60

 


 

Capital Management (continued)  

acquisitions, market conditions (including the trading price of our stock), and regulatory and legal considerations, including the FRB’s response to our capital plan and to changes in our risk profile.

In October 2012, the Board authorized the repurchase of 200   million shares, which was completed by July 2014. The Board authorized the repurchase of an additional 350 million shares in March 2014. At June 30, 2014 , we had remaining authority to repurchase  approximately 351 million  shares, subject to regulatory and legal conditions. For more information about share repurchases during 2014, see Part II, Item 2 in this Report.

Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Securities Exchange Act of 1934 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 connection with our participation in the Capital Purchase Program (CPP), a part of the Troubled Asset Relief Program (TARP), we issued to the U.S. Treasury Department warrants to purchase 110,261,688 shares of our common stock with an exercise price of $34.01 per share expiring on October 28, 2018. The terms of the warrants require the exercise price to be adjusted under certain circumstances when the Company’s quarterly common stock dividend exceeds $0.34 per share, which occurred in second quarter 2014. Accordingly, with each quarterly common stock dividend above $0.34 per share, we must calculate whether an adjustment to the exercise price is required by the terms of the warrants, including whether certain minimum thresholds have been met to trigger an adjustment, and notify the holders of any such change. The Board authorized the repurchase by the Company of up to $1 billion of the warrants. At June 30, 2014, there were 39,108,764 warrants outstanding and exercisable and $452 million of unused warrant repurchase authority. Depending on market conditions, we may purchase from time to time additional warrants in privately negotiated or open market transactions, by tender offer or otherwise.

 

Risk-Based Capital and Risk-Weighted Assets

Table 52 and Table 53 provide information regarding the composition of and change in our risk-based capital, respectively, under Basel I and Basel III (General Approach).

 

 

 

 

61

 


 

      

 

Table 52:  Risk-Based Capital Components

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Under Basel III

  

  

  

  

  

  

  

  

(General

  

Under

  

  

  

  

  

  

Approach) (1)

  

Basel I

  

  

  

  

  

  

  

June 30,

  

Dec. 31,

(in billions)

  

  

 2014 

  

 2013 

Total equity

  

$

 181.5 

  

 171.0 

Noncontrolling interests

  

  

 (0.6) 

  

 (0.9) 

  

Total Wells Fargo stockholders' equity

  

  

 180.9 

  

 170.1 

Adjustments:

  

  

  

  

  

  

Preferred stock

  

  

 (17.2) 

  

 (15.2) 

  

Cumulative other comprehensive income (2)

  

  

 (3.2) 

  

 (1.4) 

  

Goodwill and other intangible assets (2)(3)

  

  

 (25.6) 

  

 (29.6) 

  

Investment in certain subsidiaries and other

  

  

 (0.1) 

  

 (0.4) 

Common Equity Tier 1 (1)(4)

(A)

  

 134.8 

  

 123.5 

Preferred stock

  

  

 17.2 

  

 15.2 

Qualifying hybrid securities and noncontrolling interests

  

 - 

  

 2.0 

Other

  

 (0.3) 

  

 - 

Total Tier 1 capital

  

  

 151.7 

  

 140.7 

Long-term debt and other instruments qualifying as Tier 2

  

  

 24.0 

  

 20.5 

Qualifying allowance for credit losses

  

  

 13.8 

  

 14.3 

Other

  

  

 -  

  

 0.7 

Total Tier 2 capital

  

  

 37.8 

  

 35.5 

Total qualifying capital

(B)

$

 189.5 

  

 176.2 

  

  

  

  

  

  

  

  

  

  

Basel III Risk-Weighted Assets (RWAs) (5) :

  

  

  

  

  

  

Credit risk

  

$

 1,145.7 

  

  

  

Market risk

  

  

 46.8 

  

  

Basel I RWAs (5):

  

  

  

  

  

  

Credit risk

  

  

  

  

 1,105.2 

  

Market risk

  

  

  

  

 36.3 

Total Basel III / Basel I RWAs

(C)

$

 1,192.5 

  

 1,141.5 

  

  

  

  

  

  

  

  

  

  

Capital Ratios:

  

  

  

  

  

  

Common Equity Tier 1 to total RWAs

(A)/(C)

  

 11.31 

%

 10.82 

  

Total capital to total RWAs

(B)/(C)

  

 15.89 

  

 15.43 

  

  

  

  

  

  

  

  

  

  

(1)

Basel III revises the definition of capital, increases minimum capital ratios, and introduces a minimum Common Equity Tier 1 (CET1) ratio. These changes are being fully phased-in effective January 1, 2014, through the end of 2021 and the capital ratios will be determined using Basel III (General Approach) RWAs during 2014. See Table 55 in this section for a summary of changes in RWAs from December 31, 2013, to June 30, 2014.

(2)

Under transition provisions to Basel III, cumulative other comprehensive income (previously deducted under Basel I) is included in CET1 over a specified phase-in period. In addition, certain intangible assets includable in CET1 are phased out over a specified period.

(3)

Goodwill and other intangible assets are net of any associated deferred tax liabilities.

(4)

CET1 (formerly Tier 1 common equity under Basel I) is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews CET1 along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation to total equity, because of current interest in such information on the part of market participants.

(5)

Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total RWAs.

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Capital Management (continued)  

 

Table 53:  Analysis of Changes in Capital Under Basel III (General Approach)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in billions)

  

  

  

Common Equity Tier 1 at December 31, 2013

  

  

  

$

 123.5 

  

Net income

  

  

  

  

 11.0 

  

Common stock dividends

  

  

  

  

 (3.4) 

  

Common stock issued and repurchased

  

  

  

  

 (2.4) 

  

Goodwill and other intangible assets (net of any associated deferred tax liabilities)

  

  

  

  

 4.0 

  

Other

  

  

  

  

 2.1 

  

  

Change in Common Equity Tier 1

  

  

  

  

 11.3 

Common Equity Tier 1 at June 30, 2014

  

  

  

$

 134.8 

  

  

  

  

  

  

  

  

  

  

Tier 1 capital at December 31, 2013

  

  

  

$

 140.7 

  

Change in Common Equity Tier 1

  

  

  

  

 11.3 

  

Issuance of noncumulative perpetual preferred

  

  

  

  

 2.0 

  

Other

  

  

  

  

 (2.3) 

  

  

Change in Tier 1 capital

  

  

  

  

 11.0 

Tier 1 capital at June 30, 2014

  

  

(A)

$

 151.7 

  

  

  

  

  

  

  

  

Tier 2 capital at December 31, 2013

  

  

  

$

 35.5 

  

Change in long-term debt and other instruments qualifying as Tier 2

  

  

  

  

 3.5 

  

Change in qualifying allowance for credit losses

  

  

  

  

 (0.5) 

  

Other

  

  

  

  

 (0.7) 

  

  

Change in Tier 2 capital

  

  

  

  

 2.3 

Tier 2 capital at June 30, 2014

  

  

(B)

  

 37.8 

Total qualifying capital

  

  

(A) + (B)

$

 189.5 

  

  

Table 54 presents information on the components of RWAs included within our regulatory capital ratios. RWAs prior to 2014 were determined under Basel I, and RWAs in 2014 reflect the transition to Basel III (General Approach).

 

Table 54:  Basel III (General Approach) RWAs / Basel I RWAs

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

Dec. 31,

(in millions)

  

  

  

 2014 

  

 2013 

On-balance sheet RWAs

  

  

  

  

  

  

  

Investment securities

  

  

$

 88,041 

  

 93,445 

  

Securities financing transactions (1)

  

  

  

 10,337 

  

 10,385 

  

Loans (2)

  

  

  

 699,825 

  

 680,953 

  

Market risk

  

  

  

 46,782 

  

 36,339 

  

Other

  

  

  

 108,916 

  

 91,788 

  

  

Total on-balance sheet RWAs

  

  

  

 953,901 

  

 912,910 

Off-balance sheet RWAs

  

  

  

  

  

  

  

Commitments and guarantees (3)

  

  

  

 206,797 

  

 199,197 

  

Derivatives

  

  

  

 11,159 

  

 10,545 

  

Other

  

  

  

 20,646 

  

 18,862 

  

  

Total off-balance sheet RWAs

  

  

  

 238,602 

  

 228,604 

  

  

  

Total Basel III / Basel I RWAs

  

  

$

 1,192,503 

  

 1,141,514 

  

  

  

  

  

  

  

  

  

  

  

(1)

Represents federal funds sold and securities purchased under resale agreements.

(2)

Represents loans held for sale and loans held for investment.

(3)

Primarily includes financial standby letters of credit and other unused commitments.

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Table 55 presents changes in RWAs for the first half of 2014. Effective January 1, 2014, we commenced transitioning  RWAs from Basel I to Basel III (General Approach) under final rules adopted by federal banking regulators in July 2013.

 

Table 55:  Analysis of Changes in RWAs

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in millions)

  

  

  

Basel I RWAs at December 31, 2013

  

  

  

$

 1,141,514 

Net change in on-balance sheet RWAs:

  

  

  

  

  

  

Investment securities

  

  

  

  

 (5,404) 

  

Securities financing transactions

  

  

  

  

 (48) 

  

Loans

  

  

  

  

 18,872 

  

Market risk

  

  

  

  

 10,443 

  

Other

  

  

  

  

 17,128 

  

  

Total change in on-balance sheet RWAs

  

  

  

  

 40,991 

Net change in off-balance sheet RWAs:

  

  

  

  

  

  

Commitments and guarantees

  

  

  

  

 7,600 

  

Derivatives

  

  

  

  

 614 

  

Other

  

  

  

  

 1,784 

  

  

Total change in off-balance sheet RWAs

  

  

  

  

 9,998 

  

  

  

Total change in RWAs

  

  

  

  

 50,989 

Basel III (General Approach) RWAs at June 30, 2014

  

  

  

$

 1,192,503 

  

  

  

  

  

  

  

  

  

  

The increase in total RWAs from December 31, 2013, was primarily due to increased lending activity

Table 56 provides information regarding our CET1 calculation as estimated under Basel III using the Advanced Approach, fully phased-in method. 

 

Table 56:  Common Equity Tier 1 Under Basel III (Advanced Approach, Fully Phased-In) (1)(2)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in billions)

  

  

June 30, 2014

  

Common Equity Tier 1 (transition amount) under Basel III

  

  

  

$

 134.8 

  

  

Adjustments from transition amount to fully phased-in Basel III (3):

  

  

  

  

  

  

  

  

Cumulative other comprehensive income

  

  

  

 3.2 

  

  

  

Other

  

  

  

  

 (2.6) 

  

  

Total adjustments

  

  

  

  

 0.6 

  

  

  

Common Equity Tier 1 (fully phased-in) under Basel III

  

  

(C)

$

 135.4 

  

Total RWAs anticipated under Basel III (4)

  

  

(D)

$

 1,335.3 

  

Common Equity Tier 1 to total RWAs anticipated under Basel III (Advanced Approach, fully phased-in)

  

  

(C)/(D)

  

 10.14 

%

  

  

  

  

  

  

  

  

  

  

  

(1)

CET1 is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews CET1 along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation to total equity, because of current interest in such information on the part of market participants.

  

(2)

The Basel III CET1 and RWAs are estimated based on the Basel III capital rules adopted July 2, 2013, by the FRB. The rules establish a new comprehensive capital framework for U.S. banking organizations that implement the Basel III capital framework and certain provisions of the Dodd-Frank Act. The rules are being fully phased-in effective January 1, 2014, through the end of 2021.

  

(3)

Assumes cumulative other comprehensive income is fully phased-in and certain other intangible assets are fully phased out under Basel III capital rules.

  

(4)

The final Basel III capital rules provide for two capital frameworks: the Standardized Approach intended to replace Basel I, and the Advanced Approach applicable to certain institutions. Under the final rules, we will be subject to the lower of our CET1 ratio calculated under the Standardized Approach and under the Advanced Approach in the assessment of our capital adequacy. Accordingly, the estimate of RWAs has been determined under the Advanced Approach because management's estimate of RWAs is currently higher using the Advanced Approach, and thus results in a lower CET1, compared with the Standardized Approach. Basel III capital rules adopted by the Federal Reserve Board incorporate different classification of assets, with risk weights based on Wells Fargo's internal models, along with adjustments to address a combination of credit/counterparty, operational and market risks, and other Basel III elements.

  

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Regulatory Reform                                                                                                                                                     

Since the enactment of the Dodd-Frank Act in 2010, the U.S. financial services industry has been subject to a significant increase in regulation and regulatory oversight initiatives. This increased regulation and oversight has substantially changed how most U.S. financial services companies conduct business and has increased their regulatory compliance costs.

The following supplements our discussion of the significant regulations and regulatory oversight initiatives that have affected or may affect our business contained in the “Regulatory Reform” and “Risk Factors” sections of our 2013 Form 10-K and the “Regulatory Reform” section of our 2014 First Quarter Report on Form 10-Q.

 

VOLCKER RULE   The Volcker Rule , with limited exceptions, prohibits banking entities from engaging in proprietary trading or owning any interest in or sponsoring or having certain relationships with a hedge fund, a private equity fund or certain structured transactions that are deemed covered funds. On December 10, 2013, federal banking regulators, the SEC and CFTC (collectively, the “Volcker supervisory regulators”) jointly released a final rule to implement the Volcker Rule’s restrictions. Banking entities are not required to come into compliance with the Volcker Rule’s restrictions until July 21, 2015. Banking entities with $50 billion or more in trading assets and liabilities such as Wells Fargo, however, are required to report to the Volcker supervisory regulators certain trading metrics beginning June 30, 2014. During the conformance period, banking entities are expected to engage in “good-faith” planning efforts, appropriate for their activities and investments, to enable them to conform all of their activities and investments to the Volcker Rule’s restrictions by no later than July 21, 2015. Limited further extensions of the compliance period may be granted at the discretion of the FRB. The FRB recently announced that it intends to exercise its authority to give banking entities two additional one-year extensions to conform their ownership interests in and sponsorships of certain collateralized loan obligations that meet the definition of covered fund under the rule. As a banking entity with more than $50 billion in consolidated assets, we will also be subject to enhanced compliance program requirements. We continue to evaluate the final rule and assess its impact on our trading and investment activities, but we do not anticipate a material impact to our financial results from the rule as prohibited proprietary trading and covered fund investment activities are not significant to our financial results. Moreover, we already have reduced or exited certain businesses in anticipation of the rule’s compliance date and expect to have to make limited divestments in non-conforming funds as a result of the rule.

 

ENHANCED REGULATION OF MONEY MARKET MUTUAL FUNDS   On July 23, 2014, the SEC adopted a rule governing money market mutual funds that, among other things, requires significant structural changes to these funds, including requiring institutional prime money market funds to maintain a variable net asset value and providing for the imposition of liquidity fees and redemption gates for all non-governmental money market funds during periods in which they experience liquidity impairments of a certain magnitude. The SEC has provided a period of two years following the effective date of the rule for funds to comply with these structural changes.

 

REGULATION OF INTERCHANGE TRANSACTION FEES (THE DURBIN AMENDMENT)   On October 1, 2011, the FRB rule enacted to implement the Durbin Amendment to the Dodd-Frank Act that limits debit card interchange transaction fees to those “reasonable” and “proportional” to the cost of the transaction became effective. The rule generally established that the maximum allowable interchange fee that an issuer may receive or charge for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. On July 31, 2013, the U.S. District Court for the District of Columbia ruled that the approach used by the FRB in setting the maximum allowable interchange transaction fee impermissibly included costs that were specifically excluded from consideration under the Durbin Amendment. The District Court’s decision maintained the current interchange transaction fee standards until the FRB drafted new regulations or interim standards. In August 2013, the FRB filed a notice of appeal of the decision to the United States Court of Appeals for the District of Columbia. In September 2013, the Court of Appeals granted a joint motion for an expedited appeal, and the District Court’s order was stayed pending the appeal. In March 2014, the Court of Appeals reversed the District Court’s decision, but did direct the FRB to provide further explanation regarding its treatment of the costs of monitoring transactions. The plaintiffs did not file a petition for rehearing with the Court of Appeals but have requested and received an extension of time to file a petition for writ of certiorari with the U.S. Supreme Court.

 

  “LIVING WILL” REQUIREMENTS AND RELATED MATTERS  Rules adopted by the FRB and the FDIC under the Dodd-Frank Act require large financial institutions, including Wells Fargo, to prepare and periodically revise resolution plans, so-called “living wills”, that would facilitate their resolution in the event of material distress or failure. Wells Fargo submitted its second annual resolution plan under these rules on June 26, 2014. Our national bank subsidiary, Wells Fargo Bank, N.A., is also required to prepare a resolution plan for the FDIC under separate regulatory authority and submitted its second annual plan on June 16, 2014.

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Critical Accounting Policies                                                                                                                                        

Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2013 Form 10-K) are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Six 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;

·          PCI loans;

·          the valuation of residential MSRs;

·          liability for mortgage loan repurchase losses;  

·          the fair valuation of financial instruments; and

·          income taxes.

Management has reviewed and approved these critical accounting policies and has discussed these policies with the Board’s Audit and Examination Committee. These policies are described further in the “Financial Review – Critical Accounting Policies” section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2013 Form 10-K.

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Current Accounting Developments                                                                                                                           

The following accounting pronouncements have been issued by the FASB but are not yet effective:     

•       Accounting Standards Update (ASU or Update) 2014-12 – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period ;  

•       ASU 2014-11 – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures

•       ASU 2014-09 – Revenue from Contracts With Customers (Topic 606);

•       ASU 2014-08 - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ; and

•       ASU 2014-01 - Accounting for Investments in Qualified Affordable Housing Projects

 

ASU 2014-12 provides accounting guidance for employee share-based payment awards with a specific performance target. The Update clarifies that awards containing a performance target that affects vesting and could be achieved after the requisite service period should be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the cost attributable to service periods that employees have already completed.  This guidance is effective for us in first quarter 2016 with early adoption permitted.  The guidance can be applied prospectively to awards granted or modified after the effective date or retrospectively to awards outstanding in the prior periods presented.  The Update will not affect our consolidated financial statements as the guidance is consistent with our current practice.

 

ASU 2014-11 changes the accounting for certain repurchase agreements and similar transactions and requires new disclosures.  The Update eliminates the difference in accounting treatment for repurchase agreements that settle at the same time as transferred financial assets (repurchase-to-maturity transactions) and repurchase agreements that settle before the maturity of the transferred financial asset. Under the new guidance, repurchase-to-maturity transactions must be accounted for as secured borrowings and not as sales with forward agreements, as is required under current accounting. The Update also requires separate accounting treatment for repurchase financing arrangements where an agreement to transfer a financial asset is executed at the same time as a repurchase agreement with the same counterparty. Under such arrangements, the repurchase agreement is accounted for as a secured borrowing.  The new disclosure requirements include expanded information about transfers accounted for as sales, such as the carrying amount of assets derecognized and the amount of gross proceeds received.  In addition, new disclosures will be required for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions, including the remaining contractual maturity of the agreements, and discussion of the potential risks associated with the agreements and related collateral. The accounting changes are effective for us in first quarter 2015 with early adoption prohibited. The disclosures are required in first quarter 2015 for transfers accounted for as sales with the remaining disclosures required in second quarter 2015. We are evaluating the impact this Update will have on our consolidated financial statements.

 

ASU 2014-09 modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards.  The Update requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and services.  The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the satisfaction of performance obligations. The Update is effective for us in first quarter 2017 with retrospective application to prior periods presented or retrospectively as a cumulative effect adjustment in the period of adoption.  Early adoption is not permitted. We are evaluating the impact this Update will have on our consolidated financial statements.

 

ASU 2014-08 changes the definition and reporting requirements for discontinued operations. Under the new guidance, an entity’s disposal of a component or group of components must be reported in discontinued operations if the disposal is a strategic shift that has or will have a significant effect on the entity’s operations and financial results. Major strategic shifts include disposals of a significant geographic area or line of business. This guidance also requires new disclosures on discontinued operations, such as the income statement line items making up the pretax profit or loss of the discontinued operations and information on significant continuing involvement with discontinued operations. These changes are effective for us in first quarter 2015 with prospective application. Early adoption is permitted for disposals that have not been previously reported. This Update will not have a material impact on our consolidated financial statements.

 

ASU 2014-01 amends the accounting guidance for investments in affordable housing projects that qualify for the low-income housing tax credit. The Update allows companies to make an accounting policy election to amortize the cost of its investments in proportion to the tax benefits received if certain criteria are met and present the amortization as a component of income tax expense. The new guidance is effective in first quarter 2015 with early adoption permitted. Additionally, the new accounting guidance requires incremental disclosures for all entities that invest in qualified affordable housing projects regardless of the policy election. We do not intend to adopt the accounting policy election permitted by the Update, and therefore, it will not affect our consolidated financial statements.

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Forward-Looking Statements                                                                                                                                    

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make forward-looking statements in our other documents filed or furnished with the SEC, and our management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “target,” “projects,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “can” and similar references to future periods. In particular, forward-looking statements include, but are not limited to, statements we make about: (i) the future operating or financial performance of the Company, including our outlook for future growth; (ii) our noninterest expense and efficiency ratio; (iii) future credit quality and performance, including our expectations regarding future loan losses and allowance releases; (iv) the appropriateness of the allowance for credit losses; (v) our expectations regarding net interest income and net interest margin; (vi) loan growth or the reduction or mitigation of risk in our loan portfolios; (vii) future capital levels and our estimated Common Equity Tier 1 ratio under Basel III capital standards; (viii) the performance of our mortgage business and any related exposures; (ix) the expected outcome and impact of legal, regulatory and legislative developments, as well as our expectations regarding compliance therewith; (x) future common stock dividends, common share repurchases and other uses of capital; (xi) our targeted range for return on assets and return on equity; (xii) the outcome of contingencies, such as legal proceedings; and (xiii) the Company’s plans, objectives and strategies.

Forward-looking statements are not based on historical facts but instead represent our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:

·          current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates , U.S. fiscal debt, budget and tax matters, and the overall slowdown in global economic growth ;  

·          our capital and liquidity requirements (including under regulatory capital standards, such as the Basel III capital standards) and our ability to generate capital internally or raise capital on favorable terms;

·          financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;

·          the extent of our success in our loan modification efforts, as well as the effects of regulatory requirements or guidance regarding loan modifications;

·          the amount of mortgage loan repurchase demands that we receive and our ability to satisfy any such demands without having to repurchase loans related thereto or otherwise indemnify or reimburse third parties, and the credit quality of or losses on such repurchased mortgage loans;

·          negative effects relating to our mortgage servicing and foreclosure practices, including our obligations under the settlement with the Department of Justice and other federal and state government entities, as well as changes in industry standards or practices, regulatory or judicial requirements, penalties or fines, increased servicing and other costs or obligations, including loan modification requirements, or delays or moratoriums on foreclosures;

·          our ability to realize our efficiency ratio target as part of our expense management initiatives, including as a result of business and economic cyclicality, seasonality, changes in our business composition and operating environment, growth in our businesses and/or acquisitions, and unexpected expenses relating to, among other things, litigation and regulatory matters;

·          the effect of the current low interest rate environment or changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;

·          a recurrence of significant turbulence or disruption in the capital or financial markets, which could result in, among other things, reduced investor demand for mortgage loans, a reduction in the availability of funding or increased funding costs, and declines in asset values and/or recognition of other-than-temporary impairment on securities held in our investment securities portfolio;

·          the effect of a fall in stock market prices on our investment banking business and our fee income from our brokerage, asset and wealth management businesses;

·          reputational damage from negative publicity, protests, fines, penalties and other negative consequences from regulatory violations and legal actions;

·          a failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber attacks;

·          the effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin;

·          fiscal and monetary policies of the Federal Reserve Board; and

·          the other risk factors and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

In addition to the above factors, we also caution that the amount and timing of any future common stock dividends or repurchases will depend on the earnings, cash requirements and financial condition of the Company, market conditions, capital requirements (including under Basel capital standards), common stock issuance requirements, applicable law and regulations (including federal securities laws and federal banking regulations), and other factors deemed relevant by the Company’s Board of Directors, and may be subject to regulatory approval or conditions.

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Forward-Looking Statements   (continued)  

For more information about factors that could cause actual results to differ materially from our expectations, refer to our reports filed with the Securities and Exchange Commission, including the discussion under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission and available on its website at www.sec.gov

Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

Risk Factors                                                                                                                                                                 

An investment in the Company involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. For a discussion of risk factors that could adversely affect our financial results and condition, and the value of, and return on, an investment in the Company, we refer you to the “Risk Factors” section of our 2013 Form 10-K.

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Controls and Procedures

 

Disclosure Controls and Procedures                                                                                                                 

The Company’s management evaluated the effectiveness, as of June 30, 2014, of the Company’s disclosure controls and procedures. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2014.

 

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 Company’s principal executive and principal financial officers and effected by the Company’s Board, 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 Company’s 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 second quarter 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Wells Fargo & Company and Subsidiaries

Consolidated Statement of Income (Unaudited)

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions, except per share amounts)

  

 2014 

  

 2013 

  

 2014 

  

 2013 

Interest income

  

  

  

  

  

  

  

  

Trading assets

$

 407 

  

 340 

  

 781 

  

 667 

Investment securities

  

 2,112 

  

 2,034 

  

 4,222 

  

 3,959 

Mortgages held for sale

  

 195 

  

 378 

  

 365 

  

 749 

Loans held for sale

  

 1 

  

 4 

  

 3 

  

 7 

Loans

  

 8,852 

  

 8,902 

  

 17,598 

  

 17,763 

Other interest income

  

 226 

  

 169 

  

 436 

  

 332 

  

Total interest income

  

 11,793 

  

 11,827 

  

 23,405 

  

 23,477 

Interest expense

  

  

  

  

  

  

  

  

Deposits

  

 275 

  

 353 

  

 554 

  

 722 

Short-term borrowings

  

 14 

  

 17 

  

 26 

  

 37 

Long-term debt

  

 620 

  

 632 

  

 1,239 

  

 1,329 

Other interest expense

  

 93 

  

 75 

  

 180 

  

 140 

  

Total interest expense

  

 1,002 

  

 1,077 

  

 1,999 

  

 2,228 

Net interest income

  

 10,791 

  

 10,750 

  

 21,406 

  

 21,249 

Provision for credit losses

  

 217 

  

 652 

  

 542 

  

 1,871 

Net interest income after provision for credit losses

  

 10,574 

  

 10,098 

  

 20,864 

  

 19,378 

Noninterest income

  

  

  

  

  

  

  

  

Service charges on deposit accounts

  

 1,283 

  

 1,248 

  

 2,498 

  

 2,462 

Trust and investment fees

  

 3,609 

  

 3,494 

  

 7,021 

  

 6,696 

Card fees

  

 847 

  

 813 

  

 1,631 

  

 1,551 

Other fees

  

 1,088 

  

 1,089 

  

 2,135 

  

 2,123 

Mortgage banking

  

 1,723 

  

 2,802 

  

 3,233 

  

 5,596 

Insurance

  

 453 

  

 485 

  

 885 

  

 948 

Net gains from trading activities

  

 382 

  

 331 

  

 814 

  

 901 

Net gains (losses) on debt securities (1)

  

 71 

  

 (54) 

  

 154 

  

 (9) 

Net gains from equity investments (2)

  

 449 

  

 203 

  

 1,296 

  

 316 

Lease income

  

 129 

  

 225 

  

 262 

  

 355 

Other

  

 241 

  

 (8) 

  

 356 

  

 449 

  

Total noninterest income

  

 10,275 

  

 10,628 

  

 20,285 

  

 21,388 

Noninterest expense

  

  

  

  

  

  

  

  

Salaries

  

 3,795 

  

 3,768 

  

 7,523 

  

 7,431 

Commission and incentive compensation

  

 2,445 

  

 2,626 

  

 4,861 

  

 5,203 

Employee benefits

  

 1,170 

  

 1,118 

  

 2,542 

  

 2,701 

Equipment

  

 445 

  

 418 

  

 935 

  

 946 

Net occupancy

  

 722 

  

 716 

  

 1,464 

  

 1,435 

Core deposit and other intangibles

  

 349 

  

 377 

  

 690 

  

 754 

FDIC and other deposit assessments

  

 225 

  

 259 

  

 468 

  

 551 

Other

  

 3,043 

  

 2,973 

  

 5,659 

  

 5,634 

  

Total noninterest expense

  

 12,194 

  

 12,255 

  

 24,142 

  

 24,655 

Income before income tax expense

  

 8,655 

  

 8,471 

  

 17,007 

  

 16,111 

Income tax expense

  

 2,869 

  

 2,863 

  

 5,146 

  

 5,283 

Net income before noncontrolling interests

  

 5,786 

  

 5,608 

  

 11,861 

  

 10,828 

Less: Net income from noncontrolling interests

  

 60 

  

 89 

  

 242 

  

 138 

Wells Fargo net income

$

 5,726 

  

 5,519 

  

 11,619 

  

 10,690 

  

  

  

  

  

  

  

  

  

  

Less: Preferred stock dividends and other

  

 302 

  

 247 

  

 588 

  

 487 

Wells Fargo net income applicable to common stock

$

 5,424 

  

 5,272 

  

 11,031 

  

 10,203 

Per share information

  

  

  

  

  

  

  

  

Earnings per common share

$

1.02 

  

1.00 

  

2.09 

  

1.93 

Diluted earnings per common share

  

1.01 

  

0.98 

  

2.06 

  

1.90 

Dividends declared per common share

  

0.35 

  

0.30 

  

0.65 

  

0.55 

Average common shares outstanding

  

5,268.4 

  

5,304.7 

  

5,265.6 

  

5,291.9 

Diluted average common shares outstanding

  

5,350.8 

  

5,384.6 

  

5,353.2 

  

5,369.9 

  

  

  

  

  

  

  

  

  

  

(1)   Total other-than-temporary impairment (OTTI) losses (reversal of losses) were $3 million and $64 million for  second quarter 2014 and 2013, respectively. Of total OTTI, losses of $13 million and $71 million were recognized in earnings, and reversal of losses of $(10) million and $(7) million were recognized as non-credit-related OTTI in other comprehensive income for second quarter 2014 and 2013, respectively. Total other-than-temporary impairment (OTTI) losses (reversal of losses) were $(11) million and $49 million for the first half of 2014 and 2013, respectively. Of total OTTI, losses of $20 million and $105 million were recognized in earnings, and reversal of losses of $(31) million and $(56) million were recognized as non-credit-related OTTI in other comprehensive income for the first half of 2014 and 2013, respectively.

(2)   Includes OTTI losses of $69 million and $40 million for second quarter 2014 and 2013, respectively, and $197 million and $84 million for the first half of 2014 and 2013, respectively.

 

The accompanying notes are an integral part of these statements.

71

 


 

   

 

Wells Fargo & Company and Subsidiaries

  

  

  

  

Consolidated Statement of Comprehensive Income (Unaudited)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

 2014 

  

 2013 

  

 2014 

  

 2013 

Wells Fargo net income

$

 5,726 

  

 5,519 

  

 11,619 

  

 10,690 

Other comprehensive income (loss), before tax:

  

  

  

  

  

  

  

  

  

Investment securities:

  

  

  

  

  

  

  

  

  

  

Net unrealized gains (losses) arising during the period

  

 2,085 

  

 (6,130) 

  

 4,810 

  

 (6,764) 

  

  

Reclassification of net (gains) losses to net income

  

 (150) 

  

 30 

  

 (544) 

  

 (83) 

  

Derivatives and hedging activities:

  

  

  

  

  

  

  

  

  

  

Net unrealized gains (losses) arising during the period

  

 212 

  

 (10) 

  

 256 

  

 (3) 

  

  

Reclassification of net gains on cash flow hedges to net income

  

 (115) 

  

 (69) 

  

 (221) 

  

 (156) 

  

Defined benefit plans adjustments:

  

  

  

  

  

  

  

  

  

  

Net actuarial gains (losses) arising during the period

  

 (12) 

  

 772 

  

 (12) 

  

 778 

  

  

Amortization of net actuarial loss, settlements and other to net income

  

 20 

  

 113 

  

 38 

  

 162 

  

Foreign currency translation adjustments:

  

  

  

  

  

  

  

  

  

  

Net unrealized gains (losses) arising during the period

  

 17 

  

 (21) 

  

 - 

  

 (39) 

  

  

Reclassification of net (gains) losses to net income

  

 - 

  

 (15) 

  

 6 

  

 (15) 

Other comprehensive income (loss), before tax

  

 2,057 

  

 (5,330) 

  

 4,333 

  

 (6,120) 

Income tax (expense) benefit related to other comprehensive income

  

 (816) 

  

 1,979 

  

 (1,647) 

  

 2,267 

Other comprehensive income (loss), net of tax

  

 1,241 

  

 (3,351) 

  

 2,686 

  

 (3,853) 

Less: Other comprehensive loss from noncontrolling interests

  

 (124) 

  

 (3) 

  

 (45) 

  

 - 

Wells Fargo other comprehensive income (loss), net of tax

  

 1,365 

  

 (3,348) 

  

 2,731 

  

 (3,853) 

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo comprehensive income

  

 7,091 

  

 2,171 

  

 14,350 

  

 6,837 

Comprehensive income (loss) from noncontrolling interests

  

 (64) 

  

 86 

  

 197 

  

 138 

Total comprehensive income

$

 7,027 

  

 2,257 

  

 14,547 

  

 6,975 

  

  

  

  

  

  

  

  

  

  

  

  

The accompanying notes are an integral part of these statements.

72

 


 

      

 

Wells Fargo & Company and Subsidiaries

Consolidated Balance Sheet

  

  

  

  

  

  

  

  

June 30,

Dec. 31,

(in millions, except shares)  

  

2014 

  

2013 

Assets  

  

(Unaudited)

  

  

Cash and due from banks  

$

 20,635 

  

 19,919 

Federal funds sold, securities purchased under resale agreements and other short-term investments  

  

 238,719 

  

 213,793 

Trading assets  

  

 71,674 

  

 62,813 

Investment securities:  

  

  

  

  

  

Available-for-sale, at fair value  

  

 248,961 

  

 252,007 

  

Held-to-maturity, at cost (fair value $30,386 and $12,247)  

  

 30,108 

  

 12,346 

Mortgages held for sale (includes $16,448 and $13,879 carried at fair value) (1)  

  

 21,064 

  

 16,763 

Loans held for sale (includes $1 and $1 carried at fair value) (1)  

  

 9,762 

  

 133 

  

  

  

  

  

  

  

  

  

  

Loans (includes $5,926 and $5,995 carried at fair value) (1)(2)  

  

 828,942 

  

 822,286 

Allowance for loan losses  

  

 (13,101) 

  

 (14,502) 

  

Net loans (2)  

  

 815,841 

  

 807,784 

Mortgage servicing rights:  

  

  

  

  

  

Measured at fair value  

  

 13,900 

  

 15,580 

  

Amortized  

  

 1,196 

  

 1,229 

Premises and equipment, net  

  

 8,977 

  

 9,156 

Goodwill  

  

 25,705 

  

 25,637 

Other assets (includes $1,902 and $1,386 carried at fair value) (1)  

  

 92,332 

  

 86,342 

  

  

  

  

Total assets (2)(3)  

$

 1,598,874 

  

 1,523,502 

Liabilities  

  

  

  

  

Noninterest-bearing deposits  

$

 308,099 

  

 288,117 

Interest-bearing deposits  

  

 810,478 

  

 791,060 

  

Total deposits  

  

 1,118,577 

  

 1,079,177 

Short-term borrowings  

  

 61,849 

  

 53,883 

Accrued expenses and other liabilities (2)  

  

 69,021 

  

 66,436 

Long-term debt  

  

 167,878 

  

 152,998 

  

  

  

Total liabilities (2)(4)  

  

 1,417,325 

  

 1,352,494 

Equity  

  

  

  

  

Wells Fargo stockholders' equity:  

  

  

  

  

  

Preferred stock  

  

 18,749 

  

 16,267 

  

Common stock – $1-2/3 par value, authorized 9,000,000,000 shares;  

  

  

  

  

  

  

 issued 5,481,811,474 shares and 5,481,811,474 shares  

  

 9,136 

  

 9,136 

  

Additional paid-in capital  

  

 59,926 

  

 60,296 

  

Retained earnings  

  

 99,926 

  

 92,361 

  

Cumulative other comprehensive income  

  

 4,117 

  

 1,386 

  

Treasury stock – 231,916,784 shares and 224,648,769 shares  

  

 (9,271) 

  

 (8,104) 

  

Unearned ESOP shares  

  

 (1,724) 

  

 (1,200) 

  

  

Total Wells Fargo stockholders' equity  

  

 180,859 

  

 170,142 

Noncontrolling interests  

  

 690 

  

 866 

  

  

  

Total equity  

  

 181,549 

  

 171,008 

  

  

  

  

Total liabilities and equity (2)  

$

 1,598,874 

  

 1,523,502 

  

  

  

  

  

  

  

  

  

  

(1)   Parenthetical amounts represent assets and liabilities for which we have elected the fair value option.

(2)   Financial information for certain periods prior to 2014 was revised to reflect our determination that certain factoring arrangements did not qualify as loans. See Note 1 for more information.

(3)   Our consolidated assets at June 30, 2014 and December 31, 2013, include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash and due from banks, $175 million and $165 million; Trading assets, $34 million and $162 million; Investment Securities, $1.1 billion and $1.4 billion; Mortgages held for sale, $0 million and $38 million; Net loans, $5.5 billion and $6.0 billion; Other assets, $326 million and $347 million, and Total assets, $7.2 billion and $8.1 billion, respectively.

(4)   Our consolidated liabilities at June 30, 2014 and December 31, 2013, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Short-term borrowings, $16 million and $29 million; Accrued expenses and other liabilities, $48 million and $90 million; Long-term debt, $2.1 billion and $2.3 billion; and Total liabilities, $2.2 billion and $2.4 billion, respectively.

 

The accompanying notes are an integral part of these statements.

73

 


 

   

 

Wells Fargo & Company and Subsidiaries

  

  

  

  

  

  

  

  

  

Consolidated Statement of Changes in Equity (Unaudited)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Preferred stock

  

Common stock

(in millions, except shares)

  

  

Shares

  

  

Amount

  

Shares

  

  

Amount

Balance January 1, 2013

  

  

 10,558,865 

  

$

 12,883 

  

 5,266,314,176 

  

$

 9,136 

Net income

  

  

Other comprehensive income (loss), net of tax

  

  

  

  

  

  

  

  

  

  

Noncontrolling interests

  

  

  

  

  

  

  

  

  

  

Common stock issued

  

  

  

  

  

  

 60,150,600 

  

  

  

Common stock repurchased (1)

  

  

  

  

  

  

 (43,293,905) 

  

  

  

Preferred stock issued to ESOP

  

 1,200,000 

  

  

 1,200 

  

  

  

  

  

Preferred stock released by ESOP

  

  

  

  

  

  

  

  

  

  

Preferred stock converted to common shares

 (719,590) 

  

  

 (720) 

  

 18,985,851 

  

  

  

Preferred stock issued

  

  

 25,000 

  

  

 625 

  

  

  

  

  

Common stock dividends

  

  

  

  

  

  

  

  

  

  

  

Preferred stock dividends

  

  

  

  

  

  

  

  

  

Tax benefit from stock incentive compensation

  

  

  

  

  

  

  

  

  

  

Stock incentive compensation expense

  

  

  

  

  

  

  

  

  

  

Net change in deferred compensation and related plans

  

  

  

  

  

  

  

  

  

Net change

  

  

  

 505,410 

  

  

 1,105 

  

 35,842,546 

  

  

 - 

Balance June 30, 2013

  

  

 11,064,275 

  

$

 13,988 

  

 5,302,156,722 

  

$

 9,136 

  

  

  

  

  

  

  

  

  

  

Balance January 1, 2014

  

 10,881,195 

  

$

 16,267 

  

 5,257,162,705 

  

$

 9,136 

Net income

  

  

  

  

  

  

  

  

  

Other comprehensive income (loss), net of tax

  

  

  

  

  

  

  

  

  

  

Noncontrolling interests

  

  

  

  

  

  

  

  

  

  

Common stock issued

  

  

  

  

  

  

  

 50,949,650 

  

  

  

Common stock repurchased (1)

  

  

  

  

  

  

 (72,897,568) 

  

  

  

Preferred stock issued to ESOP

  

 1,217,000 

  

  

 1,217 

  

  

  

  

  

Preferred stock released by ESOP

  

  

  

  

  

  

  

  

  

  

Preferred stock converted to common shares

 (735,699) 

  

  

 (735) 

  

 14,679,903 

  

  

  

Preferred stock issued

  

 80,000 

  

  

 2,000 

  

  

  

  

  

Common stock dividends

  

  

  

  

  

  

  

  

  

  

Preferred stock dividends

  

  

  

  

  

  

  

  

  

  

Tax benefit from stock incentive compensation

  

  

  

  

  

  

  

  

  

  

Stock incentive compensation expense

  

  

  

  

  

  

  

  

  

  

Net change in deferred compensation and related plans

  

  

  

  

  

  

  

  

  

Net change

  

 561,301 

  

  

 2,482 

  

 (7,268,015) 

  

  

 - 

Balance June 30, 2014

  

 11,442,496 

  

$

 18,749 

  

 5,249,894,690 

  

$

 9,136 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   For the first half of 2014, includes $1.0 billion related to a private forward repurchase transaction entered into in second quarter 2014 that settled in July 2014 for 19.5 million shares of common stock. For the first half of 2013, includes $500 million related to a private forward repurchase transaction entered into in second quarter 2013 that settled in third quarter 2013 for 12.5 million shares of common stock. See Note 1 for additional information.

 

The accompanying notes are an integral part of these statements.

74

 


 

      

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo stockholders' equity

  

  

  

  

  

  

  

  

Cumulative

  

  

  

  

  

Total

  

  

  

  

Additional

  

  

  

other

  

  

  

Unearned

  

Wells Fargo

  

  

  

  

paid-in

  

Retained

comprehensive

  

Treasury

  

ESOP

  

stockholders'

Noncontrolling

  

Total

capital

  

   earnings

  

income

  

stock

  

shares

  

equity

  

interests

  

equity

 59,802 

  

 77,679 

  

 5,650 

  

 (6,610) 

  

 (986) 

  

 157,554 

  

 1,357 

  

 158,911 

  

  

 10,690 

  

  

  

  

  

  

  

 10,690 

  

 138 

  

 10,828 

  

  

  

  

 (3,853) 

  

  

  

  

  

 (3,853) 

  

 - 

  

 (3,853) 

 (1) 

  

  

  

  

  

  

  

  

  

 (1) 

  

 (139) 

  

 (140) 

 14 

  

 (10) 

  

  

  

 1,795 

  

  

  

 1,799 

  

  

  

 1,799 

 (300) 

  

  

  

  

  

 (1,636) 

  

  

  

 (1,936) 

  

  

  

 (1,936) 

 108 

  

  

  

  

  

  

  

 (1,308) 

  

 - 

  

  

  

 - 

 (64) 

  

  

  

  

  

  

  

 784 

  

 720 

  

  

  

 720 

 136 

  

  

  

  

  

 584 

  

  

  

 - 

  

  

  

 - 

 (15) 

  

  

  

  

  

  

  

  

  

 610 

  

  

  

 610 

 39 

  

 (2,950) 

  

  

  

  

  

  

  

 (2,911) 

  

  

  

 (2,911) 

  

  

 (486) 

  

  

  

  

  

  

  

 (486) 

  

  

  

 (486) 

 156 

  

  

  

  

  

  

  

  

  

 156 

  

  

  

 156 

 462 

  

  

  

  

  

  

  

  

  

 462 

  

  

  

 462 

 (392) 

  

  

  

  

  

 9 

  

  

  

 (383) 

  

  

  

 (383) 

 143 

  

 7,244 

  

 (3,853) 

  

 752 

  

 (524) 

  

 4,867 

  

 (1) 

  

 4,866 

 59,945 

  

 84,923 

  

 1,797 

  

 (5,858) 

  

 (1,510) 

  

 162,421 

  

 1,356 

  

 163,777 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 60,296 

  

 92,361 

  

 1,386 

  

 (8,104) 

  

 (1,200) 

  

 170,142 

  

 866 

  

 171,008 

  

  

 11,619 

  

  

  

  

  

  

  

 11,619 

  

 242 

  

 11,861 

  

  

  

  

 2,731 

  

  

  

  

  

 2,731 

  

 (45) 

  

 2,686 

 (1) 

  

  

  

  

  

  

  

  

  

 (1) 

  

 (373) 

  

 (374) 

 (176) 

  

  

  

  

  

 1,749 

  

  

  

 1,573 

  

  

  

 1,573 

 (500) 

  

  

  

  

  

 (3,479) 

  

  

  

 (3,979) 

  

  

  

 (3,979) 

 108 

  

  

  

  

  

  

  

 (1,325) 

  

 - 

  

  

  

 - 

 (66) 

  

  

  

  

  

  

  

 801 

  

 735 

  

  

  

 735 

 182 

  

  

  

  

  

 553 

  

  

  

 - 

  

  

  

 - 

 (5) 

  

  

  

  

  

  

  

  

  

 1,995 

  

  

  

 1,995 

 44 

  

 (3,467) 

  

  

  

  

  

  

  

 (3,423) 

  

  

  

 (3,423) 

  

  

 (587) 

  

  

  

  

  

  

  

 (587) 

  

  

  

 (587) 

 330 

  

  

  

  

  

  

  

  

  

 330 

  

  

  

 330 

 538 

  

  

  

  

  

  

  

  

  

 538 

  

  

  

 538 

 (824) 

  

  

  

  

  

 10 

  

  

  

 (814) 

  

  

  

 (814) 

 (370) 

  

 7,565 

  

 2,731 

  

 (1,167) 

  

 (524) 

  

 10,717 

  

 (176) 

  

 10,541 

 59,926 

  

 99,926 

  

 4,117 

  

 (9,271) 

  

 (1,724) 

  

 180,859 

  

 690 

  

 181,549 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

75

 


 

   

 

Wells Fargo & Company and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

(in millions)

  

  

 2014 

  

2013 

Cash flows from operating activities:

  

  

  

  

Net income before noncontrolling interests

$

 11,861 

  

 10,828 

Adjustments to reconcile net income to net cash provided by operating activities:

  

  

  

  

  

Provision for credit losses

  

 542 

  

 1,871 

  

Changes in fair value of MSRs, MHFS and LHFS carried at fair value

  

 1,040 

  

 (2,269) 

  

Depreciation, amortization and accretion

  

 1,303 

  

 1,643 

  

Other net gains

  

 (118) 

  

 (6,404) 

  

Stock-based compensation

  

 1,144 

  

 1,139 

  

Excess tax benefits related to stock incentive compensation

  

 (330) 

  

 (158) 

Originations of MHFS

  

 (68,250) 

  

 (203,840) 

Proceeds from sales of and principal collected on mortgages originated for sale

  

 54,849 

  

 191,426 

Proceeds from sales of and principal collected on LHFS

  

 192 

  

 242 

Purchases of LHFS

  

 (102) 

  

 (187) 

Net change in:

  

  

  

  

  

Trading assets

  

 2,679 

  

 27,924 

  

Deferred income taxes

  

 (470) 

  

 2,170 

  

Accrued interest receivable

  

 3 

  

 (186) 

  

Accrued interest payable

  

 326 

  

 198 

  

Other assets

  

 (6,170) 

  

 (1,156) 

  

Other accrued expenses and liabilities

  

 1,103 

  

 (1,126) 

  

  

Net cash provided (used) by operating activities

  

 (398) 

  

 22,115 

Cash flows from investing activities:

  

  

  

  

Net change in:

  

  

  

  

  

Federal funds sold, securities purchased under resale agreements

  

  

  

  

  

  

and other short-term investments

  

 (23,667) 

  

 (13,047) 

Available-for-sale securities:

  

  

  

  

  

Sales proceeds

  

 1,670 

  

 2,166 

  

Prepayments and maturities

  

 16,573 

  

 27,721 

  

Purchases

  

 (10,954) 

  

 (52,238) 

Held-to-maturity securities:

  

  

  

  

  

Paydowns and maturities

  

 3,422 

  

 - 

  

Purchases

  

 (20,637) 

  

 - 

Nonmarketable equity investments:

  

  

  

  

  

Sales proceeds

  

 1,897 

  

 1,133 

  

Purchases

  

 (1,565) 

  

 (998) 

Loans:

  

  

  

  

  

Loans originated by banking subsidiaries, net of principal collected

  

 (29,987) 

  

 (15,275) 

  

Proceeds from sales (including participations) of loans originated for

  

  

  

  

  

  

investment

  

 9,209 

  

 4,692 

  

Purchases (including participations) of loans

  

 (2,783) 

  

 (3,729) 

  

Principal collected on nonbank entities’ loans

  

 6,455 

  

 12,012 

  

Loans originated by nonbank entities

  

 (6,054) 

  

 (10,410) 

Net cash paid for acquisitions

  

 (174) 

  

 - 

Proceeds from sales of foreclosed assets and short sales

  

 4,299 

  

 5,358 

Net cash from purchases and sales of MSRs

  

 (72) 

  

 530 

Other, net

  

 (377) 

  

 1,109 

  

  

Net cash used by investing activities

  

 (52,745) 

  

 (40,976) 

Cash flows from financing activities:

  

  

  

  

Net change in:

  

  

  

  

  

Deposits

  

 39,400 

  

 18,750 

  

Short-term borrowings

  

 7,966 

  

 (203) 

Long-term debt:

  

  

  

  

  

Proceeds from issuance

  

 18,493 

  

 15,712 

  

Repayment

  

 (6,733) 

  

 (16,076) 

Preferred stock:

  

  

  

  

  

Proceeds from issuance

  

 1,995 

  

 610 

  

Cash dividends paid

  

 (570) 

  

 (486) 

Common stock:

  

  

  

  

  

Proceeds from issuance

  

 1,052 

  

 1,337 

  

Repurchased

  

 (3,979) 

  

 (1,838) 

  

Cash dividends paid

  

 (3,347) 

  

 (2,850) 

Excess tax benefits related to stock incentive compensation

  

 330 

  

 158 

Net change in noncontrolling interests

  

 (850) 

  

 (174) 

Other, net

  

 102 

  

 - 

  

  

Net cash provided by financing activities

  

 53,859 

  

 14,940 

  

  

Net change in cash and due from banks

  

 716 

  

 (3,921) 

Cash and due from banks at beginning of period

  

 19,919 

  

 21,860 

Cash and due from banks at end of period

$

 20,635 

  

 17,939 

Supplemental cash flow disclosures:

  

  

  

  

  

Cash paid for interest

$

 1,673 

  

 2,030 

  

Cash paid for income taxes

  

 4,091 

  

 4,883 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The accompanying notes are an integral part of these statements. See Note 1 (Summary of Significant Accounting Policies) for noncash activities.

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See the Glossary of Acronyms at the end of this Report for terms used throughout the Financial Statements and related Notes.

 

Note 1:   Summary of Significant Accounting Policies                                                                                             

Wells Fargo & Company is a diversified financial services company. We provide banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage, and consumer and commercial finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of Columbia, and in foreign countries. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us,” 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. For discussion of our significant accounting policies, see Note 1 (Summary of Significant Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K). There were no material changes to these policies in the first half of 2014. To prepare the financial statements in conformity with GAAP, management must make estimates based on assumptions about future economic and market conditions (for example, unemployment, market liquidity, real estate prices, etc.) that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period and the related disclosures. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made significant estimates in several areas, including allowance for credit losses and purchased credit-impaired (PCI) loans (Note 5 (Loans and Allowance for Credit Losses)), valuations of residential mortgage servicing rights (MSRs) (Note 7 (Securitizations and Variable Interest Entities) and Note 8 (Mortgage Banking Activities)) and financial instruments (Note 13 (Fair Values of Assets and Liabilities)), liability for mortgage loan repurchase losses (Note 8 (Mortgage Banking Activities)) and income taxes. Actual results could differ from those estimates.

These unaudited interim financial statements reflect 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 financial 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 2013 Form 10-K.

 

Accounting for Certain Factored Loan Receivable Arrangements

The Company determined that certain factoring arrangements previously included within commercial loans, which were recorded with a corresponding obligation in other liabilities, did not qualify as loan purchases under Accounting Standard Codification (ASC) Topic 860 (Transfers and Servicing of Financial Assets) based on interpretations of the specific arrangements. Accordingly, we revised our commercial loan balances for year-end 2012 and each of the quarters in 2013 in order to present the Company’s lending trends on a comparable basis over this period. This revision, which resulted in a reduction to total commercial loans and a corresponding decrease to other liabilities, did not impact the Company’s consolidated net income or total cash flows. We reduced our commercial loans by $3.5 billion, $3.2 billion, $2.1 billion, $1.6 billion, and $1.2 billion at December 31, September 30, June 30 and March 31, 2013, and December 31, 2012, respectively, which represented less than 1% of total commercial loans and less than 0.5% of our total loan portfolio. We also appropriately revised other affected financial information, including financial guarantees and financial ratios, to reflect this revision.

 

Accounting Standards Adopted in 2014

In first quarter 2014, we adopted the following new accounting guidance:

·          Accounting Standards Update (ASU or Update) 2014-04, Receivables  Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

·          ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ; and

·          ASU 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements

 

ASU 2014-04 clarifies the timing of when a creditor is considered to have taken physical possession of residential real estate collateral for a consumer mortgage loan, resulting in the reclassification of the loan receivable to real estate owned. A creditor has taken physical possession of the property when either (1) the creditor obtains legal title through foreclosure, or (2) the borrower transfers all interests in the property to the creditor via a deed in lieu of foreclosure or a similar legal agreement. The Update also requires disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in residential real estate mortgage loans that are in process of foreclosure. We have included this disclosure through an early adoption of this guidance in first quarter 2014 with prospective application. Our adoption of this guidance did not have a material effect on our consolidated financial statements as this guidance was consistent with our prior practice. See Note 5 (Loans and Allowance for Credit Losses) for the new disclosures.

 

ASU 2013-11 eliminates diversity in practice as it provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. We adopted this guidance in first quarter 2014 with prospective application to all unrecognized tax benefits that exist at the effective date. This Update did not have a material effect on our consolidated financial statements.

 

ASU 2013-08 amends the scope, measurement and disclosure requirements for investment companies. The Update changes criteria

77

 


 

      

companies use to assess whether an entity is an investment company. In addition, investment companies must measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting. This Update also requires new disclosures, including information about changes, if any, in an entity’s status as an investment company and information about financial support provided or contractually required to be provided by an investment company to any of its investees. We adopted this guidance in first quarter 2014. The Update did not have a material effect on our consolidated financial statements, as our existing practice complies with the requirements.

 


Private Share Repurchases

From time to time we enter into private forward repurchase transactions with unrelated third parties to complement our open-market common stock repurchase strategies, to allow us to manage our share repurchases in a manner consistent with our capital plans, currently submitted under the 2014 Comprehensive Capital Analysis and Review (CCAR), and to provide an economic benefit to the Company.

Our payments to the counterparties for these contracts are recorded  in permanent equity in the quarter paid and are not subject to re-measurement. The classification of the up-front payments as permanent equity assures that we have appropriate repurchase timing consistent with our 2014 capital plan, which contemplated a fixed dollar amount available per quarter for share repurchases pursuant to Federal Reserve Board (FRB) supervisory guidance. In return, the counterparty agrees to deliver a variable number of shares based on a per share discount to the volume-weighted average stock price over the contract period. There are no scenarios where the contracts would not either physically settle in shares or allow us to choose the settlement method. Our total number of outstanding shares of common stock is not reduced until settlement of the private share repurchase contract.

In June 2014, we entered into a private forward repurchase contract and paid $1.0 billion to an unrelated third party.  This contract settled in July 2014 for 19.5   million shares of common stock. At June 30, 2013, we had a $500 million private repurchase contract outstanding that settled in third quarter 2013 for 12.5 million shares of common stock.

 

Supplemental Cash Flow Information   Significant noncash activities are presented below.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

(in millions)

  

2014 

  

2013 

Trading assets retained from securitization of MHFS

$

 12,373 

  

 29,074 

Transfers from loans to MHFS

  

 6,662 

  

 4,855 

Transfers from loans to LHFS

  

 9,828 

  

 133 

Transfers from loans to foreclosed assets (1)

  

 2,268 

  

 1,563 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Includes $1.4 billion and $687 million in transfers of government insured/guaranteed loans for the six months ended June 30, 2014 and 2013, respectively. Six months ended June 30, 2013, has been revised to correct previously reported amount.

 

Subsequent Events   We have evaluated the effects of events that have occurred subsequent to June 30, 2014, and there have been no material events that would require recognition in our second quarter 2014  consolidated financial statements or disclosure in the Notes to the consolidated financial statements  

78

 


 

      

Note 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. For information on additional contingent consideration related to acquisitions, which is considered to be a guarantee, see Note 10 (Guarantees, Pledged Assets and Collateral).

In the first half of 2014, we completed one acquisition of a railcar and locomotive leasing business with combined total assets of $422 million. We had no pending business combinations as of June 30, 2014.

 

 

 

 

 

 

 

 

 

 

 

Note 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 short-term resale agreements (generally less than one year) and other short-term investments. The majority of interest-earning deposits at June 30, 2014 and December 31, 2013, were held at the Federal Reserve.  

 

  

  

  

  

  

  

  

  

June 30,

  

Dec. 31,

(in millions)

  

 2014 

  

 2013 

Federal funds sold and securities

  

  

  

  

  

purchased under resale agreements

$

 29,432 

  

 25,801 

Interest-earning deposits

  

 207,080 

  

 186,249 

Other short-term investments

  

 2,207 

  

 1,743 

  

Total

$

 238,719 

  

 213,793 

  

  

  

  

  

  

We have classified securities purchased under long-term resale agreements (generally one year or more), which totaled $9.7 billion and $10.1 billion at June 30, 2014 and December 31, 2013, respectively, in loans. For additional information on the collateral we receive from other entities under resale agreements and securities borrowings, see the “Offsetting of Resale and Repurchase Agreements and Securities Borrowing and Lending Agreements” section of Note 10 (Guarantees, Pledged Assets and Collateral).

79

 


 

   

Note 4:  Investment Securities                                                                                                                                    

The following table provides the amortized cost and fair value by major categories of available-for-sale securities, which are carried at fair value, and held-to-maturity debt securities, which are carried at amortized cost. The net unrealized gains (losses) for available-for-sale securities are reported on an after‑tax basis as a component of cumulative OCI.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Gross

Gross

  

  

  

  

  

  

  

  

  

  

unrealized

unrealized

Fair

(in millions)

  

Cost

gains

losses

value

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

$

 6,565 

 15 

 (166) 

 6,414 

  

Securities of U.S. states and political subdivisions

  

 43,193 

 1,838 

 (252) 

 44,779 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

Federal agencies

  

 115,659 

 2,912 

 (1,663) 

 116,908 

  

  

Residential

  

 9,830 

 1,407 

 (18) 

 11,219 

  

  

Commercial

  

 17,164 

 1,105 

 (55) 

 18,214 

  

  

  

Total mortgage-backed securities

  

 142,653 

 5,424 

 (1,736) 

 146,341 

  

Corporate debt securities

  

 18,615 

 1,024 

 (60) 

 19,579 

  

Collateralized loan and other debt obligations (1) 

  

 20,314 

 585 

 (68) 

 20,831 

  

Other (2)  

  

 7,469 

 438 

 (5) 

 7,902 

  

  

  

  

Total debt securities

  

 238,809 

 9,324 

 (2,287) 

 245,846 

  

Marketable equity securities:

  

  

  

  

  

  

  

Perpetual preferred securities

  

 1,640 

 174 

 (52) 

 1,762 

  

  

Other marketable equity securities

  

 295 

 1,058 

 - 

 1,353 

  

  

  

  

Total marketable equity securities

  

 1,935 

 1,232 

 (52) 

 3,115 

  

  

  

  

  

Total available-for-sale securities

  

 240,744 

 10,556 

 (2,339) 

 248,961 

Held-to-maturity securities:

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 17,777 

 141 

 (4) 

 17,914 

  

Securities of U.S. states and political subdivisions

  

 41 

 - 

 - 

 41 

  

Federal agency mortgage-backed securities

  

 6,030 

 112 

 - 

 6,142 

  

Collateralized loan and other debt obligations (1)

  

 1,162 

 3 

 - 

 1,165 

  

Other (2)  

  

 5,098 

 26 

 - 

 5,124 

  

  

  

  

  

Total held-to-maturity securities

  

 30,108 

 282 

 (4) 

 30,386 

  

  

  

  

  

  

Total

$

 270,852 

 10,838 

 (2,343) 

 279,347 

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

$

 6,592 

 17 

 (329) 

 6,280 

  

Securities of U.S. states and political subdivisions

  

 42,171 

 1,092 

 (727) 

 42,536 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

Federal agencies

  

 119,303 

 1,902 

 (3,614) 

 117,591 

  

  

Residential

  

 11,060 

 1,433 

 (40) 

 12,453 

  

  

Commercial

  

 17,689 

 1,173 

 (115) 

 18,747 

  

  

  

Total mortgage-backed securities

  

 148,052 

 4,508 

 (3,769) 

 148,791 

  

Corporate debt securities

  

 20,391 

 976 

 (140) 

 21,227 

  

Collateralized loan and other debt obligations (1)

  

 19,610 

 642 

 (93) 

 20,159 

  

Other (2)

  

 9,232 

 426 

 (29) 

 9,629 

  

  

  

  

Total debt securities

  

 246,048 

 7,661 

 (5,087) 

 248,622 

  

Marketable equity securities:

  

  

  

  

  

  

  

Perpetual preferred securities

  

 1,703 

 222 

 (60) 

 1,865 

  

  

Other marketable equity securities

  

 336 

 1,188 

 (4) 

 1,520 

  

  

  

  

Total marketable equity securities

  

 2,039 

 1,410 

 (64) 

 3,385 

  

  

  

  

  

Total available-for-sale securities

  

 248,087 

 9,071 

 (5,151) 

 252,007 

Held-to-maturity securities:

  

  

  

  

  

  

Federal agency mortgage-backed securities

  

 6,304 

 - 

 (99) 

 6,205 

  

Other (2)

  

 6,042 

 - 

 - 

 6,042 

  

  

  

  

  

Total held-to-maturity securities

  

 12,346 

 - 

 (99) 

 12,247 

  

  

  

  

  

  

Total

$

 260,433 

 9,071 

 (5,250) 

 264,254 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   The available-for-sale portfolio includes collateralized debt obligations (CDOs) with a cost basis and fair value of $426 million and $580 million, respectively, at June 30, 2014, and $509 million and $693 million, respectively, at December 31, 2013. The held-to-maturity portfolio only includes collateralized loan obligations.

(2)   The  “Other” category of available-for-sale securities predominantly includes asset-backed securities collateralized by credit cards, student loans, home equity loans and auto leases or loans and cash reserves. Included in the “Other” category of held-to-maturity securities are asset-backed securities collateralized by auto leases or loans and cash reserves with a cost basis and fair value of $4.0 billion each at June 30, 2014, and $4.3 billion each at December 31, 2013. Also included in the “Other” category of held-to-maturity securities are asset-backed securities collateralized by dealer floorplan loans with a cost basis and fair value of $1.1 billion each at June 30, 2014, and $1.7 billion each at December 31, 2013.  

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Note 4:     Investment Securities (continued)  

 

Gross Unrealized Losses and Fair Value

The following table shows the gross unrealized losses and fair value of securities in the investment securities portfolio by length of time that individual securities in each category had been in a continuous loss position. Debt securities on which we have taken credit-related OTTI write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Less than 12 months

  

12 months or more

  

Total

  

  

  

  

  

  

  

  

Gross

  

  

Gross

  

  

Gross

  

  

  

  

  

  

  

  

unrealized

Fair

unrealized

Fair

unrealized

Fair

(in millions)

  

losses

value

  

losses

value

  

losses

value

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

$

 - 

 - 

  

 (166) 

 5,799 

  

 (166) 

 5,799 

  

Securities of U.S. states and political subdivisions

  

 (11) 

 1,841 

  

 (241) 

 5,043 

  

 (252) 

 6,884 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

Federal agencies

  

 (19) 

 5,559 

  

 (1,644) 

 41,343 

  

 (1,663) 

 46,902 

  

  

Residential

  

 (8) 

 294 

  

 (10) 

 137 

  

 (18) 

 431 

  

  

Commercial

  

 (1) 

 262 

  

 (54) 

 1,801 

  

 (55) 

 2,063 

  

  

  

Total mortgage-backed securities

  

 (28) 

 6,115 

  

 (1,708) 

 43,281 

  

 (1,736) 

 49,396 

  

Corporate debt securities

  

 (2) 

 296 

  

 (58) 

 1,461 

  

 (60) 

 1,757 

  

Collateralized loan and other debt obligations

 (10) 

 2,392 

  

 (58) 

 3,123 

  

 (68) 

 5,515 

  

Other

  

 (1) 

 94 

  

 (4) 

 432 

  

 (5) 

 526 

  

  

  

  

Total debt securities

  

 (52) 

 10,738 

  

 (2,235) 

 59,139 

  

 (2,287) 

 69,877 

  

Marketable equity securities:

  

  

  

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 (22) 

 290 

  

 (30) 

 384 

  

 (52) 

 674 

  

  

  

  

Total marketable equity securities

  

 (22) 

 290 

  

 (30) 

 384 

  

 (52) 

 674 

  

  

  

  

  

Total available-for-sale securities

  

 (74) 

 11,028 

  

 (2,265) 

 59,523 

  

 (2,339) 

 70,551 

Held-to-maturity securities:

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 (4) 

 2,568 

  

 - 

 - 

  

 (4) 

 2,568 

  

  

  

  

  

Total held-to-maturity securities

  

 (4) 

 2,568 

  

 - 

 - 

  

 (4) 

 2,568 

  

  

  

  

  

  

Total

$

 (78) 

 13,596 

  

 (2,265) 

 59,523 

  

 (2,343) 

 73,119 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

$

 (329) 

 5,786 

  

 - 

 - 

  

 (329) 

 5,786 

  

Securities of U.S. states and political subdivisions

  

 (399) 

 9,238 

  

 (328) 

 4,120 

  

 (727) 

 13,358 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

Federal agencies

  

 (3,562) 

 67,045 

  

 (52) 

 1,132 

  

 (3,614) 

 68,177 

  

  

Residential

  

 (18) 

 1,242 

  

 (22) 

 232 

  

 (40) 

 1,474 

  

  

Commercial

  

 (15) 

 2,128 

  

 (100) 

 2,027 

  

 (115) 

 4,155 

  

  

  

Total mortgage-backed securities

  

 (3,595) 

 70,415 

  

 (174) 

 3,391 

  

 (3,769) 

 73,806 

  

Corporate debt securities

  

 (85) 

 2,542 

  

 (55) 

 428 

  

 (140) 

 2,970 

  

Collateralized loan and other debt obligations

  

 (55) 

 7,202 

  

 (38) 

 343 

  

 (93) 

 7,545 

  

Other

  

 (11) 

 1,690 

  

 (18) 

 365 

  

 (29) 

 2,055 

  

  

  

  

Total debt securities

  

 (4,474) 

 96,873 

  

 (613) 

 8,647 

  

 (5,087) 

 105,520 

  

Marketable equity securities:

  

  

  

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 (28) 

 424 

  

 (32) 

 308 

  

 (60) 

 732 

  

  

Other marketable equity securities

  

 (4) 

 34 

  

 - 

 - 

  

 (4) 

 34 

  

  

  

  

Total marketable equity securities

  

 (32) 

 458 

  

 (32) 

 308 

  

 (64) 

 766 

  

  

  

  

  

Total available-for-sale securities

  

 (4,506) 

 97,331 

  

 (645) 

 8,955 

  

 (5,151) 

 106,286 

Held-to-maturity securities:

  

  

  

  

  

  

  

  

  

  

Federal agency mortgage-backed securities

  

 (99) 

 6,153 

  

 - 

 - 

  

 (99) 

 6,153 

  

  

  

  

  

Total held-to-maturity securities

  

 (99) 

 6,153 

  

 - 

 - 

  

 (99) 

 6,153 

  

  

  

  

  

  

Total

$

 (4,605) 

 103,484 

  

 (645) 

 8,955 

  

 (5,250) 

 112,439 

81

 


 

      

We do not have the intent to sell any securities included in the previous table. For debt securities included in the table, we have concluded it is more likely than not that we will not be required to sell prior to recovery of the amortized cost basis. We have assessed each security with gross unrealized losses for credit impairment. For debt securities, we evaluate, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’ amortized cost basis. For equity securities, we consider numerous factors in determining whether impairment exists, including our intent and ability to hold the securities for a period of time sufficient to recover the cost basis of the securities.

For complete descriptions of the factors we consider when analyzing securities for impairment, see Note 1 (Summary of Significant Accounting Policies) and Note 5 (Investment Securities) to Financial Statements in our 2013 Form 10-K. There have been no material changes to our methodologies for assessing impairment in the first half of 2014.

The following table shows the gross unrealized losses and fair value of debt and perpetual preferred investment securities by those rated investment grade and those rated less than investment grade, according to their lowest credit rating by Standard & Poor’s Rating Services (S&P) or Moody’s Investors Service (Moody’s). Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by S&P or Baa3 or higher by Moody’s, are generally considered by the rating agencies and market participants to be low credit risk. Conversely, securities rated below investment grade, labeled as “speculative grade” by the rating agencies, are considered to be distinctively higher credit risk than investment grade securities. We have also included securities not rated by S&P or Moody’s in the table below based on the internal credit grade of the securities (used for credit risk management purposes) equivalent to the credit rating assigned by major credit agencies. The unrealized losses and fair value of unrated securities categorized as investment grade based on internal credit grades were $5 million and $1.6 billion, respectively, at June 30, 2014, and $18 million and $1.9 billion, respectively, at December 31, 2013. If an internal credit grade was not assigned, we categorized the security as non-investment grade.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Investment grade

  

Non-investment grade

  

  

  

  

  

  

  

  

  

Gross

  

  

Gross

  

  

  

  

  

  

  

  

  

  

unrealized

Fair

  

unrealized

Fair

(in millions)

  

losses

value

  

losses

value

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

$

 (166) 

 5,799 

  

 - 

 - 

  

Securities of U.S. states and political subdivisions

  

 (217) 

 6,370 

  

 (35) 

 514 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

Federal agencies

  

 (1,663) 

 46,902 

  

 - 

 - 

  

  

Residential

  

 - 

 - 

  

 (18) 

 431 

  

  

Commercial

  

 (17) 

 1,752 

  

 (38) 

 311 

  

  

  

Total mortgage-backed securities

  

 (1,680) 

 48,654 

  

 (56) 

 742 

  

Corporate debt securities

  

 (30) 

 1,476 

  

 (30) 

 281 

  

Collateralized loan and other debt obligations

  

 (53) 

 5,392 

  

 (15) 

 123 

  

Other

  

 (3) 

 507 

  

 (2) 

 19 

  

  

  

  

Total debt securities

  

 (2,149) 

 68,198 

  

 (138) 

 1,679 

  

Perpetual preferred securities

  

 (52) 

 674 

  

 - 

 - 

  

  

  

  

  

Total available-for-sale securities

  

 (2,201) 

 68,872 

  

 (138) 

 1,679 

Held-to-maturity securities:

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 (4) 

 2,568 

  

 - 

 - 

  

  

  

  

  

Total held-to-maturity securities

  

 (4) 

 2,568 

  

 - 

 - 

  

  

  

  

  

  

Total

$

 (2,205) 

 71,440 

  

 (138) 

 1,679 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

$

 (329) 

 5,786 

  

 - 

 - 

  

Securities of U.S. states and political subdivisions

  

 (671) 

 12,915 

  

 (56) 

 443 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

Federal agencies

  

 (3,614) 

 68,177 

  

 - 

 - 

  

  

Residential

  

 (2) 

 177 

  

 (38) 

 1,297 

  

  

Commercial

  

 (46) 

 3,364 

  

 (69) 

 791 

  

  

  

Total mortgage-backed securities

  

 (3,662) 

 71,718 

  

 (107) 

 2,088 

  

Corporate debt securities

  

 (96) 

 2,343 

  

 (44) 

 627 

  

Collateralized loan and other debt obligations

  

 (72) 

 7,376 

  

 (21) 

 169 

  

Other

  

 (19) 

 1,874 

  

 (10) 

 181 

  

  

  

  

Total debt securities

  

 (4,849) 

 102,012 

  

 (238) 

 3,508 

  

Perpetual preferred securities

  

 (60) 

 732 

  

 - 

 - 

  

  

  

  

  

Total available-for-sale securities

  

 (4,909) 

 102,744 

  

 (238) 

 3,508 

Held-to-maturity securities:

  

  

  

  

  

  

  

Federal agency mortgage-backed securities

  

 (99) 

 6,153 

  

 - 

 - 

  

  

  

  

  

Total held-to-maturity securities

  

 (99) 

 6,153 

  

 - 

 - 

  

  

  

  

  

  

Total

$

 (5,008) 

 108,897 

  

 (238) 

 3,508 

82

 


 

Note 4:     Investment Securities (continued)  

 

Contractual Maturities

The following table shows the remaining contractual maturities and contractual weighted-average yields (taxable-equivalent basis) of available-for-sale debt securities. The remaining contractual principal maturities for MBS do not consider prepayments. Remaining expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Remaining contractual maturity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

After one year

  

After five years

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total

  

  

Within one year

  

through five years

  

through ten years

  

  

After ten years

  

(in millions)

amount

Yield

  

Amount

Yield

  

Amount

Yield

  

Amount

Yield

  

Amount

Yield

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities (1)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

and federal agencies

$

 6,414 

 1.67 

%

$

 199 

 1.32 

%

$

 578 

 1.49 

%

$

 5,637 

 1.70 

%

$

 - 

 - 

%

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

 44,779 

 5.48 

  

  

 2,680 

 2.10 

  

  

 9,043 

 2.08 

  

  

 3,470 

 4.97 

  

  

 29,586 

 6.88 

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Federal agencies

  

 116,908 

 3.28 

  

  

 - 

 - 

  

  

 327 

 2.73 

  

  

 923 

 3.38 

  

  

 115,658 

 3.28 

  

  

  

Residential

  

 11,219 

 4.37 

  

  

 - 

 - 

  

  

 11 

 4.80 

  

  

 85 

 5.58 

  

  

 11,123 

 4.36 

  

  

  

Commercial

  

 18,214 

 5.22 

  

  

 1 

 0.70 

  

  

 29 

 2.78 

  

  

 6 

 1.63 

  

  

 18,178 

 5.22 

  

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 146,341 

 3.61 

  

  

 1 

 0.70 

  

  

 367 

 2.80 

  

  

 1,014 

 3.55 

  

  

 144,959 

 3.61 

  

  

Corporate debt securities

  

 19,579 

 4.19 

  

  

 4,635 

 1.65 

  

  

 7,762 

 4.47 

  

  

 5,845 

 5.47 

  

  

 1,337 

 5.72 

  

  

Collateralized loan and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

other debt obligations

 20,831 

 1.67 

  

  

 23 

 1.94 

  

  

 1,072 

 0.69 

  

  

 8,423 

 1.50 

  

  

 11,313 

 1.90 

  

  

Other

  

 7,902 

 1.75 

  

  

 65 

 2.06 

  

  

 2,552 

 1.94 

  

  

 1,027 

 1.42 

  

  

 4,258 

 1.72 

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

debt securities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

at fair value

$

 245,846 

 3.72 

%

$

 7,603 

 1.81 

%

$

 21,374 

 2.86 

%

$

 25,416 

 3.01 

%

$

 191,453 

 3.99 

%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities (1):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

and federal agencies

$

 6,280 

 1.66 

%

$

 86 

 0.54 

%

$

 701 

 1.45 

%

$

 5,493 

 1.71 

%

$

 - 

 - 

%

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

  

 42,536 

 5.30 

  

  

 4,915 

 1.84 

  

  

 7,901 

 2.19 

  

  

 3,151 

 5.19 

  

  

 26,569 

 6.89 

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Federal agencies

  

 117,591 

 3.33 

  

  

 1 

 7.14 

  

  

 398 

 2.71 

  

  

 956 

 3.46 

  

  

 116,236 

 3.33 

  

  

  

Residential

  

 12,453 

 4.31 

  

  

 - 

 - 

  

  

 - 

 - 

  

  

 113 

 5.43 

  

  

 12,340 

 4.30 

  

  

  

Commercial

  

 18,747 

 5.24 

  

  

 - 

 - 

  

  

 52 

 3.33 

  

  

 59 

 0.96 

  

  

 18,636 

 5.26 

  

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 148,791 

 3.65 

  

  

 1 

 7.14 

  

  

 450 

 2.78 

  

  

 1,128 

 3.52 

  

  

 147,212 

 3.66 

  

  

Corporate debt securities

  

 21,227 

 4.18 

  

  

 6,136 

 2.06 

  

  

 7,255 

 4.22 

  

  

 6,528 

 5.80 

  

  

 1,308 

 5.77 

  

  

Collateralized loan and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

other debt obligations

  

 20,159 

 1.59 

  

  

 40 

 0.25 

  

  

 1,100 

 0.63 

  

  

 7,750 

 1.29 

  

  

 11,269 

 1.89 

  

  

Other

  

 9,629 

 1.80 

  

  

 906 

 2.53 

  

  

 2,977 

 1.74 

  

  

 1,243 

 1.64 

  

  

 4,503 

 1.73 

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

debt securities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

at fair value

$

 248,622 

 3.69 

%

$

 12,084 

 1.99 

%

$

 20,384 

 2.75 

%

$

 25,293 

 3.14 

%

$

 190,861 

 3.97 

%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Weighted-average yields displayed by maturity bucket are weighted based on fair value and predominantly represent contractual coupon rates without effect for any related hedging derivatives.

  

83

 


 

      

The following table shows the amortized cost and weighted-average yields of held-to-maturity debt securities by contractual maturity.

 

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Remaining contractual maturity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

After one year

  

After five years

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total

  

  

Within one year

  

through five years

  

through ten years

  

  

After ten years

  

(in millions)

amount

Yield

  

Amount

Yield

  

Amount

Yield

  

Amount

Yield

  

Amount

Yield

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Held-to-maturity securities (1)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Amortized cost:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

and federal agencies

$

 17,777 

 2.07 

%

$

 - 

 - 

%

$

 - 

 - 

%

$

 17,777 

 2.07 

%

$

 - 

 - 

%

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

  

 41 

 4.13 

  

  

 - 

 - 

  

  

 - 

 - 

  

  

 - 

 -   

  

  

 41 

 4.13 

  

  

  

Federal agency mortgage-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

backed securities

  

 6,030 

 3.90 

  

  

 - 

 - 

  

  

 - 

 - 

  

  

 - 

 -   

  

  

 6,030 

 3.90 

  

  

  

Collateralized loan and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

other debt obligations

  

 1,162 

 1.85 

  

  

 - 

 - 

  

  

 - 

 - 

  

  

 - 

 -   

  

  

 1,162 

 1.85 

  

  

  

Other

  

 5,098 

 1.76 

  

  

 150 

 1.70 

  

  

 3,274 

 1.81 

  

  

 1,674 

 1.67 

  

  

 - 

 - 

  

  

  

  

  

Total held-to-maturity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

debt securities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

at amortized cost

$

 30,108 

 2.38 

%

$

 150 

 1.70 

%

$

 3,274 

 1.81 

%

$

 19,451 

 2.04 

%

$

 7,233 

 3.57 

%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Held-to-maturity securities (1):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Amortized cost:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Federal agency mortgage-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

backed securities

$

 6,304 

 3.90 

%

$

 - 

 - 

%

$

 - 

 - 

%

$

 - 

 - 

%

$

 6,304 

 3.90 

%

  

  

Other

  

 6,042 

 1.89 

  

  

 195 

 1.72 

  

  

 4,468 

 1.87 

  

  

 1,379 

 1.98 

  

  

 - 

 - 

  

  

  

  

  

Total held-to-maturity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

debt securities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

at amortized cost

$

 12,346 

 2.92 

%

$

 195 

 1.72 

%

$

 4,468 

 1.87 

%

$

 1,379 

 1.98 

%

$

 6,304 

 3.90 

%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Weighted-average yields displayed by maturity bucket are weighted based on amortized cost and predominantly represent contractual coupon rates.

  

84

 


 

Note 4:     Investment Securities (continued)  

 

The following table shows the fair value of held-to-maturity debt securities by contractual maturity.

 

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Remaining contractual maturity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

After one year

  

After five years

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total

  

Within one year

  

through five years

  

through ten years

  

  

After ten years

  

(in millions)

amount

  

Amount

  

Amount

  

Amount

  

Amount

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Held-to-maturity securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair value:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

and federal agencies

$

 17,914 

  

$

 - 

  

$

 - 

  

$

 17,914 

  

$

 - 

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

  

 41 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 41 

  

  

  

Federal agency mortgage-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

backed securities

  

 6,142 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 6,142 

  

  

  

Collateralized loan and

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

other debt obligations

  

 1,165 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 1,165 

  

  

  

Other

  

 5,124 

  

  

 150 

  

  

 3,289 

  

  

 1,685 

  

  

 -   

  

  

  

  

  

Total held-to-maturity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

debt securities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

at fair value

$

 30,386 

  

$

 150 

  

$

 3,289 

  

$

 19,599 

  

$

 7,348 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Held-to-maturity securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair value:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Federal agency mortgage-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

backed securities

$

 6,205 

  

$

 - 

  

$

 - 

  

$

 - 

  

$

 6,205 

  

  

  

Other

  

 6,042 

  

  

 195 

  

  

 4,468 

  

  

 1,379 

  

  

 - 

  

  

  

  

  

Total held-to-maturity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

debt securities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

at fair value

$

 12,247 

  

$

 195 

  

$

 4,468 

  

$

 1,379 

  

$

 6,205 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

85

 


 

      

Realized Gains and Losses

The following table shows the gross realized gains and losses on sales and OTTI write-downs related to the investment securities portfolio, which includes marketable equity securities, as well as net realized gains and losses on nonmarketable equity investments (see Note 6 (Other Assets)).

 

 

 

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter

  

Six months

  

  

  

  

  

ended June 30,

  

ended June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

 2013 

Gross realized gains

$

 154 

 54 

  

 545 

 210 

Gross realized losses

  

 (2) 

 (8) 

  

 (5) 

 (13) 

OTTI write-downs

  

 (13) 

 (76) 

  

 (22) 

 (114) 

  

Net realized gains (losses) from investment securities

  

 139 

 (30) 

  

 518 

 83 

Net realized gains from nonmarketable equity investments

  

 381 

 179 

  

 932 

 224 

  

  

Net realized gains from debt securities and equity investments

$

 520 

 149 

  

 1,450 

 307 

  

  

Other-Than-Temporary Impairment

The following table shows the detail of total OTTI write-downs included in earnings for debt securities, marketable equity securities and nonmarketable equity investments.

 

 

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter

  

Six months

  

  

  

  

  

  

  

  

ended June 30,

  

ended June 30,

(in millions)

  

  

 2014 

 2013 

  

 2014 

 2013 

OTTI write-downs included in earnings

  

  

  

  

  

  

  

Debt securities:

  

  

  

  

  

  

  

  

Securities of U.S. states and political subdivisions

$

 2 

 - 

  

 2 

 - 

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

Federal agencies

  

 - 

 1 

  

 - 

 1 

  

  

  

Residential

  

 5 

 22 

  

 10 

 37 

  

  

  

Commercial

  

 4 

 26 

  

 6 

 41 

  

  

Corporate debt securities

  

 - 

 - 

  

 - 

 2 

  

  

Collateralized loan and other debt obligations

  

 2 

 - 

  

 2 

 - 

  

  

Other debt securities

  

 - 

 22 

  

 - 

 24 

  

  

  

  

Total debt securities

  

 13 

 71 

  

 20 

 105 

  

Equity securities:

  

  

  

  

  

  

  

  

Marketable equity securities:

  

  

  

  

  

  

  

  

  

Other marketable equity securities

  

 - 

 5 

  

 2 

 9 

  

  

  

  

Total marketable equity securities

  

 - 

 5 

  

 2 

 9 

  

  

  

  

  

Total investment securities

  

 13 

 76 

  

 22 

 114 

  

  

Nonmarketable equity investments

  

 69 

 35 

  

 195 

 75 

  

  

  

  

  

  

Total OTTI write-downs included in earnings

$

 82 

 111 

  

 217 

 189 

  

  

  

  

  

  

  

  

  

  

  

  

  

86

 


 

Note 4:     Investment Securities (continued)  

 

Other-Than-Temporarily Impaired Debt Securities

The following table shows the detail of OTTI write-downs on debt securities included in earnings and the related changes in OCI for the same securities.

 

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

  

 2014 

 2013 

  

 2014 

 2013 

OTTI on debt securities

  

  

  

  

  

  

  

Recorded as part of gross realized losses:

  

  

  

  

  

  

  

  

Credit-related OTTI

$

 9 

 33 

  

 16 

 56 

  

  

Intent-to-sell OTTI

  

 4 

 38 

  

 4 

 49 

  

  

  

Total recorded as part of gross realized losses

  

 13 

 71 

  

 20 

 105 

  

Changes to OCI for losses (reversal of losses) in non-credit-related OTTI (1):

  

  

  

  

  

  

  

  

Securities of U.S. states and political subdivisions

  

 1 

 - 

  

 1 

 - 

  

  

Residential mortgage-backed securities

  

 (4) 

 (7) 

  

 (13) 

 (16) 

  

  

Commercial mortgage-backed securities

  

 (7) 

 - 

  

 (19) 

 (41) 

  

  

Collateralized loan and other debt obligations

  

 - 

 - 

  

 - 

 (1) 

  

  

Other debt securities

  

 - 

 - 

  

 - 

 2 

  

  

  

Total changes to OCI for non-credit-related OTTI

  

 (10) 

 (7) 

  

 (31) 

 (56) 

  

  

  

  

Total OTTI losses (reversal of losses) recorded on debt securities

$

 3 

 64 

  

 (11) 

 49 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Represents amounts recorded to OCI for impairment, due to factors other than credit, on debt securities that have also had credit-related OTTI write-downs during the period. Increases represent initial or subsequent non-credit-related OTTI on debt securities. Decreases represent partial to full reversal of impairment due to recoveries in the fair value of securities due to non-credit factors.  

 

The following table presents a rollforward of the credit loss component recognized in earnings for debt securities we still own (referred to as “credit-impaired” debt securities). The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows discounted using the security’s current effective interest rate and the amortized cost basis of the security prior to considering credit losses. OTTI recognized in earnings for credit-impaired debt securities is presented as additions and is classified into one of two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or if the debt security was previously credit-impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive or expect to receive cash flows in excess of what we previously expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down.

Changes in the credit loss component of credit-impaired debt securities that were recognized in earnings and related to securities that we do not intend to sell are presented in the following table.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

2014 

 2013 

  

2014 

 2013 

Credit loss component, beginning of period

$

 1,143 

 1,252 

  

 1,171 

 1,289 

Additions:

  

  

  

  

  

  

  

Initial credit impairments

  

 3 

 4 

  

 3 

 5 

  

Subsequent credit impairments

  

 6 

 29 

  

 13 

 51 

  

  

Total additions

  

 9 

 33 

  

 16 

 56 

Reductions:

  

  

  

  

  

  

  

For securities sold or matured

  

 (40) 

 (59) 

  

 (69) 

 (111) 

  

For recoveries of previous credit impairments (1)

  

 (5) 

 (8) 

  

 (11) 

 (16) 

  

  

Total reductions

  

 (45) 

 (67) 

  

 (80) 

 (127) 

Credit loss component, end of period

$

 1,107 

 1,218 

  

 1,107 

 1,218 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Recoveries of previous credit impairments result from increases in expected cash flows subsequent to credit loss recognition. Such recoveries are reflected prospectively as interest yield adjustments using the effective interest method.

87

 


 

   

Note 5:  Loans and Allowance for Credit Losses                                                                                                     

The following table presents total loans outstanding by portfolio segment and class of financing receivable. Outstanding balances include a total net reduction of $4.8 billion and $6.4 billion at June 30, 2014, and December 31, 2013, respectively, for unearned income, net deferred loan fees, and unamortized discounts and premiums.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

Dec. 31,

(in millions)

  

  

 2014 

  

 2013 

Commercial:

  

  

  

  

  

  

Commercial and industrial

  

$

 206,055 

  

193,811 

  

Real estate mortgage

  

  

 108,418 

  

107,100 

  

Real estate construction

  

  

 17,056 

  

16,747 

  

Lease financing

  

  

 11,908 

  

12,034 

  

Foreign (1)

  

  

 47,967 

  

47,551 

  

  

Total commercial

  

  

 391,404 

  

377,243 

Consumer:

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

  

 260,104 

  

258,497 

  

Real estate 1-4 family junior lien mortgage

  

  

 62,455 

  

65,914 

  

Credit card

  

  

 27,215 

  

26,870 

  

Automobile

  

  

 54,095 

  

50,808 

  

Other revolving credit and installment

  

  

 33,669 

  

42,954 

  

  

Total consumer

  

  

 437,538 

  

445,043 

  

  

  

Total loans

  

$

 828,942 

  

822,286 

  

  

  

  

  

  

  

  

  

  

  

(1)   Substantially all of our foreign loan portfolio is commercial loans. Loans are classified as foreign primarily based on whether the borrower’s primary address is outside of the United States.

 

Loan Purchases, Sales, and Transfers

The following table summarizes the proceeds paid or received for purchases and sales of loans and transfers from loans held for investment to mortgages/loans held for sale at lower of cost or fair value. This loan activity primarily includes loans purchased and sales of whole loan or participating interests, whereby we receive or transfer a portion of a loan after origination. The table excludes PCI loans and loans recorded at fair value, including loans originated for sale because their loan activity normally does not impact the allowance for credit losses.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 2014 

  

 2013 

(in millions)

Commercial

Consumer

Total

  

Commercial

Consumer

Total

Quarter ended June 30,

  

  

  

  

  

  

  

  

  

Purchases (1)

$

 1,523 

 - 

 1,523 

  

 2,122 

 502 

 2,624 

  

Sales

  

 (1,958) 

 (25) 

 (1,983) 

  

 (1,796) 

 (130) 

 (1,926) 

  

Transfers to MHFS/LHFS (1)

  

 (24) 

 (9,773) 

 (9,797) 

  

 (53) 

 (5) 

 (58) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

  

  

  

  

  

  

  

  

  

Purchases (1)

$

 2,537 

 168 

 2,705 

  

 3,148 

 581 

 3,729 

  

Sales

  

 (3,599) 

 (75) 

 (3,674) 

  

 (3,812) 

 (446) 

 (4,258) 

  

Transfers to MHFS/LHFS (1)

  

 (59) 

 (9,778) 

 (9,837) 

  

 (133) 

 (12) 

 (145) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   The “Purchases” and “Transfers to MHFS/LHFS" categories exclude activity in government insured/guaranteed real estate 1-4 family first mortgage loans. As servicer, we are able to buy delinquent insured/guaranteed loans out of the Government National Mortgage Association (GNMA) pools. These loans have different risk characteristics from the rest of our consumer portfolio, whereby this activity does not impact the allowance for loan losses in the same manner because the loans are predominantly insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). On a net basis, such purchases net of transfers to MHFS were $(1.3) billion and $805 million for the second quarter 2014 and 2013, respectively, and $237 million and $2.8 billion for the first half of 2014 and 2013, respectively.

 

88

 


 

Note 5:    Loans and Allowance for Credit Losses   (continued)  

 

Commitments to Lend

A commitment to lend is a legally binding agreement to lend funds to a customer, usually at a stated interest rate, if funded, and for specific purposes and time periods. We generally require a fee to extend such commitments. Certain commitments are subject to loan agreements with covenants regarding the financial performance of the customer or borrowing base formulas on an ongoing basis that must be met before we are required to fund the commitment. We may reduce or cancel consumer commitments, including home equity lines and credit card lines, in accordance with the contracts and applicable law.

We may, as a representative for other lenders, advance funds or provide for the issuance of letters of credit under syndicated loan or letter of credit agreements. Any advances are generally repaid in less than a week and would normally require default of both the customer and another lender to expose us to loss.  These temporary advance arrangements totaled approximately $87 billion at both June 30, 2014, and December 31, 2013, respectively.

We issue commercial letters of credit to assist customers in purchasing goods or services, typically for international trade. At June 30, 2014, and December 31, 2013, we had $1.4 billion and $1.2 billion, respectively, of outstanding issued commercial letters of credit. We also originate multipurpose lending commitments under which borrowers have the option to draw on the facility for different purposes in one of several forms, including a standby letter of credit. See Note 10 (Guarantees, Pledged Assets and Collateral) for additional information on standby letters of credit.  

When we make commitments, we are exposed to credit risk. The maximum credit risk for these commitments will generally be lower than the contractual amount because a significant portion of these commitments are expected to expire without being used by the customer. In addition, we manage the potential risk in commitments to lend by limiting the total amount of commitments, both by individual customer and in total, by monitoring the size and maturity structure of these commitments and by applying the same credit standards for these commitments as for all of our credit activities.  

For loans and commitments to lend, we generally require collateral or a guarantee. We may require various types of collateral, including commercial and consumer real estate, autos, other short-term liquid assets such as accounts receivable or inventory and long-lived assets, such as equipment and other business assets. Collateral requirements for each loan or commitment may vary based on the loan product and our assessment of a customer’s credit risk according to the specific credit underwriting, including credit terms and structure.


The contractual amount of our unfunded credit commitments, including unissued standby and commercial letters of credit, is summarized by portfolio segment and class of financing receivable in the following table. The table excludes standby and commercial letters of credit issued under the terms of our commitments and temporary advance commitments on behalf of other lenders.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

Dec. 31,

(in millions)

  

 2014 

 2013 

Commercial:

  

  

  

  

Commercial and industrial

$

 252,573 

 238,962 

  

Real estate mortgage

  

 5,864 

 5,910 

  

Real estate construction

  

 13,585 

 12,593 

  

Foreign

  

 14,836 

 12,216 

  

  

Total commercial

  

 286,858 

 269,681 

Consumer:

  

  

  

  

Real estate 1-4 family first mortgage

  

 33,908 

 32,908 

  

Real estate 1-4 family

  

  

  

  

  

junior lien mortgage

  

 46,410 

 47,668 

  

Credit card

  

 84,674 

 78,961 

  

Other revolving credit and installment

  

 22,798 

 24,213 

  

  

Total consumer

  

 187,790 

 183,750 

  

  

  

Total unfunded

  

  

  

  

  

  

  

credit commitments

$

 474,648 

 453,431 

89

 


 

      

Allowance for Credit Losses

The allowance for credit losses consists of the allowance for loan losses and the allowance for unfunded credit commitments. Changes in the allowance for credit losses were:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

  

 2014 

  

 2013 

  

 2014 

  

 2013 

Balance, beginning of period

$

 14,414 

  

 17,193 

  

 14,971 

  

 17,477 

Provision for credit losses

  

 217 

  

 652 

  

 542 

  

 1,871 

Interest income on certain impaired loans (1)

  

 (55) 

  

 (73) 

  

 (111) 

  

 (146) 

Loan charge-offs:

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

  

 (139) 

  

 (184) 

  

 (297) 

  

 (365) 

  

  

Real estate mortgage

  

 (15) 

  

 (49) 

  

 (35) 

  

 (109) 

  

  

Real estate construction

  

 (3) 

  

 (7) 

  

 (4) 

  

 (12) 

  

  

Lease financing

  

 (3) 

  

 (24) 

  

 (7) 

  

 (27) 

  

  

Foreign

  

 (8) 

  

 (8) 

  

 (13) 

  

 (19) 

  

  

  

Total commercial

  

 (168) 

  

 (272) 

  

 (356) 

  

 (532) 

  

Consumer:

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 (193) 

  

 (392) 

  

 (416) 

  

 (867) 

  

  

Real estate 1-4 family junior lien mortgage

  

 (220) 

  

 (428) 

  

 (469) 

  

 (942) 

  

  

Credit card

  

 (266) 

  

 (266) 

  

 (533) 

  

 (532) 

  

  

Automobile

  

 (143) 

  

 (126) 

  

 (323) 

  

 (290) 

  

  

Other revolving credit and installment

  

 (171) 

  

 (185) 

  

 (348) 

  

 (367) 

  

  

  

Total consumer

  

 (993) 

  

 (1,397) 

  

 (2,089) 

  

 (2,998) 

  

  

  

  

Total loan charge-offs

  

 (1,161) 

  

 (1,669) 

  

 (2,445) 

  

 (3,530) 

Loan recoveries:

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

  

 85 

  

 107 

  

 198 

  

 195 

  

  

Real estate mortgage

  

 25 

  

 54 

  

 67 

  

 85 

  

  

Real estate construction

  

 23 

  

 52 

  

 47 

  

 91 

  

  

Lease financing

  

 2 

  

 6 

  

 5 

  

 10 

  

  

Foreign

  

 2 

  

 9 

  

 3 

  

 17 

  

  

  

Total commercial

  

 137 

  

 228 

  

 320 

  

 398 

  

Consumer:

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 56 

  

 64 

  

 109 

  

 110 

  

  

Real estate 1-4 family junior lien mortgage

  

 60 

  

 69 

  

 117 

  

 134 

  

  

Credit card

  

 55 

  

 32 

  

 91 

  

 63 

  

  

Automobile

  

 97 

  

 84 

  

 187 

  

 172 

  

  

Other revolving credit and installment

  

 39 

  

 40 

  

 79 

  

 82 

  

  

  

Total consumer

  

 307 

  

 289 

  

 583 

  

 561 

  

  

  

  

Total loan recoveries

  

 444 

  

 517 

  

 903 

  

 959 

  

  

  

  

  

Net loan charge-offs (2)

  

 (717) 

  

 (1,152) 

  

 (1,542) 

  

 (2,571) 

Allowances related to business combinations/other

  

 (25) 

  

 (2) 

  

 (26) 

  

 (13) 

Balance, end of period

$

 13,834 

  

 16,618 

  

 13,834 

  

 16,618 

Components:

  

  

  

  

  

  

  

  

  

  

Allowance for loan losses

$

 13,101 

  

 16,144 

  

 13,101 

  

 16,144 

  

Allowance for unfunded credit commitments

  

 733 

  

 474 

  

 733 

  

 474 

  

  

Allowance for credit losses (3)

$

 13,834 

  

 16,618 

  

 13,834 

  

 16,618 

Net loan charge-offs (annualized) as a percentage of average total loans (2)

  

 0.35 

%

 0.58 

  

 0.38 

  

 0.65 

Allowance for loan losses as a percentage of total loans (3)

  

 1.58 

  

 2.02 

  

 1.58 

  

 2.02 

Allowance for credit losses as a percentage of total loans (3)

  

 1.67 

  

 2.08 

  

 1.67 

  

 2.08 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Certain impaired loans with an allowance calculated by discounting expected cash flows using the loan’s effective interest rate over the remaining life of the loan recognize reductions in the allowance as interest income.

(2)   For PCI loans, charge-offs are only recorded to the extent that losses exceed the purchase accounting estimates.

(3)   The allowance for credit losses includes $8 million and $71 million at June 30, 2014 and 2013, respectively, related to PCI loans acquired from Wachovia. Loans acquired from Wachovia are included in total loans net of related purchase accounting net write-downs.

 

90

 


 

Note 5:    Loans and Allowance for Credit Losses   (continued)  

 

 

The following table summarizes the activity in the allowance for credit losses by our commercial and consumer portfolio segments.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 2014 

  

  

  

 2013 

(in millions)

Commercial

Consumer

Total

  

Commercial

Consumer

Total

Quarter ended June 30,

  

  

  

  

  

  

  

  

Balance, beginning of period

$

 6,354 

 8,060 

 14,414 

  

 5,786 

 11,407 

 17,193 

  

Provision for credit losses

  

 83 

 134 

 217 

  

 172 

 480 

 652 

  

Interest income on certain impaired loans

  

 (6) 

 (49) 

 (55) 

  

 (16) 

 (57) 

 (73) 

  

  

  

  

  

  

  

  

  

  

  

  

  

Loan charge-offs

  

 (168) 

 (993) 

 (1,161) 

  

 (272) 

 (1,397) 

 (1,669) 

  

Loan recoveries

  

 137 

 307 

 444 

  

 228 

 289 

 517 

  

  

Net loan charge-offs

  

 (31) 

 (686) 

 (717) 

  

 (44) 

 (1,108) 

 (1,152) 

  

Allowance related to business combinations/other

  

 - 

 (25) 

 (25) 

  

 (2) 

 - 

 (2) 

Balance, end of period

$

 6,400 

 7,434 

 13,834 

  

 5,896 

 10,722 

 16,618 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

  

  

  

  

  

  

  

  

Balance, beginning of period

$

 6,103 

 8,868 

 14,971 

  

 5,714 

 11,763 

 17,477 

  

Provision for credit losses

  

 346 

 196 

 542 

  

 364 

 1,507 

 1,871 

  

Interest income on certain impaired loans

  

 (12) 

 (99) 

 (111) 

  

 (35) 

 (111) 

 (146) 

  

  

  

  

  

  

  

  

  

  

  

  

  

Loan charge-offs

  

 (356) 

 (2,089) 

 (2,445) 

  

 (532) 

 (2,998) 

 (3,530) 

  

Loan recoveries

  

 320 

 583 

 903 

  

 398 

 561 

 959 

  

  

Net loan charge-offs

  

 (36) 

 (1,506) 

 (1,542) 

  

 (134) 

 (2,437) 

 (2,571) 

  

Allowance related to business combinations/other

  

 (1) 

 (25) 

 (26) 

  

 (13) 

 - 

 (13) 

Balance, end of period

$

 6,400 

 7,434 

 13,834 

  

 5,896 

 10,722 

 16,618 

  

  

  

  

  

  

  

  

  

  

  

  

The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Allowance for credit losses

  

Recorded investment in loans

(in millions)

  

Commercial

Consumer

Total

  

Commercial

Consumer

Total

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Collectively evaluated (1)

$

 5,510 

 3,997 

 9,507 

  

 384,887 

 392,433 

 777,320 

Individually evaluated (2)

  

 885 

 3,434 

 4,319 

  

 4,550 

 22,105 

 26,655 

PCI (3)

  

 5 

 3 

 8 

  

 1,967 

 23,000 

 24,967 

  

Total

$

 6,400 

 7,434 

 13,834 

  

 391,404 

 437,538 

 828,942 

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

Collectively evaluated (1)

$

 4,921 

 5,011 

 9,932 

  

 369,405 

 398,084 

 767,489 

Individually evaluated (2)

  

 1,156 

 3,853 

 5,009 

  

 5,334 

 22,736 

 28,070 

PCI (3)

  

 26 

 4 

 30 

  

 2,504 

 24,223 

 26,727 

  

Total

$

 6,103 

 8,868 

 14,971 

  

 377,243 

 445,043 

 822,286 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Represents loans collectively evaluated for impairment in accordance with Accounting Standards Codification (ASC) 450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.

(2)   Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables  (formerly FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

(3)   Represents the allowance and related loan carrying value determined in accordance with ASC 310-30 , Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly SOP 03-3) and pursuant to amendments by ASU 2010-20 regarding allowance for PCI loans.

 

Credit Quality

We monitor credit quality by evaluating various attributes and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. The following sections provide the credit quality indicators we most closely monitor. The credit quality indicators are generally based on information as of our financial statement date, with the exception of updated Fair Isaac Corporation (FICO) scores and updated loan-to-value (LTV)/combined LTV (CLTV), which are obtained at least quarterly. Generally, these indicators are updated in the second month of each quarter, with updates no older than March 31,   2014.  See the “Purchased Credit-Impaired Loans” section of this Note for credit quality information on our PCI portfolio.

 

Commercial Credit Quality Indicators     In addition to monitoring commercial loan concentration risk, we manage a consistent process for assessing commercial loan credit quality. Generally, commercial loans are subject to individual risk assessment using our internal borrower and collateral quality ratings. Our ratings are aligned to Pass and Criticized categories. The Criticized category

91

 


 

      

includes Special Mention, Substandard, and Doubtful categories which are defined by bank regulatory agencies.

The following table provides a breakdown of outstanding commercial loans by risk category. Of the $10.2 billion in criticized commercial real estate (CRE) loans at June 30, 2014, $2.0 billion has been placed on nonaccrual status and written down to net realizable collateral value. CRE loans have a high level of monitoring in place to manage these assets and mitigate loss exposure.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial

Real

Real

  

  

  

  

  

  

  

  

  

and

estate

estate

Lease

  

  

(in millions)

  

industrial

mortgage

construction

financing

Foreign

Total

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By risk category:

  

  

  

  

  

  

  

Pass

$

 190,954 

 98,509 

 15,486 

 11,569 

 45,128 

 361,646 

  

Criticized

  

 14,909 

 8,906 

 1,265 

 339 

 2,372 

 27,791 

  

  

Total commercial loans (excluding PCI)

  

 205,863 

 107,415 

 16,751 

 11,908 

 47,500 

 389,437 

Total commercial PCI loans (carrying value)

  

 192 

 1,003 

 305 

 - 

 467 

 1,967 

  

  

  

Total commercial loans

$

 206,055 

 108,418 

 17,056 

 11,908 

 47,967 

 391,404 

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By risk category:

  

  

  

  

  

  

  

Pass

$

 178,673 

 94,992 

 14,594 

 11,577 

 44,094 

 343,930 

  

Criticized

  

 14,923 

 10,972 

 1,720 

 457 

 2,737 

 30,809 

  

  

Total commercial loans (excluding PCI)

  

 193,596 

 105,964 

 16,314 

 12,034 

 46,831 

 374,739 

Total commercial PCI loans (carrying value)

  

 215 

 1,136 

 433 

 - 

 720 

 2,504 

  

  

  

Total commercial loans

$

 193,811 

 107,100 

 16,747 

 12,034 

 47,551 

 377,243 

  

  

  

  

  

  

  

  

  

  

  

  

The following table provides past due information for commercial loans, which we monitor as part of our credit risk management practices.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial

Real

Real

  

  

  

  

  

  

  

  

  

and

estate

estate

Lease

  

  

(in millions)

industrial

mortgage

construction

financing

Foreign

Total

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By delinquency status:

  

  

  

  

  

  

  

  

Current-29 DPD and still accruing

$

 204,635 

 105,312 

 16,454 

 11,845 

 47,455 

 385,701 

  

30-89 DPD and still accruing

  

 484 

 248 

 42 

 35 

 7 

 816 

  

90+ DPD and still accruing

  

 51 

 53 

 16 

 - 

 2 

 122 

Nonaccrual loans

  

 693 

 1,802 

 239 

 28 

 36 

 2,798 

  

  

Total commercial loans (excluding PCI)

  

 205,863 

 107,415 

 16,751 

 11,908 

 47,500 

 389,437 

Total commercial PCI loans (carrying value)

  

 192 

 1,003 

 305 

 - 

 467 

 1,967 

  

  

  

Total commercial loans

$

 206,055 

 108,418 

 17,056 

 11,908 

 47,967 

 391,404 

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By delinquency status:

  

  

  

  

  

  

  

  

Current-29 DPD and still accruing

$

 192,509 

 103,139 

 15,698 

 11,972 

 46,784 

 370,102 

  

30-89 DPD and still accruing

  

 338 

 538 

 103 

 33 

 7 

 1,019 

  

90+ DPD and still accruing

  

 11 

 35 

 97 

 - 

 - 

 143 

Nonaccrual loans

  

 738 

 2,252 

 416 

 29 

 40 

 3,475 

  

  

Total commercial loans (excluding PCI)

  

 193,596 

 105,964 

 16,314 

 12,034 

 46,831 

 374,739 

Total commercial PCI loans (carrying value)

  

 215 

 1,136 

 433 

 - 

 720 

 2,504 

  

  

  

Total commercial loans

$

 193,811 

 107,100 

 16,747 

 12,034 

 47,551 

 377,243 

  

  

  

  

  

  

  

  

  

  

  

  

92

 


 

Note 5:    Loans and Allowance for Credit Losses   (continued)  

 

Consumer Credit Quality Indicators   We have various classes of consumer loans that present unique risks. Loan delinquency, FICO credit scores and LTV for loan types are common credit quality indicators that we monitor and utilize in our evaluation of the appropriateness of the allowance for credit losses for the consumer portfolio segment.


Many of our loss estimation techniques used for the allowance for credit losses rely on delinquency-based models; therefore, delinquency is an important indicator of credit quality and the establishment of our allowance for credit losses. The following table provides the outstanding balances of our consumer portfolio by delinquency status.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate

Real estate

  

  

Other

  

  

  

  

  

  

  

1-4 family

1-4 family

  

  

revolving

  

  

  

  

  

  

  

first

junior lien

Credit

  

credit and

  

(in millions)

  

mortgage

mortgage

card

Automobile

installment

Total

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By delinquency status:

  

  

  

  

  

  

  

Current-29 DPD

$

 201,305 

 60,903 

 26,644 

 53,083 

 33,349 

 375,284 

  

30-59 DPD

  

 2,478 

 394 

 181 

 767 

 132 

 3,952 

  

60-89 DPD

  

 1,154 

 221 

 124 

 181 

 90 

 1,770 

  

90-119 DPD

  

 537 

 151 

 95 

 57 

 71 

 911 

  

120-179 DPD

  

 626 

 201 

 170 

 6 

 17 

 1,020 

  

180+ DPD

  

 4,669 

 473 

 1 

 1 

 10 

 5,154 

Government insured/guaranteed loans (1)

  

 26,447 

 - 

 - 

 - 

 - 

 26,447 

  

Total consumer loans (excluding PCI)

  

 237,216 

 62,343 

 27,215 

 54,095 

 33,669 

 414,538 

Total consumer PCI loans (carrying value)

  

 22,888 

 112 

 - 

 - 

 - 

 23,000 

  

  

Total consumer loans

$

 260,104 

 62,455 

 27,215 

 54,095 

 33,669 

 437,538 

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By delinquency status:

  

  

  

  

  

  

  

Current-29 DPD

$

 193,361 

 64,194 

 26,203 

 49,699 

 31,866 

 365,323 

  

30-59 DPD

  

 2,784 

 461 

 202 

 852 

 178 

 4,477 

  

60-89 DPD

  

 1,157 

 253 

 144 

 186 

 111 

 1,851 

  

90-119 DPD

  

 587 

 182 

 124 

 66 

 76 

 1,035 

  

120-179 DPD

  

 747 

 216 

 196 

 4 

 20 

 1,183 

  

180+ DPD

  

 5,024 

 485 

 1 

 1 

 7 

 5,518 

Government insured/guaranteed loans (1)

  

 30,737 

 - 

 - 

 - 

 10,696 

 41,433 

  

Total consumer loans (excluding PCI)

  

 234,397 

 65,791 

 26,870 

 50,808 

 42,954 

 420,820 

Total consumer PCI loans (carrying value)

  

 24,100 

 123 

 - 

 - 

 - 

 24,223 

  

  

Total consumer loans

$

 258,497 

 65,914 

 26,870 

 50,808 

 42,954 

 445,043 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA and student loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the Federal Family Education Loan Program (FFELP). Loans insured/guaranteed by the FHA/VA and 90+ DPD totaled $16.1 billion at June 30, 2014, compared with $20.8 billion at December 31, 2013. At June 30, 2014, all government guaranteed student loans were transferred to loans held for sale. Student loans 90+ DPD totaled $900 million at December 31, 2013.

  

Of the $7.1 billion of consumer loans not government insured/guaranteed that are 90 days or more past due at June 30, 2014, $775 million was accruing, compared with $7.7 billion past due and $902 million accruing at December 31, 2013.

Real estate 1-4 family first mortgage loans 180 days or more past due totaled $4.7 billion, or 2.0% of total first mortgages (excluding PCI), at June 30, 2014, compared with $5.0  billion, or 2.1 %, at December 31, 2013.


The following table provides a breakdown of our consumer portfolio by updated FICO. We obtain FICO scores at loan origination and the scores are updated at least quarterly. The majority of our portfolio is underwritten with a FICO score of 680 and above. FICO is not available for certain loan types and may not be obtained if we deem it unnecessary due to strong collateral and other borrower attributes, primarily securities-based margin loans of $5.3 billion at June 30, 2014, and $5.0 billion at December 31, 2013.

93

 


 

      

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate

Real estate

  

  

Other

  

  

  

  

  

  

  

1-4 family

1-4 family

  

  

revolving

  

  

  

  

  

  

  

first

junior lien

Credit

  

credit and

  

(in millions)

  

mortgage

mortgage

card

Automobile

installment

Total

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By updated FICO:

  

  

  

  

  

  

  

< 600

$

 12,560 

 4,434 

 2,309 

 8,302 

 909 

 28,514 

  

600-639

  

 8,491 

 3,006 

 2,218 

 6,263 

 1,034 

 21,012 

  

640-679

  

 14,770 

 5,548 

 4,238 

 9,294 

 2,226 

 36,076 

  

680-719

  

 24,336 

 9,348 

 5,522 

 9,730 

 4,109 

 53,045 

  

720-759

  

 34,438 

 12,678 

 5,671 

 7,129 

 5,537 

 65,453 

  

760-799

  

 77,312 

 18,372 

 4,649 

 6,921 

 7,209 

 114,463 

  

800+

  

 35,822 

 7,752 

 2,420 

 6,010 

 5,588 

 57,592 

No FICO available

  

 3,040 

 1,205 

 188 

 446 

 1,805 

 6,684 

FICO not required

  

 - 

 - 

 - 

 - 

 5,252 

 5,252 

Government insured/guaranteed loans (1)

  

 26,447 

 - 

 - 

 - 

 - 

 26,447 

  

  

Total consumer loans (excluding PCI)

  

 237,216 

 62,343 

 27,215 

 54,095 

 33,669 

 414,538 

Total consumer PCI loans (carrying value)

  

 22,888 

 112 

 - 

 - 

 - 

 23,000 

  

  

  

Total consumer loans

$

 260,104 

 62,455 

 27,215 

 54,095 

 33,669 

 437,538 

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By updated FICO:

  

  

  

  

  

  

  

< 600

$

 14,128 

 5,047 

 2,404 

 8,400 

 956 

 30,935 

  

600-639

  

 9,030 

 3,247 

 2,175 

 5,925 

 1,015 

 21,392 

  

640-679

  

 14,917 

 5,984 

 4,176 

 8,827 

 2,156 

 36,060 

  

680-719

  

 24,336 

 10,042 

 5,398 

 8,992 

 3,914 

 52,682 

  

720-759

  

 32,991 

 13,575 

 5,530 

 6,546 

 5,263 

 63,905 

  

760-799

  

 72,062 

 19,238 

 4,535 

 6,313 

 6,828 

 108,976 

  

800+

  

 33,311 

 7,705 

 2,408 

 5,397 

 5,127 

 53,948 

No FICO available

  

 2,885 

 953 

 244 

 408 

 1,992 

 6,482 

FICO not required

  

 - 

 - 

 - 

 - 

 5,007 

 5,007 

Government insured/guaranteed loans (1)

  

 30,737 

 - 

 - 

 - 

 10,696 

 41,433 

  

  

Total consumer loans (excluding PCI)

  

 234,397 

 65,791 

 26,870 

 50,808 

 42,954 

 420,820 

Total consumer PCI loans (carrying value)

  

 24,100 

 123 

 - 

 - 

 - 

 24,223 

  

  

  

Total consumer loans

$

 258,497 

 65,914 

 26,870 

 50,808 

 42,954 

 445,043 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA and student loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under FFELP. At June 30, 2014, all government guaranteed student loans were transferred to loans held for sale.

 

LTV refers to the ratio comparing the loan’s unpaid principal balance to the property’s collateral value. CLTV refers to the combination of first mortgage and junior lien mortgage (including unused line amounts for credit line products) ratios. LTVs and CLTVs are updated quarterly using a cascade approach which first uses values provided by automated valuation models (AVMs) for the property. If an AVM is not available, then the value is estimated using the original appraised value adjusted by the change in Home Price Index (HPI) for the property location. If an HPI is not available, the original appraised value is used. The HPI value is normally the only method considered for high value properties, generally with an original value of $1 million or more, as the AVM values have proven less accurate for these properties.


The following table shows the most updated LTV and CLTV distribution of the real estate 1-4 family first and junior lien mortgage loan portfolios. We consider the trends in residential real estate markets as we monitor credit risk and establish our allowance for credit losses. In the event of a default, any loss should be limited to the portion of the loan amount in excess of the net realizable value of the underlying real estate collateral value. Certain loans do not have an LTV or CLTV primarily due to industry data availability and portfolios acquired from or serviced by other institutions.

94

 


 

Note 5:    Loans and Allowance for Credit Losses   (continued)  

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

Real estate

Real estate

  

  

Real estate

Real estate

  

  

  

  

  

  

  

1-4 family

1-4 family

  

  

1-4 family

1-4 family

  

  

  

  

  

  

  

first

junior lien

  

  

first

junior lien

  

  

  

  

  

  

  

mortgage

mortgage

  

  

mortgage

mortgage

  

(in millions)

  

by LTV

by CLTV

Total

  

by LTV

by CLTV

Total

By LTV/CLTV:

  

  

  

  

  

  

  

  

0-60%

$

 84,643 

 14,411 

 99,054 

  

 74,046 

 13,636 

 87,682 

  

60.01-80%

  

 82,486 

 16,980 

 99,466 

  

 80,187 

 17,154 

 97,341 

  

80.01-100%

  

 29,271 

 15,020 

 44,291 

  

 30,843 

 16,272 

 47,115 

  

100.01-120% (1)

  

 8,367 

 8,734 

 17,101 

  

 10,678 

 9,992 

 20,670 

  

> 120% (1)

  

 4,427 

 5,898 

 10,325 

  

 6,306 

 7,369 

 13,675 

No LTV/CLTV available

  

 1,575 

 1,300 

 2,875 

  

 1,600 

 1,368 

 2,968 

Government insured/guaranteed loans (2)

  

 26,447 

 - 

 26,447 

  

 30,737 

 - 

 30,737 

  

  

Total consumer loans (excluding PCI)

  

 237,216 

 62,343 

 299,559 

  

 234,397 

 65,791 

 300,188 

Total consumer PCI loans (carrying value)

  

 22,888 

 112 

 23,000 

  

 24,100 

 123 

 24,223 

  

  

  

Total consumer loans

$

 260,104 

 62,455 

 322,559 

  

 258,497 

 65,914 

 324,411 

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess of 100% LTV/CLTV.

(2)   Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.

 

Nonaccrual Loans   The following table provides loans on nonaccrual status. PCI loans are excluded from this table because they continue to earn interest from accretable yield, independent of performance in accordance with their contractual terms.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

Dec. 31,

(in millions)

  

 2014 

 2013 

Commercial:

  

  

  

  

Commercial and industrial

$

 693 

 738 

  

Real estate mortgage

  

 1,802 

 2,252 

  

Real estate construction

  

 239 

 416 

  

Lease financing

  

 28 

 29 

  

Foreign

  

 36 

 40 

  

  

Total commercial (1)

  

 2,798 

 3,475 

Consumer:

  

  

  

  

Real estate 1-4 family first mortgage (2)

 9,026 

 9,799 

  

Real estate 1-4 family junior lien mortgage

 1,964 

 2,188 

  

Automobile

  

 150 

 173 

  

Other revolving credit and installment

 34 

 33 

  

  

Total consumer

  

 11,174 

 12,193 

  

  

  

Total nonaccrual loans

  

  

  

  

  

  

(excluding PCI)

$

 13,972 

 15,668 

  

  

  

  

  

  

  

  

  

(1)   Includes LHFS of $1 million at both June 30, 2014 and December 31, 2013. 

(2)   Includes MHFS of $238 million at June 30, 2014 and $227 million at December 31, 2013. 


LOANS IN PROCESS OF FORECLOSURE   Our recorded investment in consumer mortgage loans collateralized by residential real estate property that are in process of foreclosure was $13.2 billion and $17.3 billion at June 30, 2014 and December 31, 2013, respectively, which included $7.1 billion and $10.0 billion, respectively, of loans that are government insured/guaranteed. We commence the foreclosure process on consumer real estate loans when a borrower becomes 120 days delinquent in accordance with Consumer Finance Protection Bureau Guidelines. Foreclosure procedures and timelines vary depending on whether the property address resides in a judicial or non-judicial state. Judicial states require the foreclosure to be processed through the state’s courts while non-judicial states are processed without court intervention. Foreclosure timelines vary according to state law.

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LOANS 90 Days OR MORE Past Due and Still Accruing    Certain loans 90 days or more past due as to interest or principal are still accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1‑4 family mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans of $4.0 billion at June 30, 2014, and $4.5 billion at December 31, 2013, are not included in these past due and still accruing loans even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing because they continue to earn interest from accretable yield, independent of performance in accordance with their contractual terms.

The following table shows non-PCI loans 90 days or more past due and still accruing by class for loans not government insured/guaranteed.  

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

Dec. 31,

(in millions)

 2014 

 2013 

Loans 90 days or more past due and still accruing:

  

  

  

Total (excluding PCI):

$

 18,582 

23,219 

  

Less: FHA insured/guaranteed by the VA (1)(2)

 16,978 

21,274 

  

Less: Student loans guaranteed

  

  

  

  

  

under the FFELP (3)

  

 707 

900 

  

  

  

Total, not government

  

  

  

  

  

  

  

insured/guaranteed

$

 897 

1,045 

  

  

  

  

  

  

  

  

  

By segment and class, not government

  

  

  

  

insured/guaranteed:

  

  

Commercial:

  

  

  

  

Commercial and industrial

$

 51 

11 

  

Real estate mortgage

  

 53 

35 

  

Real estate construction

  

 16 

97 

  

Foreign

  

 2 

  

  

Total commercial

  

 122 

143 

Consumer:

  

  

  

  

Real estate 1-4 family first mortgage (2)

  

 311 

354 

  

Real estate 1-4 family junior lien mortgage (2)

 70 

86 

  

Credit card

  

 266 

321 

  

Automobile

  

 48 

55 

  

Other revolving credit and installment

  

 80 

86 

  

  

Total consumer

  

 775 

902 

  

  

  

Total, not government

  

  

  

  

  

  

  

insured/guaranteed

$

 897 

1,045 

  

  

  

  

  

  

  

  

  

(1)   Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.

(2)   Includes mortgage loans held for sale 90 days or more past due and still accruing.

(3)   Represents loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the FFELP. In  second quarter 2014, all government guaranteed student loans were transferred to loans held for sale.

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Note 5:    Loans and Allowance for Credit Losses   (continued)  

 

Impaired Loans   The table below summarizes key information for impaired loans. Our impaired loans predominantly include loans on nonaccrual status in the commercial portfolio segment and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans generally have estimated losses which are included in the allowance for credit losses. We have impaired loans with no allowance for credit losses when loss content has been previously recognized through charge-offs and we do not anticipate additional charge-offs or losses, or certain loans are currently performing in accordance with their terms and for which no loss has been estimated. Impaired loans exclude PCI loans. The table below includes trial modifications that totaled $469 million at June 30, 2014, and $650 million at December 31, 2013.

For additional information on our impaired loans and allowance for credit losses, see Note 1 (Summary of Significant Accounting Policies) in our 2013 Form 10-K.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Recorded investment

  

  

  

  

  

  

  

  

  

Impaired loans

  

  

  

  

  

  

  

Unpaid

  

with related

Related

  

  

  

  

  

  

principal

Impaired

allowance for

allowance for

(in millions)

  

balance (1)

loans

credit losses

credit losses

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

Commercial and industrial

$

 1,759 

 1,093 

 826 

 274 

  

Real estate mortgage

  

 3,840 

 2,963 

 2,861 

 529 

  

Real estate construction

  

 715 

 430 

 394 

 54 

  

Lease financing

  

 68 

 30 

 30 

 16 

  

Foreign

  

 43 

 34 

 24 

 12 

  

  

Total commercial

  

 6,425 

 4,550 

 4,135 

 885 

Consumer:

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 21,838 

 18,974 

 13,330 

 2,587 

  

Real estate 1-4 family junior lien mortgage

  

 3,125 

 2,560 

 2,057 

 726 

  

Credit card

  

 379 

 379 

 379 

 108 

  

Automobile

  

 208 

 151 

 69 

 9 

  

Other revolving credit and installment

  

 50 

 40 

 33 

 4 

  

  

Total consumer (2)

  

 25,600 

 22,104 

 15,868 

 3,434 

  

  

  

Total impaired loans (excluding PCI)

$

 32,025 

 26,654 

 20,003 

 4,319 

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

Commercial and industrial

$

 2,016 

 1,274 

 1,024 

 223 

  

Real estate mortgage

  

 4,269 

 3,375 

 3,264 

 819 

  

Real estate construction

  

 946 

 615 

 589 

 101 

  

Lease financing

  

 71 

 33 

 33 

 8 

  

Foreign

  

 44 

 37 

 37 

 5 

  

  

Total commercial

  

 7,346 

 5,334 

 4,947 

 1,156 

Consumer:

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 22,450 

 19,500 

 13,896 

 3,026 

  

Real estate 1-4 family junior lien mortgage

  

 3,130 

 2,582 

 2,092 

 681 

  

Credit card

  

 431 

 431 

 431 

 132 

  

Automobile

  

 245 

 189 

 95 

 11 

  

Other revolving credit and installment

  

 44 

 34 

 27 

 3 

  

  

Total consumer (2)

  

 26,300 

 22,736 

 16,541 

 3,853 

  

  

  

Total impaired loans (excluding PCI)

$

 33,646 

 28,070 

 21,488 

 5,009 

  

  

  

  

  

  

  

  

  

  

(1)   Excludes the unpaid principal balance for loans that have been fully charged off or otherwise have zero recorded investment.

(2)   At June 30, 2014 and December 31, 2013, includes the recorded investment of $2.1 billion and $2.5 billion, respectively, of government insured/guaranteed loans that are predominantly insured by the FHA or guaranteed by the VA and generally do not have an allowance.

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Commitments to lend additional funds on loans whose terms have been modified in a TDR amounted to $308 million and $407 million at June 30, 2014 and December 31, 2013, respectively.

The following tables provide the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans by portfolio segment and class.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

  

  

  

  

  

  

 2014 

  

2013 

  

 2014 

  

2013 

  

  

  

  

  

  

Average

Recognized

  

Average

Recognized

  

Average

Recognized

  

Average

Recognized

  

  

  

  

  

  

recorded

  

interest

  

recorded

interest

  

recorded

  

interest

  

recorded

interest

(in millions)

investment

  

income

  

investment

income

investment

  

income

  

investment

income

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

     

Commercial and industrial

$

 1,157 

  

 17 

  

 1,573 

 22 

  

 1,185 

  

 38 

  

 1,603 

 48 

     

Real estate mortgage

  

 3,107 

  

 36 

  

 4,194 

 36 

  

 3,178 

  

 65 

  

 4,250 

 68 

     

Real estate construction

  

 465 

  

 8 

  

 1,082 

 11 

  

 521 

  

 15 

  

 1,174 

 23 

  

Lease financing

  

 33 

  

 - 

  

 30 

 - 

  

 33 

  

 - 

  

 32 

 - 

     

Foreign

  

 36 

  

 - 

  

 41 

 - 

  

 36 

  

 - 

  

 37 

 - 

         

  

Total commercial

  

 4,798 

  

 61 

  

 6,920 

 69 

  

 4,953 

  

 118 

  

 7,096 

 139 

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

first mortgage

  

 19,313 

  

 238 

  

 19,669 

 264 

  

 19,407 

  

 475 

  

 19,275 

 515 

  

Real estate 1-4 family

  

  

  

  

  

  

  

  

  

  

  

  

  

  

     

  

junior lien mortgage

  

 2,545 

  

 36 

  

 2,499 

 38 

  

 2,551 

  

 71 

  

 2,490 

 73 

  

Credit card

  

 391 

  

 12 

  

 490 

 14 

  

 405 

  

 24 

  

 503 

 29 

  

Automobile

  

 160 

  

 4 

  

 262 

 7 

  

 169 

  

 11 

  

 280 

 17 

  

Other revolving credit

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

and installment

  

 38 

  

 1 

  

 28 

 - 

  

 37 

  

 2 

  

 27 

 1 

         

  

Total consumer

  

 22,447 

  

 291 

  

 22,948 

 323 

  

 22,569 

  

 583 

  

 22,575 

 635 

  

  

  

Total impaired loans

  

  

  

  

  

  

  

  

  

  

  

  

  

  

             

  

  

  

(excluding PCI)

$

 27,245 

  

 352 

  

 29,868 

 392 

  

 27,522 

  

 701 

  

 29,671 

 774 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest income:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cash basis of accounting

  

  

$

 100 

  

  

 119 

  

  

  

 199 

  

  

 242 

  

Other (1)

  

  

  

 252 

  

  

 273 

  

  

  

 502 

  

  

 532 

  

  

Total interest income

  

  

$

 352 

  

  

 392 

  

  

  

 701 

  

  

 774 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Includes interest recognized on accruing TDRs, interest recognized related to certain impaired loans which have an allowance calculated using discounting, and amortization of purchase accounting adjustments related to certain impaired loans.

 

TROUBLED DEBT RESTRUCTURINGs (TDR s   When, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession for other than an insignificant period of time to a borrower that we would not otherwise consider, the related loan is classified as a TDR. We do not consider any loans modified through a loan resolution such as foreclosure or short sale to be a TDR.

We may require some consumer borrowers experiencing financial difficulty to make trial payments generally for a period of three to four months, according to the terms of a planned permanent modification, to determine if they can perform according to those terms. These arrangements represent trial modifications, which we classify and account for as TDRs. While loans are in trial payment programs, their original terms are not considered modified and they continue to advance through delinquency status and accrue interest according to their original terms. The planned modifications for these arrangements predominantly involve interest rate reductions or other interest rate concessions; however, the exact concession type and resulting financial effect are usually not finalized and do not take effect until the loan is permanently modified. The trial period terms are developed in accordance with our proprietary programs or the U.S. Treasury’s Making Home Affordable programs for real estate 1-4 family first lien (i.e. Home Affordable Modification Program – HAMP) and junior lien (i.e. Second Lien Modification Program – 2MP) mortgage loans.

At June 30, 2014, the loans in trial modification period were $143 million under HAMP, $38 million under 2MP and $288 million under proprietary programs, compared with $253 million, $45 million and $352 million at December 31, 2013, respectively. Trial modifications with a recorded investment of $177 million at June 30, 2014, and $286 million at December 31, 2013, were accruing loans and $292 million and $364 million, respectively, were nonaccruing loans. Our experience is that most of the mortgages that enter a trial payment period program are successful in completing the program requirements and are then permanently modified at the end of the trial period. Our allowance process considers the impact of those modifications that are probable to occur.

The following table summarizes our TDR modifications for the periods presented by primary modification type and includes the financial effects of these modifications. For those loans that modify more than once, the table reflects each modification that occurred during the period.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Primary modification type (1)

  

Financial effects of modifications

  

  

  

  

  

  

  

  

  

  

  

  

Weighted

  

Recorded

  

  

  

  

  

  

  

  

  

  

  

  

average

  

investment

  

  

  

  

  

  

  

Interest

  

  

  

  

interest

  

related to

  

  

  

  

  

  

  

rate

Other

  

  

Charge-

rate

  

interest rate

(in millions)

Principal (2)

reduction

concessions (3)

Total

  

offs (4)

reduction

  

reduction (5)

Quarter ended June 30, 2014

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

$

 4 

 23 

 246 

 273 

  

 15 

 0.95 

%

$

 23 

  

Real estate mortgage

  

 - 

 54 

 274 

 328 

  

 - 

 1.20 

  

  

 54 

  

Real estate construction

  

 - 

 1 

 24 

 25 

  

 - 

 1.72 

  

  

 1 

  

Foreign

  

 - 

 1 

 - 

 1 

  

 - 

 0.84 

  

  

 1 

  

  

Total commercial

  

 4 

 79 

 544 

 627 

  

 15 

 1.13 

  

  

 79 

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 176 

 85 

 621 

 882 

  

 28 

 2.46 

  

  

 194 

  

Real estate 1-4 family junior lien mortgage

  

 12 

 25 

 74 

 111 

  

 15 

 3.37 

  

  

 35 

  

Credit card

  

 - 

 44 

 - 

 44 

  

 - 

 12.09 

  

  

 44 

  

Automobile

  

 1 

 1 

 20 

 22 

  

 7 

 8.80 

  

  

 1 

  

Other revolving credit and installment

  

 - 

 2 

 3 

 5 

  

 - 

 4.92 

  

  

 2 

  

Trial modifications (6)

  

 - 

 - 

 (86) 

 (86) 

  

 - 

 - 

  

  

 - 

  

  

Total consumer

  

 189 

 157 

 632 

 978 

  

 50 

 4.15 

  

  

 276 

  

  

  

Total

$

 193 

 236 

 1,176 

 1,605 

  

 65 

 3.47 

%

$

 355 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30, 2013

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

$

 - 

 16 

 234 

 250 

  

 - 

 1.46 

%

$

 16 

  

Real estate mortgage

  

 4 

 95 

 346 

 445 

  

 1 

 1.57 

  

  

 95 

  

Real estate construction

  

 - 

 3 

 90 

 93 

  

 - 

 0.83 

  

  

 3 

  

Foreign

  

 - 

 - 

 - 

 - 

  

 - 

 - 

  

  

 - 

  

  

Total commercial

  

 4 

 114 

 670 

 788 

  

 1 

 1.54 

  

  

 114 

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 282 

 378 

 715 

 1,375 

  

 48 

 2.71 

  

  

 563 

  

Real estate 1-4 family junior lien mortgage

  

 25 

 46 

 90 

 161 

  

 1 

 3.24 

  

  

 70 

  

Credit card

  

 - 

 46 

 - 

 46 

  

 - 

 10.53 

  

  

 46 

  

Automobile

  

 1 

 2 

 24 

 27 

  

 8 

 8.77 

  

  

 2 

  

Other revolving credit and installment

  

 - 

 4 

 4 

 8 

  

 - 

 5.31 

  

  

 4 

  

Trial modifications (6)

  

 - 

 - 

 22 

 22 

  

 - 

 - 

  

  

 - 

  

  

Total consumer

  

 308 

 476 

 855 

 1,639 

  

 57 

 3.32 

  

  

 685 

  

  

  

Total

$

 312 

 590 

 1,525 

 2,427 

  

 58 

 3.06 

%

$

 799 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

98

 


 

      

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Primary modification type (1)

  

Financial effects of modifications

  

  

  

  

  

  

  

  

  

  

  

  

Weighted

  

Recorded

  

  

  

  

  

  

  

  

  

  

  

  

average

  

investment

  

  

  

  

  

  

  

Interest

  

  

  

  

interest

  

related to

  

  

  

  

  

  

  

rate

Other

  

  

Charge-

rate

  

interest rate

(in millions)

Principal (2)

reduction

concessions (3)

Total

  

offs (4)

reduction

  

reduction (5)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30, 2014

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

$

 4 

 36 

 511 

 551 

  

 26 

 1.69 

%

$

 36 

  

Real estate mortgage

  

 3 

 93 

 568 

 664 

  

 - 

 1.24 

  

  

 93 

  

Real estate construction

  

 - 

 2 

 167 

 169 

  

 - 

 1.61 

  

  

 2 

  

Foreign

  

 -   

 1 

 - 

 1 

  

 - 

 - 

  

  

 1 

  

  

Total commercial

  

 7 

 132 

 1,246 

 1,385 

  

 26 

 1.36 

  

  

 132 

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 349 

 193 

 1,378 

 1,920 

  

 60 

 2.61 

  

  

 440 

  

Real estate 1-4 family junior lien mortgage

  

 30 

 59 

 137 

 226 

  

 33 

 3.29 

  

  

 85 

  

Credit card

  

 - 

 80 

 - 

 80 

  

 - 

 11.20 

  

  

 80 

  

Automobile

  

 2 

 2 

 43 

 47 

  

 17 

 9.17 

  

  

 2 

  

Other revolving credit and installment

  

 - 

 3 

 4 

 7 

  

 - 

 4.91 

  

  

 3 

  

Trial modifications (6)

  

 - 

 - 

 (115) 

 (115) 

  

 - 

 - 

  

  

 - 

  

  

Total consumer

  

 381 

 337 

 1,447 

 2,165 

  

 110 

 3.87 

  

  

 610 

  

  

  

Total

$

 388 

 469 

 2,693 

 3,550 

  

 136 

 3.42 

%

$

 742 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30, 2013

  

  

  

  

  

  

  

  

  

Commercial:

  

  

  

  

  

  

  

  

  

  

  

  

Commercial and industrial

$

 - 

 83 

 561 

 644 

 - 

 1 

 6.42 

%

$

 83 

  

Real estate mortgage

  

 28 

 170 

 768 

 966 

 - 

 6 

 1.68 

  

  

 170 

  

Real estate construction

  

 - 

 3 

 199 

 202 

 - 

 4 

 0.91 

  

  

 3 

  

Foreign

  

 15 

 - 

 - 

 15 

 - 

 - 

 - 

  

  

 - 

  

  

Total commercial

  

 43 

 256 

 1,528 

 1,827 

 - 

 11 

 3.20 

  

  

 256 

Consumer:

  

  

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 626 

 757 

 2,096 

 3,479 

 - 

 145 

 2.56 

  

  

 1,186 

  

Real estate 1-4 family junior lien mortgage

  

 52 

 94 

 258 

 404 

 - 

 16 

 3.24 

  

  

 142 

  

Credit card

  

 - 

 92 

 - 

 92 

 - 

 - 

 10.63 

  

  

 92 

  

Automobile

  

 2 

 8 

 48 

 58 

 - 

 16 

 7.00 

  

  

 8 

  

Other revolving credit and installment

  

 - 

 6 

 7 

 13 

 - 

 - 

 4.80 

  

  

 6 

  

Trial modifications (6)

  

 - 

 - 

 54 

 54 

 - 

 - 

 - 

  

  

 - 

  

  

Total consumer

  

 680 

 957 

 2,463 

 4,100 

 - 

 177 

 3.18 

  

  

 1,434 

  

  

  

Total

$

 723 

 1,213 

 3,991 

 5,927 

 - 

 188 

 3.19 

%

$

 1,690 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1) 

Amounts represent the recorded investment in loans after recognizing the effects of the TDR, if any. TDRs may have multiple types of concessions, but are presented only once in the first modification type based on the order presented in the table above. The reported amounts include loans remodified of $558 million and $647 million, for quarters ended June 30, 2014 and 2013, and $1.2 billion and $1.6 billion for the first half of 2014 and 2013, respectively.

(2)

Principal modifications include principal forgiveness at the time of the modification, contingent principal forgiveness granted over the life of the loan based on borrower performance, and principal that has been legally separated and deferred to the end of the loan, with a zero percent contractual interest rate.

(3)

Other concessions include loan renewals, term extensions and other interest and noninterest adjustments, but exclude modifications that also forgive principal and/or reduce the contractual interest rate.

(4)

Charge-offs include write-downs of the investment in the loan in the period it is contractually modified. The amount of charge-off will differ from the modification terms if the loan has been charged down prior to the modification based on our policies. In addition, there may be cases where we have a charge-off/down with no legal principal modification. Modifications resulted in legally forgiving principal (actual, contingent or deferred) of $44 million and $95 million for quarters ended June 30, 2014 and 2013, and $92 million and $229 million for the first half of 2014 and 2013, respectively.

(5)

Reflects the effect of reduced interest rates on loans with principal or interest rate reduction primary modification type.

(6)

Trial modifications are granted a delay in payments due under the original terms during the trial payment period. However, these loans continue to advance through delinquency status and accrue interest according to their original terms. Any subsequent permanent modification generally includes interest rate related concessions; however, the exact concession type and resulting financial effect are usually not known until the loan is permanently modified. Trial modifications for the period are presented net of previously reported trial modifications that became permanent in the current period.

  

  

100

 


 

Note 5:    Loans and Allowance for Credit Losses   (continued)  

 

The table below summarizes permanent modification TDRs that have defaulted in the current period within 12 months of their permanent modification date. We are reporting these defaulted TDRs based on a payment default definition of 90 days past due for the commercial portfolio segment and 60 days past due for the consumer portfolio segment.  

 

 

 

 

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Recorded investment of defaults

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

 2013 

Commercial:

  

  

  

  

  

  

  

Commercial and industrial

$

 16 

 174 

  

 25 

 195 

  

Real estate mortgage

  

 21 

 116 

  

 63 

 177 

  

Real estate construction

  

 - 

 24 

  

 3 

 52 

  

Foreign

  

 - 

 - 

  

 5 

 - 

  

  

Total commercial

  

 37 

 314 

  

 96 

 424 

Consumer:

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 78 

 81 

  

 157 

 164 

  

Real estate 1-4 family junior lien mortgage

  

 8 

 7 

  

 15 

 17 

  

Credit card

  

 13 

 16 

  

 26 

 32 

  

Automobile

  

 3 

 5 

  

 7 

 9 

  

  

Total consumer

  

 102 

 109 

  

 205 

 222 

  

  

  

Total

$

 139 

 423 

  

 301 

 646 

  

  

  

  

  

Purchased Credit-Impaired Loans

Substantially all of our PCI loans were acquired from Wachovia on December 31, 2008. The following table presents PCI loans net of any remaining purchase accounting adjustments. Real estate 1-4 family first mortgage PCI loans are predominantly Pick-a-Pay loans.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

December 31,

(in millions)

  

 2014 

  

 2013 

 2008 

Commercial:

  

  

  

  

  

  

Commercial and industrial

$

 192 

  

 215 

 4,580 

  

Real estate mortgage

  

 1,003 

  

 1,136 

 5,803 

  

Real estate construction

  

 305 

  

 433 

 6,462 

  

Foreign

  

 467 

  

 720 

 1,859 

  

  

Total commercial

  

 1,967 

  

 2,504 

 18,704 

Consumer:

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 22,888 

  

 24,100 

 39,214 

  

Real estate 1-4 family junior lien mortgage

  

 112 

  

 123 

 728 

  

Automobile

  

 - 

  

 - 

 151 

  

  

Total consumer

  

 23,000 

  

 24,223 

 40,093 

  

  

  

Total PCI loans (carrying value)

$

 24,967 

  

 26,727 

 58,797 

Total PCI loans (unpaid principal balance)

$

 35,471 

  

 38,229 

 98,182 

  

  

  

  

  

  

  

  

  

  

101

 


 

      

Accretable Yield   The excess of cash flows expected to be collected over the carrying value of PCI loans is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loan, or pools of loans. The accretable yield is affected by:

·          changes in interest rate indices for variable rate PCI loans – expected future cash flows are based on the variable rates in effect at the time of the regular evaluations of cash flows expected to be collected;

·          changes in prepayment assumptions – prepayments affect the estimated life of PCI loans which may change the amount of interest income, and possibly principal, expected to be collected; and

·          changes in the expected principal and interest payments over the estimated life – updates to expected cash flows are driven by the credit outlook and actions taken with borrowers. Changes in expected future cash flows from loan modifications are included in the regular evaluations of cash flows expected to be collected.

 

The change in the accretable yield related to PCI loans is presented in the following table.

 

  

  

  

  

  

  

  

  

(in millions)

  

  

Balance, December 31, 2008  

$

 10,447 

  

Addition of accretable yield due to acquisitions  

  

 132 

  

Accretion into interest income (1)

  

 (11,184) 

  

Accretion into noninterest income due to sales (2)

  

 (393) 

  

Reclassification from nonaccretable difference for loans with improving credit-related cash flows  

  

 6,325 

  

Changes in expected cash flows that do not affect nonaccretable difference (3)

  

 12,065 

Balance, December 31, 2013  

  

 17,392 

  

Addition of accretable yield due to acquisitions  

  

 - 

  

Accretion into interest income (1)

  

 (737) 

  

Accretion into noninterest income due to sales (2)

  

 (35) 

  

Reclassification from nonaccretable difference for loans with improving credit-related cash flows  

  

 2,076 

  

Changes in expected cash flows that do not affect nonaccretable difference (3)

  

 (278) 

Balance, June 30, 2014  

$

 18,418 

  

  

  

  

  

  

  

  

Balance, March 31, 2014  

$

 17,086 

  

Addition of accretable yield due to acquisitions  

  

 - 

  

Accretion into interest income (1)

  

 (362) 

  

Accretion into noninterest income due to sales (2)

  

 - 

  

Reclassification from nonaccretable difference for loans with improving credit-related cash flows  

  

 1,966 

  

Changes in expected cash flows that do not affect nonaccretable difference (3)

  

 (272) 

Balance, June 30, 2014  

$

 18,418 

  

  

  

  

  

  

  

  

(1)

Includes accretable yield released as a result of settlements with borrowers, which is included in interest income.

(2)

Includes accretable yield released as a result of sales to third parties, which is included in noninterest income.

(3)

Represents changes in cash flows expected to be collected due to the impact of modifications, changes in prepayment assumptions, changes in interest rates on variable rate PCI loans and sales to third parties.

  

  

  

  

  

  

  

  

102

 


 

Note 5:    Loans and Allowance for Credit Losses   (continued)  

 

PCI Allowance   Based on our regular evaluation of estimates of cash flows expected to be collected, we may establish an allowance for a PCI loan or pool of loans, with a charge to income though the provision for losses. The following table summarizes the changes in allowance for PCI loan losses.

 

 

 

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other

  

(in millions)

  

Commercial

Pick-a-Pay

consumer

Total

Balance, December 31, 2008

$

 - 

 - 

 - 

 - 

  

Provision for loan losses

  

 1,641 

 - 

 107 

 1,748 

  

Charge-offs

  

 (1,615) 

 - 

 (103) 

 (1,718) 

Balance, December 31, 2013

  

 26 

 - 

 4 

 30 

  

Provision (reversal of provision) for loan losses

  

 (19) 

 - 

 1 

 (18) 

  

Charge-offs

  

 (2) 

 - 

 (2) 

 (4) 

Balance, June 30, 2014

$

 5 

 - 

 3 

 8 

  

  

  

  

  

  

  

  

Balance, March 31, 2014

$

 18 

 - 

 3 

 21 

  

Reversal of provision for loan losses

  

 (14) 

 - 

 - 

 (14) 

  

Recoveries

  

 1 

 - 

 - 

 1 

Balance, June 30, 2014

$

 5 

 - 

 3 

 8 

  

  

  

  

  

  

  

  

Commercial PCI Credit Quality Indicators  The following

table provides a breakdown of commercial PCI loans by risk category.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial

Real

Real

  

  

  

  

  

  

  

  

and

estate

estate

  

  

(in millions)

  

industrial

mortgage

construction

Foreign

Total

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By risk category:

  

  

  

  

  

  

Pass

$

 114 

 301 

 162 

 1 

 578 

  

Criticized

  

 78 

 702 

 143 

 466 

 1,389 

  

  

Total commercial PCI loans

$

 192 

 1,003 

 305 

 467 

 1,967 

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

By risk category:

  

  

  

  

  

  

Pass

$

 118 

 316 

 160 

 8 

 602 

  

Criticized

  

 97 

 820 

 273 

 712 

 1,902 

  

  

Total commercial PCI loans

$

 215 

 1,136 

 433 

 720 

 2,504 

  

  

  

  

  

  

  

  

  

  

  

103

 


 

      

 

The following table provides past due information for commercial PCI loans.

 

  

  

  

  

  

  

  

  

  

  

  

  

Commercial

Real

Real

  

  

  

  

  

  

  

  

and

estate

estate

  

  

(in millions)

  

industrial

mortgage

construction

Foreign

Total

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By delinquency status:

  

  

  

  

  

  

Current-29 DPD and still accruing

$

 190 

 952 

 265 

 414 

 1,821 

  

30-89 DPD and still accruing

  

 - 

 5 

 11 

 - 

 16 

  

90+ DPD and still accruing

  

 2 

 46 

 29 

 53 

 130 

  

  

Total commercial PCI loans

$

 192 

 1,003 

 305 

 467 

 1,967 

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

By delinquency status:

  

  

  

  

  

  

Current-29 DPD and still accruing

$

 210 

 1,052 

 355 

 632 

 2,249 

  

30-89 DPD and still accruing

  

 5 

 41 

 2 

 - 

 48 

  

90+ DPD and still accruing

  

 - 

 43 

 76 

 88 

 207 

  

  

Total commercial PCI loans

$

 215 

 1,136 

 433 

 720 

 2,504 

  

  

  

  

  

  

  

  

  

  

  

Consumer PCI Credit Quality Indicators   Our consumer PCI loans were aggregated into several pools of loans at acquisition. Below, we have provided credit quality indicators based on the unpaid principal balance (adjusted for write-downs) of the individual loans included in the pool, but we have not allocated the remaining purchase accounting adjustments, which were established at a pool level. The following table provides the delinquency status of consumer PCI loans.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

Real estate

Real estate

  

  

Real estate

Real estate

  

  

  

  

  

  

  

1-4 family

1-4 family

  

  

1-4 family

1-4 family

  

  

  

  

  

  

  

first

junior lien

  

  

first

junior lien

  

(in millions)

  

mortgage

mortgage

Total

  

mortgage

mortgage

Total

By delinquency status:

  

  

  

  

  

  

  

  

  

Current-29 DPD and still accruing

$

 20,243 

 174 

 20,417 

  

 20,712 

 171 

 20,883 

  

30-59 DPD and still accruing

  

 2,029 

 7 

 2,036 

  

 2,185 

 8 

 2,193 

  

60-89 DPD and still accruing

  

 1,027 

 3 

 1,030 

  

 1,164 

 4 

 1,168 

  

90-119 DPD and still accruing

  

 434 

 2 

 436 

  

 457 

 2 

 459 

  

120-179 DPD and still accruing

  

 424 

 2 

 426 

  

 517 

 4 

 521 

  

180+ DPD and still accruing

  

 3,948 

 91 

 4,039 

  

 4,291 

 95 

 4,386 

  

  

Total consumer PCI loans (adjusted unpaid principal balance)

$

 28,105 

 279 

 28,384 

  

 29,326 

 284 

 29,610 

  

  

Total consumer PCI loans (carrying value)

$

 22,888 

 112 

 23,000 

  

 24,100 

 123 

 24,223 

  

  

  

  

  

  

  

  

  

  

  

  

  

104

 


 

Note 5:    Loans and Allowance for Credit Losses   (continued)  

 

 

The following table provides FICO scores for consumer PCI loans.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

Real estate

Real estate

  

  

Real estate

Real estate

  

  

  

  

  

  

1-4 family

1-4 family

  

  

1-4 family

1-4 family

  

  

  

  

  

  

  

first

junior lien

  

  

first

junior lien

  

(in millions)

  

mortgage

mortgage

Total

  

mortgage

mortgage

Total

By FICO:

  

  

  

  

< 600

$

 8,619 

 87 

 8,706 

  

 9,933 

 101 

 10,034 

  

600-639

  

 5,792 

 55 

 5,847 

  

 6,029 

 60 

 6,089 

  

640-679

  

 6,855 

 68 

 6,923 

  

 6,789 

 70 

 6,859 

  

680-719

  

 3,922 

 39 

 3,961 

  

 3,732 

 35 

 3,767 

  

720-759

  

 1,707 

 11 

 1,718 

  

 1,662 

 11 

 1,673 

  

760-799

  

 887 

 6 

 893 

  

 865 

 5 

 870 

  

800+

  

 205 

 1 

 206 

  

 198 

 1 

 199 

No FICO available

  

 118 

 12 

 130 

  

 118 

 1 

 119 

  

  

Total consumer PCI loans (adjusted unpaid principal balance)

$

 28,105 

 279 

 28,384 

  

 29,326 

 284 

 29,610 

  

  

Total consumer PCI loans (carrying value)

$

 22,888 

 112 

 23,000 

  

 24,100 

 123 

 24,223 

  

  

  

  

  

  

  

  

  

  

  

  

  

The following table shows the distribution of consumer PCI loans by LTV for real estate 1-4 family first mortgages and by CLTV  for real estate 1-4 family junior lien mortgages.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

Real estate

Real estate

  

  

Real estate

Real estate

  

  

  

  

  

  

  

1-4 family

1-4 family

  

  

1-4 family

1-4 family

  

  

  

  

  

  

  

first

junior lien

  

  

first

junior lien

  

  

  

  

  

  

  

mortgage

mortgage

  

  

mortgage

mortgage

  

(in millions)

  

by LTV

by CLTV

Total

  

by LTV

by CLTV

Total

By LTV/CLTV:

  

  

  

  

  

  

  

  

  

0-60%

$

 2,926 

 32 

 2,958 

  

 2,501 

 32 

 2,533 

  

60.01-80%

  

 9,384 

 49 

 9,433 

  

 8,541 

 42 

 8,583 

  

80.01-100%

  

 9,626 

 93 

 9,719 

  

 10,366 

 88 

 10,454 

  

100.01-120% (1)

  

 3,988 

 61 

 4,049 

  

 4,677 

 67 

 4,744 

  

> 120% (1)

  

 2,171 

 43 

 2,214 

  

 3,232 

 54 

 3,286 

No LTV/CLTV available

  

 10 

 1 

 11 

  

 9 

 1 

 10 

  

  

Total consumer PCI loans (adjusted unpaid principal balance)

$

 28,105 

 279 

 28,384 

  

 29,326 

 284 

 29,610 

  

  

Total consumer PCI loans (carrying value)

$

 22,888 

 112 

 23,000 

  

 24,100 

 123 

 24,223 

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess of 100% LTV/CLTV.

105

 


 

   

Note 6:   Other Assets                                                                                                                                                  

The components of other assets were:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

Dec. 31,

(in millions)

  

 2014 

 2013 

Nonmarketable equity investments:

  

  

  

Cost method:

  

  

  

  

  

Private equity

$

 2,310 

 2,308 

  

  

Federal bank stock

  

 4,546 

 4,670 

  

  

  

Total cost method

  

 6,856 

 6,978 

  

Equity method:

  

  

  

  

  

LIHTC investments (1)

  

 6,347 

 6,209 

  

  

Private equity and other

  

 5,386 

 5,782 

  

  

  

Total equity method

  

 11,733 

 11,991 

  

Fair value (2)

  

 1,902 

 1,386 

  

  

  

  

Total nonmarketable

  

  

  

  

  

  

  

  

equity investments

 20,491 

 20,355 

Corporate/bank-owned life insurance

  

 18,837 

 18,738 

Accounts receivable

  

 22,628 

 21,422 

Interest receivable

  

 5,016 

 5,019 

Core deposit intangibles

  

 4,117 

 4,674 

Customer relationship and

  

  

  

  

other amortized intangibles

  

 955 

 1,084 

Foreclosed assets:

  

  

  

  

Residential real estate:

  

  

  

  

  

Government insured/guaranteed (3)

  

 2,359 

 2,093 

  

  

Non-government insured/guaranteed

  

 630 

 814 

  

Non-residential real estate

  

 1,118 

 1,030 

Operating lease assets

  

 2,409 

 2,047 

Due from customers on acceptances

 234 

 279 

Other (4)

  

 13,538 

 8,787 

  

  

  

  

  

Total other assets

$

 92,332 

 86,342 

  

  

  

  

  

  

  

  

  

(1)

Represents low income housing tax credit investments.

(2)

Represents nonmarketable equity investments for which we have elected the fair value option. See Note 13 (Fair Values of Assets and Liabilities) for additional information.

(3)

These are foreclosed real estate resulting from government insured/guaranteed loans. Both principal and interest related to these foreclosed real estate assets are collectible because the loans were predominantly insured by the FHA or guaranteed by the VA.

(4)

Includes derivatives designated as hedging instruments, free-standing derivatives (economic hedges), and derivative loan commitments, which are carried at fair value. See Note 12 (Derivatives) for additional information.

  

  

  

  

  

  

  

  

  

Income (expense) related to nonmarketable equity investments was:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter

  

Six months

  

  

  

  

  

ended June 30,

  

ended June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

 2013 

Net realized gains

  

  

  

  

  

  

  

from nonmarketable

  

  

  

  

  

  

  

equity investments

$

381 

 179 

  

 932 

 224 

All other

  

(209)

 (128) 

  

 (432) 

 (91) 

  

Total

$

172 

 51 

  

 500 

 133 

106

 


 

      

Note 7: Securitizations and Variable Interest Entities                                                         

 

Involvement with SPEs

In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. Generally, SPEs are formed in connection with securitization transactions and are considered variable interest entities (VIEs). For further description of our involvement with SPEs, see Note 8 (Securitizations and Variable Interest Entities) to Financial Statements in our 2013 Form 10-K.

We have segregated our involvement with VIEs between those VIEs which we consolidate, those which we do not consolidate and those for which we account for the transfers of financial assets as secured borrowings. Secured borrowings are transactions involving transfers of our financial assets to third parties that are accounted for as financings with the assets pledged as collateral. Accordingly, the transferred assets remain recognized on our balance sheet. Subsequent tables within this Note further segregate these transactions by structure type.

The classifications of assets and liabilities in our balance sheet associated with our transactions with VIEs follow:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Transfers that

  

  

  

  

  

  

VIEs that we

  

VIEs

we account

  

  

  

  

  

  

do not

  

that we

for as secured

  

  

(in millions)

consolidate

consolidate

borrowings

  

Total

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cash

$

 - 

  

 175 

  

 33 

  

 208 

Trading assets

  

 1,008 

  

 34 

  

 210 

  

 1,252 

Investment securities (1)

  

 18,143 

  

 1,134 

  

 7,920 

  

 27,197 

Mortgages held for sale

  

 - 

  

 - 

  

 - 

  

 - 

Loans

  

 7,206 

  

 5,543 

  

 5,646 

  

 18,395 

Mortgage servicing rights

  

 13,208 

  

 - 

  

 - 

  

 13,208 

Other assets

  

 6,300 

  

 326 

  

 93 

  

 6,719 

  

Total assets

  

 45,865 

  

 7,212 

  

 13,902 

  

 66,979 

Short-term borrowings

  

 - 

  

 16 

  

 5,621 

  

 5,637 

Accrued expenses and other liabilities  

  

 2,962 

  

 57 

(2)

 3 

  

 3,022 

Long-term debt  

  

 - 

  

 2,114 

(2)

 5,359 

  

 7,473 

  

Total liabilities

  

 2,962 

  

 2,187 

  

 10,983 

  

 16,132 

Noncontrolling interests

  

 - 

  

 4 

  

 - 

  

 4 

  

  

Net assets

$

 42,903 

  

 5,021 

  

 2,919 

  

 50,843 

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cash

$

 - 

  

 165 

  

 7 

  

 172 

Trading assets

  

 1,206 

  

 162 

  

 193 

  

 1,561 

Investment securities (1)

  

 18,795 

  

 1,352 

  

 8,976 

  

 29,123 

Mortgages held for sale

  

 - 

  

 38 

  

 - 

  

 38 

Loans

  

 7,652 

  

 6,058 

  

 6,021 

  

 19,731 

Mortgage servicing rights

  

 14,859 

  

 - 

  

 - 

  

 14,859 

Other assets

  

 6,151 

  

 347 

  

 110 

  

 6,608 

  

Total assets  

  

 48,663 

  

 8,122 

  

 15,307 

  

 72,092 

Short-term borrowings

  

 - 

  

 29 

  

 7,871 

  

 7,900 

Accrued expenses and other liabilities

  

 3,464 

  

 99 

(2)

 3 

  

 3,566 

Long-term debt

  

 - 

  

 2,356 

(2)

 5,673 

  

 8,029 

  

Total liabilities

  

 3,464 

  

 2,484 

  

 13,547 

  

 19,495 

Noncontrolling interests

  

 - 

  

 5 

  

 - 

  

 5 

  

  

Net assets

$

 45,199 

  

 5,633 

  

 1,760 

  

 52,592 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and GNMA.

(2)   Includes the following VIE liabilities at June 30, 2014, and December 31, 2013, respectively, with recourse to the general credit of Wells Fargo: Accrued expenses and other liabilities, $9 million at each date; and Long-term debt, $19 million and $29 million.

 

 

 

Transactions with Unconsolidated VIEs

Our transactions with VIEs include securitizations of residential mortgage loans, CRE loans, student loans and auto loans and leases; investment and financing activities involving collateralized debt obligations (CDOs) backed by asset-backed and CRE securities, collateralized loan obligations (CLOs) backed by corporate loans, and other types of structured financing. We have various forms of involvement with VIEs, including holding senior or subordinated

107

 


 

      

interests, entering into liquidity arrangements, credit default swaps and other derivative contracts. Involvements with these unconsolidated VIEs are recorded on our balance sheet primarily in trading assets, investment securities, loans, MSRs, other assets and other liabilities, as appropriate.

The following tables provide a summary of unconsolidated VIEs with which we have significant continuing involvement, but we are not the primary beneficiary. We do not consider our continuing involvement in an unconsolidated VIE to be significant when it relates to third-party sponsored VIEs for which we were not the transferor or if we were the sponsor but do not have any other significant continuing involvement.

Significant continuing involvement includes transactions where we were the sponsor or transferor and have other significant forms of involvement. Sponsorship includes transactions with unconsolidated VIEs where we solely or materially participated in the initial design or structuring of the entity or marketing of the transaction to investors. When we transfer assets to a VIE and account for the transfer as a sale, we are considered the transferor. We consider investments in securities held outside of trading, loans, guarantees, liquidity agreements, written options and servicing of collateral to be other forms of involvement that may be significant. We have excluded certain transactions with unconsolidated VIEs from the balances presented in the following table where we have determined that our continuing involvement is not significant due to the temporary nature and size of our variable interests, because we were not the transferor or because we were not involved in the design or operations of the unconsolidated VIEs.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Carrying value - asset (liability)

  

  

  

  

  

  

  

  

  

  

  

Other

  

  

  

  

  

  

  

Total

  

Debt and

  

  

commitments

  

  

  

  

  

  

  

VIE

  

equity

Servicing

  

and

Net

(in millions)

  

assets

interests (1)

assets

Derivatives

guarantees

assets

June 30, 2014

  

  

  

  

  

  

  

Residential mortgage loan

  

  

  

  

  

  

  

  

  

securitizations:

  

  

  

  

  

  

  

  

  

  

Conforming (2)

$

 1,298,082 

  

 2,347 

 12,722 

 - 

 (696) 

 14,373 

  

  

Other/nonconforming

  

 35,080 

  

 1,557 

 226 

 - 

 (10) 

 1,773 

Commercial mortgage securitizations

  

 159,799 

  

 8,489 

 239 

 220 

 - 

 8,948 

Collateralized debt obligations:

  

  

  

  

  

  

  

  

  

  

Debt securities

  

 5,324 

  

 36 

 - 

 200 

 (108) 

 128 

  

  

Loans (3)

  

 5,776 

  

 5,649 

 - 

 - 

 - 

 5,649 

Asset-based finance structures

  

 9,179 

  

 5,885 

 - 

 (62) 

 - 

 5,823 

Tax credit structures

  

 22,132 

  

 6,631 

 - 

 - 

 (2,040) 

 4,591 

Collateralized loan obligations

  

 2,702 

  

 747 

 - 

 - 

 - 

 747 

Investment funds

  

 3,280 

  

 51 

 - 

 - 

 - 

 51 

Other (4)

  

 10,841 

  

 811 

 21 

 5 

 (17) 

 820 

  

  

Total

$

 1,552,195 

  

 32,203 

 13,208 

 363 

 (2,871) 

 42,903 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Maximum exposure to loss

  

  

  

  

  

  

  

  

  

  

  

Other

  

  

  

  

  

  

  

  

  

Debt and

  

  

commitments

  

  

  

  

  

  

  

  

  

equity

Servicing

  

and

Total

  

  

  

interests

assets

Derivatives

guarantees

exposure

Residential mortgage loan

  

  

  

  

  

  

  

  

  

securitizations:

  

  

  

  

  

  

  

  

  

  

Conforming

  

  

$

 2,347 

 12,722 

 - 

 2,366 

 17,435 

  

  

Other/nonconforming

  

  

  

 1,557 

 226 

 - 

 347 

 2,130 

Commercial mortgage securitizations

  

  

  

 8,489 

 239 

 244 

 - 

 8,972 

Collateralized debt obligations:

  

  

  

  

  

  

  

  

  

  

Debt securities

  

  

  

 36 

 - 

 200 

 108 

 344 

  

  

Loans (3)

  

  

  

 5,649 

 - 

 - 

 - 

 5,649 

Asset-based finance structures

  

  

  

 5,885 

 - 

 62 

 995 

 6,942 

Tax credit structures

  

  

  

 6,631 

 - 

 - 

 506 

 7,137 

Collateralized loan obligations

  

  

  

 747 

 - 

 - 

 39 

 786 

Investment funds

  

  

  

 51 

 - 

 - 

 18 

 69 

Other (4)

  

  

  

 811 

 21 

 133 

 167 

 1,132 

  

  

Total

  

  

$

 32,203 

 13,208 

 639 

 4,546 

 50,596 

  

  

  

  

  

  

  

  

  

  

  

  

  

(continued on following page)

  

  

  

  

  

  

  

108

 


 

Note 7:    Securitizations and Variable Interest Entities   (continued)  

 

 

  

(continued from previous page)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Carrying value - asset (liability)

  

  

  

  

  

  

  

  

  

  

  

Other

  

  

  

  

  

  

  

Total

  

Debt and

  

  

commitments

  

  

  

  

  

  

  

VIE

  

equity

Servicing

  

and

Net

(in millions)

  

assets

  

interests (1)

assets

Derivatives

guarantees

assets

December 31, 2013

  

  

  

  

  

  

  

  

Residential mortgage loan securitizations:

  

  

  

  

  

  

  

  

  

Conforming (2)

$

 1,314,285 

  

 2,721 

 14,253 

 - 

 (745) 

 16,229 

  

Other/nonconforming

  

 38,330 

  

 1,739 

 258 

 - 

 (26) 

 1,971 

Commercial mortgage securitizations

  

 170,088 

  

 7,627 

 325 

 209 

 - 

 8,161 

Collateralized debt obligations:

  

  

  

  

  

  

  

  

  

Debt securities

  

 6,730 

  

 37 

 - 

 214 

 (130) 

 121 

  

Loans (3)

  

 6,021 

  

 5,888 

 - 

 - 

 - 

 5,888 

Asset-based finance structures

  

 11,415 

  

 6,857 

 - 

 (84) 

 - 

 6,773 

Tax credit structures

  

 23,112 

  

 6,455 

 - 

 - 

 (2,213) 

 4,242 

Collateralized loan obligations

  

 4,382 

  

 1,061 

 - 

 - 

 - 

 1,061 

Investment funds

  

 3,464 

  

 54 

 - 

 - 

 - 

 54 

Other (4)

  

 10,343 

  

 860 

 23 

 5 

 (189) 

 699 

  

Total

$

 1,588,170 

  

 33,299 

 14,859 

 344 

 (3,303) 

 45,199 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Maximum exposure to loss

  

  

  

  

  

  

  

  

  

  

  

Other

  

  

  

  

  

  

  

  

  

Debt and

  

  

commitments

  

  

  

  

  

  

  

  

  

equity

Servicing

  

and

Total

  

  

  

  

interests

assets

Derivatives

guarantees

exposure

Residential mortgage loan securitizations:

  

  

  

  

  

  

  

  

  

Conforming

  

  

$

 2,721 

 14,253 

 - 

 2,287 

 19,261 

  

Other/nonconforming

  

  

  

 1,739 

 258 

 - 

 346 

 2,343 

Commercial mortgage securitizations

  

  

  

 7,627 

 325 

 322 

 - 

 8,274 

Collateralized debt obligations:

  

  

  

  

  

  

  

  

  

Debt securities

  

  

  

 37 

 - 

 214 

 130 

 381 

  

Loans (3)

  

  

  

 5,888 

 - 

 - 

 - 

 5,888 

Asset-based finance structures

  

  

  

 6,857 

 - 

 84 

 1,665 

 8,606 

Tax credit structures

  

  

  

 6,455 

 - 

 - 

 626 

 7,081 

Collateralized loan obligations

  

  

  

 1,061 

 - 

 - 

 159 

 1,220 

Investment funds

  

  

  

 54 

 - 

 - 

 31 

 85 

Other (4)

  

  

  

 860 

 23 

 178 

 188 

 1,249 

  

Total

  

  

$

 33,299 

 14,859 

 798 

 5,432 

 54,388 

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Includes total equity interests of $7.0 billion and $6.9 billion  at June 30, 2014, and December 31, 2013, respectively. Also includes debt interests in the form of both loans and securities. Excludes certain debt securities held related to loans serviced for FNMA, FHLMC and GNMA.

(2)   Excludes assets and related liabilities with a recorded carrying value on our balance sheet of $1.4 billion and $2.1 billion at June 30, 2014, and December 31, 2013, respectively, for certain delinquent loans that are eligible for repurchase primarily from GNMA loan securitizations. The recorded carrying value represents the amount that would be payable if the Company was to exercise the repurchase option. The carrying amounts are excluded from the table because the loans eligible for repurchase do not represent interests in the VIEs.

(3)   Represents senior loans to trusts that are collateralized by asset-backed securities. The trusts invest primarily in senior tranches from a diversified pool of primarily U.S. asset securitizations, of which all are current and 71% and 72% were rated as investment grade by the primary rating agencies at June 30, 2014, and December 31, 2013, respectively. These senior loans are accounted for at amortized cost and are subject to the Company’s allowance and credit charge-off policies.

(4)   Includes structured financing, auto loan and lease securitizations and credit-linked note structures. Also contains investments in auction rate securities (ARS) issued by VIEs that we do not sponsor and, accordingly, are unable to obtain the total assets of the entity.

109

 


 

      

In the two preceding tables, “Total VIE assets” represents the remaining principal balance of assets held by unconsolidated VIEs using the most current information available. For VIEs that obtain exposure to assets synthetically through derivative instruments, the remaining notional amount of the derivative is included in the asset balance. “Carrying value” is the amount in our consolidated balance sheet related to our involvement with the unconsolidated VIEs. “Maximum exposure to loss” from our involvement with off-balance sheet entities, which is a required disclosure under GAAP, is determined as the carrying value of our involvement with off-balance sheet (unconsolidated) VIEs plus the remaining undrawn liquidity and lending commitments, the notional amount of net written derivative contracts, and generally the notional amount of, or stressed loss estimate for, other commitments and guarantees. It represents estimated loss that would be incurred under severe, hypothetical circumstances, for which we believe the possibility is extremely remote, such as where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss.

For complete descriptions of our types of transactions with unconsolidated VIEs with which we have a significant continuing involvement, but we are not the primary beneficiary, see Note 8 (Securitizations and Variable Interest Entities) to Financial Statements in our 2013 Form 10-K.

 

OTHER TRANSACTIONS WITH VIEs   Auction rate securities (ARS) are debt instruments with long-term maturities, which re-price more frequently, and preferred equities with no maturity. At June 30, 2014, we held in our available-for-sale securities portfolio $605 million of ARS issued by VIEs redeemed pursuant to agreements entered into in 2008 and 2009, compared with $653 million at December 31, 2013.

We do not consolidate the VIEs that issued the ARS because we do not have power over the activities of the VIEs.

 

TRUST PREFERRED SECURITIES   VIEs that we wholly own issue debt securities or preferred equity to third party investors. All of the proceeds of the issuance are invested in debt securities or preferred equity that we issue to the VIEs. The VIEs’ operations and cash flows relate only to the issuance, administration and repayment of the securities held by third parties. We do not consolidate these VIEs because the sole assets of the VIEs are receivables from us, even though we own all of the voting equity shares of the VIEs, have fully guaranteed the obligations of the VIEs and may have the right to redeem the third party securities under certain circumstances. In our consolidated balance sheet at June 30, 2014, and December 31, 2013, we reported the debt securities issued to the VIEs as long-term junior subordinated debt with a carrying value of $2.0 billion  and $1.9 billion, respectively, and the preferred equity securities issued to the VIEs as preferred stock with a carrying value of $2.5 billion at both dates. These amounts are in addition to the involvements in these VIEs included in the preceding table.

 

Securitization Activity Related to Unconsolidated VIEs

We use VIEs to securitize consumer and CRE loans and other types of financial assets, including student loans and auto loans. We typically retain the servicing rights from these sales and may continue to hold other beneficial interests in the VIEs. We may also provide liquidity to investors in the beneficial interests and credit enhancements in the form of standby letters of credit. Through these securitizations we may be exposed to liability under limited amounts of recourse as well as standard representations and warranties we make to purchasers and issuers. The following table presents the cash flows with our securitization trusts that were involved in transfers accounted for as sales.

110

 


 

Note 7:    Securitizations and Variable Interest Entities   (continued)  

 

 

  

  

  

  

  

  

  

  

  

  

  

 2014 

  

 2013 

  

  

  

  

Other

  

  

Other

  

  

Mortgage

financial

  

Mortgage

financial

(in millions)

  

loans

assets

  

loans

assets

Quarter ended June 30,

  

  

  

  

  

  

Sales proceeds from securitizations

$

 39,830 

 - 

  

 115,287 

 - 

Fees from servicing rights retained

  

 979 

 2 

  

 1,051 

 3 

Other interests held

  

 369 

 18 

  

 441 

 21 

Purchases of delinquent assets

  

 - 

 - 

  

 7 

 - 

Servicing advances, net of repayments

  

 138 

 - 

  

 12 

 - 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

  

  

  

  

  

  

Sales proceeds from securitizations

$

 77,444 

 - 

  

 221,593 

 - 

Fees from servicing rights retained

  

 2,007 

 4 

  

 2,127 

 5 

Other interests held

  

 662 

 39 

  

 847 

 48 

Purchases of delinquent assets

  

 3 

 - 

  

 16 

 - 

Servicing advances, net of repayments

  

 (135) 

 - 

  

 814 

 - 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

In the second quarter and first half of 2014, we recognized net gains of $68 million and $97 million, respectively, from transfers accounted for as sales of financial assets in securitizations, compared with $46 million and $110 million, respectively, in the same periods of 2013. These net gains primarily relate to commercial mortgage securitizations and residential mortgage securitizations where the loans were not already carried at fair value.

Sales with continuing involvement during the second quarter and first half of 2014 and 2013 predominantly related to securitizations of residential mortgages that are sold to the government-sponsored entities (GSEs), including FNMA, FHLMC and GNMA (conforming residential mortgage securitizations). During the second quarter and first half of 2014, we transferred $36.9 billion and $70.5 billion respectively, in fair value of conforming residential mortgages to unconsolidated VIEs and recorded the transfers as sales, compared with $111.2 billion and $211.9 billion, respectively in the same periods of 2013. Substantially all of these transfers did not result in a gain or loss because the loans were already carried at fair value. In connection with all of these transfers, in the first half of 2014 we recorded a $560 million servicing asset, measured at fair value using a Level 3 measurement technique, and a $22 million liability for repurchase losses which reflects management’s estimate of probable losses related to various representations and warranties for the loans transferred, initially measured at fair value. In the first half of 2013, we recorded a $2.0 billion servicing asset and a $98 million liability.


We used the following key weighted-average assumptions to measure mortgage servicing assets at the date of securitization:

 

  

  

  

  

  

  

  

  

  

Residential mortgage

  

  

  

servicing rights

  

  

  

 2014 

  

2013 

Quarter ended June 30,

  

  

  

  

Prepayment speed (1)

  

 12.9 

%

 11.7 

Discount rate

  

 7.3 

  

 7.1 

Cost to service ($ per loan) (2)

$

 301 

  

 199 

  

  

  

  

  

  

Six months ended June 30,

  

  

  

  

Prepayment speed (1)

  

 12.5 

%

 11.8 

Discount rate

  

 7.6 

  

 7.1 

Cost to service ($ per loan) (2)

$

 268 

  

 189 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   The prepayment speed assumption for residential mortgage servicing rights includes a blend of prepayment speeds and default rates. Prepayment speed assumptions are influenced by mortgage interest rate inputs as well as our estimation of drivers of borrower behavior.

(2)   Includes costs to service and unreimbursed foreclosure costs.

 

During the second quarter and first half of 2014, we transferred $1.0 billion and $2.3 billion, respectively, in fair value of commercial mortgages to unconsolidated VIEs and recorded the transfers as sales, compared with $1.5 billion and $3.2 billion in the same periods of 2013, respectively. These transfers resulted in gains of $17 million and $41 million in the second quarter and first half of 2014, respectively, because the loans were carried at lower of cost or market value (LOCOM), compared with gains of $38 million and $100 million in the second quarter and first half of 2013. In connection with these transfers, in the first half of 2014 we recorded a servicing asset of $5 million, initially measured at fair value using a Level 3 measurement technique, and securities available-for-sale of $100 million, classified as Level 2. In the first half of 2013, we recorded a servicing asset of $9 million, using a Level 3 measurement technique, and available-for-sale securities of $23 million, classified as Level 2.

111

 


 

      

The following table provides key economic assumptions and the sensitivity of the current fair value of residential mortgage servicing rights and other retained interests to immediate adverse changes in those assumptions. “Other interests held” relate predominantly to residential and commercial mortgage loan securitizations. Residential mortgage-backed securities retained in securitizations issued through GSEs, such as FNMA, FHLMC and GNMA, are excluded from the table because these securities have a remote risk of credit loss due to the GSE guarantee. These securities also have economic characteristics similar to GSE mortgage-backed securities that we purchase, which are not included in the table. Subordinated interests include only those bonds whose credit rating was below AAA by a major rating agency at issuance. Senior interests include only those bonds whose credit rating was AAA by a major rating agency at issuance. The information presented excludes trading positions held in inventory.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other interests held

  

  

  

  

  

Residential

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

mortgage

Interest-

  

  

Consumer

  

Commercial (2)

  

  

  

  

  

servicing

  

only

  

Subordinated

  

Senior

Subordinated

  

Senior

($ in millions, except cost to service amounts)

  

rights (1)

  

strips

  

  

bonds

  

bonds

  

bonds

  

bonds

Fair value of interests held at June 30, 2014

$

 13,900 

  

 136 

  

  

 38 

  

 - 

  

 319 

  

 642 

Expected weighted-average life (in years)

  

 5.9 

  

 3.8 

  

  

 5.5 

  

 - 

  

 3.3 

  

 5.9 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Key economic assumptions:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Prepayment speed assumption (3)

  

 12.1 

%

 11.3 

  

  

 7.1 

  

 - 

  

  

  

  

  

  

Decrease in fair value from:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

10% adverse change

$

 804 

  

 3 

  

  

 - 

  

 - 

  

  

  

  

  

  

  

25% adverse change

  

 1,913 

  

 6 

  

  

 - 

  

 - 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Discount rate assumption

  

 7.7 

%

 18.7 

  

  

 3.8 

  

 - 

  

 4.4 

  

 3.3 

  

  

Decrease in fair value from:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

100 basis point increase

$

 716 

  

 3 

  

  

 2 

  

 - 

  

 20 

  

 32 

  

  

  

200 basis point increase

  

 1,363 

  

 5 

  

  

 3 

  

 - 

  

 29 

  

 62 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cost to service assumption ($ per loan)

  

 184 

  

  

  

  

  

  

  

  

  

  

  

  

  

Decrease in fair value from:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

10% adverse change

  

 614 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

25% adverse change

  

 1,536 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Credit loss assumption

  

  

  

  

  

  

 0.4 

%

 - 

  

 9.3 

  

 - 

  

  

Decrease in fair value from:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

10% higher losses

  

  

  

  

  

$

 - 

  

 - 

  

 18 

  

 - 

  

  

  

25% higher losses

  

  

  

  

  

  

 - 

  

 - 

  

 26 

  

 - 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair value of interests held at December 31, 2013

$

 15,580 

  

 135 

  

  

 39 

  

 - 

  

 283 

  

 587 

Expected weighted-average life (in years)

  

 6.4 

  

 3.8 

  

  

 5.9 

  

 - 

  

 3.6 

  

 6.3 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Key economic assumptions:

  

  

  

  

  

  

  

  

  

  

  

  

  

Prepayment speed assumption (3)

  

 10.7 

%

 10.7 

  

  

 6.7 

  

 - 

  

  

  

  

  

Decrease in fair value from:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

10% adverse change

$

 864 

  

 3 

  

  

 - 

  

 - 

  

  

  

  

  

  

25% adverse change

  

 2,065 

  

 7 

  

  

 - 

  

 - 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Discount rate assumption

  

 7.8 

%

 18.3 

  

  

 4.4 

  

 - 

  

 4.5 

  

 3.6 

  

  

Decrease in fair value from:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

100 basis point increase

$

 840 

  

 2 

  

  

 2 

  

 - 

  

 30 

  

 30 

  

  

  

200 basis point increase

  

 1,607 

  

 5 

  

  

 4 

  

 - 

  

 38 

  

 58 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cost to service assumption ($ per loan)

  

 191 

  

  

  

  

  

  

  

  

  

  

  

  

  

Decrease in fair value from:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

10% adverse change

  

 636 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

25% adverse change

  

 1,591 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Credit loss assumption

  

  

  

  

  

  

 0.4 

%

 - 

  

 14.2 

  

 - 

  

  

Decrease in fair value from:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

10% higher losses

  

  

  

  

  

$

 - 

  

 - 

  

 29 

  

 - 

  

  

  

25% higher losses

  

  

  

  

  

  

 - 

  

 - 

  

 39 

  

 1 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   See narrative following this table for a discussion of commercial mortgage servicing rights.

(2)   Prepayment speed assumptions do not significantly impact the value of commercial mortgage securitization bonds as the underlying commercial mortgage loans experience significantly lower prepayments due to certain contractual restrictions, impacting the borrower’s ability to prepay the mortgage.

(3)   The prepayment speed assumption for residential mortgage servicing rights includes a blend of prepayment speeds and default rates. Prepayment speed assumptions are influenced by mortgage interest rate inputs as well as our estimation of drivers of borrower behavior.

112

 


 

Note 7:    Securitizations and Variable Interest Entities   (continued)  

 

In addition to residential mortgage servicing rights (MSRs) included in the previous table, we have a small portfolio of commercial MSRs with a fair value of $1.6 billion at both June 30, 2014, and December 31, 2013. The nature of our commercial MSRs, which are carried at LOCOM, is different from our residential MSRs. Prepayment activity on serviced loans does not significantly impact the value of commercial MSRs because, unlike residential mortgages, commercial mortgages experience significantly lower prepayments due to certain contractual restrictions, impacting the borrower’s ability to prepay the mortgage. Additionally, for our commercial MSR portfolio, we are typically master/primary servicer, but not the special servicer, who is separately responsible for the servicing and workout of delinquent and foreclosed loans. It is the special servicer, similar to our role as servicer of residential mortgage loans, who is affected by higher servicing and foreclosure costs due to an increase in delinquent and foreclosed loans. Accordingly, prepayment speeds and costs to service are not key assumptions for commercial MSRs as they do not significantly impact the valuation. The primary economic driver impacting the fair value of our commercial MSRs is forward interest rates, which are derived from market observable yield curves used to price capital markets instruments. Market interest rates most significantly affect interest earned on custodial deposit balances. The sensitivity of the current fair value to an immediate adverse 25% change in the assumption about interest earned on deposit balances at June 30, 2014, and December 31, 2013, results in a decrease in fair value of $176 million and $175 million, respectively. See Note 8 (Mortgage Banking Activities) for further information on our commercial MSRs.

The sensitivities in the preceding paragraph and table are hypothetical and caution should be exercised when relying on this data. Changes in value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in value may not be linear. Also, the effect of a variation in a particular assumption on the value of the other interests held is calculated independently without changing any other assumptions. In reality, changes in one factor may result in changes in others (for example, changes in prepayment speed estimates could result in changes in the credit losses), which might magnify or counteract the sensitivities.

The following table presents information about the principal balances of off-balance sheet securitized loans, including residential mortgages sold to FNMA, FHLMC, GNMA and securitizations where servicing is our only form of continuing involvement. Delinquent loans include loans 90 days or more past due and loans in bankruptcy, regardless of delinquency status. In securitizations where servicing is our only form of continuing involvement, we would only experience a loss if required to repurchase a delinquent loan due to a breach in representations and warranties associated with our loan sale or servicing contracts.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net charge-offs

  

  

  

  

  

  

Total loans

  

Delinquent loans

  

Six months ended

  

  

  

  

  

  

June 30,

Dec. 31

  

June 30,

Dec. 31

  

June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

 2013 

  

 2014 

 2013 

Commercial:

  

  

  

  

  

  

  

  

  

  

Real estate mortgage

$

 116,023 

 119,346 

  

 8,377 

 8,808 

  

 706 

 387 

  

  

Total commercial

  

 116,023 

 119,346 

  

 8,377 

 8,808 

  

 706 

 387 

Consumer:

  

  

  

  

  

  

  

  

  

  

Real estate 1-4 family first mortgage

  

 1,290,759 

 1,313,298 

  

 16,299 

 17,009 

  

 270 

 471 

  

Real estate 1-4 family junior lien mortgage

  

 1 

 1 

  

 - 

 - 

  

 - 

 - 

  

Other revolving credit and installment

  

 1,698 

 1,790 

  

 82 

 99 

  

 - 

 - 

  

  

Total consumer

  

 1,292,458 

 1,315,089 

  

 16,381 

 17,108 

  

 270 

 471 

  

  

  

Total off-balance sheet securitized loans (1)

$

 1,408,481 

 1,434,435 

  

 24,758 

 25,916 

  

 976 

 858 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   At June 30, 2014, and December 31, 2013, the table includes total loans of $1.3 trillion at both dates and delinquent loans of $13.6 billion and $14.0 billion, respectively for FNMA, FHLMC and GNMA. Net charge-offs exclude loans sold to FNMA, FHLMC and GNMA as we do not service or manage the underlying real estate upon foreclosure and, as such, do not have access to net charge-off information.

113

 


 

      

Transactions with Consolidated VIEs and Secured Borrowings

The following table presents a summary of transfers of financial assets accounted for as secured borrowings and involvements with consolidated VIEs. “Consolidated assets” are presented using GAAP measurement methods, which may include fair value, credit impairment or other adjustments, and therefore in some instances will differ from “Total VIE assets.” For VIEs that obtain exposure synthetically through derivative instruments, the remaining notional amount of the derivative is included in “Total VIE assets.” On the consolidated balance sheet, we separately disclose the consolidated assets of certain VIEs that can only be used to settle the liabilities of those VIEs.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Carrying value

  

  

  

  

  

  

Total

  

  

  

Third

  

  

  

  

  

  

  

  

  

  

VIE

Consolidated

  

party

Noncontrolling

  

Net

(in millions)

  

assets

  

assets

  

liabilities

  

interests

  

assets

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Secured borrowings:

  

  

  

  

  

  

  

  

  

  

  

Municipal tender option bond securitizations

$

 9,197 

  

 8,211 

  

 (5,624) 

  

 - 

  

 2,587 

  

Commercial real estate loans

  

 348 

  

 348 

  

 (160) 

  

 - 

  

 188 

  

Residential mortgage securitizations

  

 5,052 

  

 5,343 

  

 (5,199) 

  

 - 

  

 144 

  

  

Total secured borrowings

  

 14,597 

  

 13,902 

  

 (10,983) 

  

 - 

  

 2,919 

Consolidated VIEs:

  

  

  

  

  

  

  

  

  

  

  

Nonconforming residential

  

  

  

  

  

  

  

  

  

  

  

  

mortgage loan securitizations

  

 6,211 

  

 5,530 

  

 (1,983) 

  

 - 

  

 3,547 

  

Structured asset finance

  

 52 

  

 52 

  

 (18) 

  

 - 

  

 34 

  

Investment funds

  

 1,196 

  

 1,196 

  

 (18) 

  

 - 

  

 1,178 

  

Other

  

 449 

  

 434 

  

 (168) 

  

 (4) 

  

 262 

  

  

Total consolidated VIEs

  

 7,908 

  

 7,212 

  

 (2,187) 

  

 (4) 

  

 5,021 

  

  

  

Total secured borrowings and consolidated VIEs

$

 22,505 

  

 21,114 

  

 (13,170) 

  

 (4) 

  

 7,940 

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Secured borrowings:

  

  

  

  

  

  

  

  

  

  

  

Municipal tender option bond securitizations

$

 11,626 

  

 9,210 

  

 (7,874) 

  

 - 

  

 1,336 

  

Commercial real estate loans

  

 486 

  

 486 

  

 (277) 

  

 - 

  

 209 

  

Residential mortgage securitizations

  

 5,337 

  

 5,611 

  

 (5,396) 

  

 - 

  

 215 

  

  

Total secured borrowings

  

 17,449 

  

 15,307 

  

 (13,547) 

  

 - 

  

 1,760 

Consolidated VIEs:

  

  

  

  

  

  

  

  

  

  

  

Nonconforming residential

  

  

  

  

  

  

  

  

  

  

  

  

mortgage loan securitizations

  

 6,770 

  

 6,018 

  

 (2,214) 

  

 - 

  

 3,804 

  

Structured asset finance

  

 56 

  

 56 

  

 (18) 

  

 - 

  

 38 

  

Investment funds

  

 1,536 

  

 1,536 

  

 (70) 

  

 - 

  

 1,466 

  

Other

  

 582 

  

 512 

  

 (182) 

  

 (5) 

  

 325 

  

  

Total consolidated VIEs

  

 8,944 

  

 8,122 

  

 (2,484) 

  

 (5) 

  

 5,633 

  

  

  

Total secured borrowings and consolidated VIEs

$

 26,393 

  

 23,429 

  

 (16,031) 

  

 (5) 

  

 7,393 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

In addition to the transactions included in the previous table, at both June 30, 2014, and December 31, 2013, we had approximately $6.0 billion of private placement debt financing issued through a consolidated VIE. The issuance is classified as long-term debt in our consolidated financial statements. At June 30, 2014, we pledged approximately $6.4 billion in loans (principal and interest eligible to be capitalized), $131 million in available-for-sale securities and $180 million in cash and cash equivalents to collateralize the VIE’s borrowings, compared with $6.6 billion, $160 million and $180 million, respectively, at December 31, 2013. These assets were not transferred to the VIE, and accordingly we have excluded the VIE from the previous table.

For complete descriptions of our accounting for transfers accounted for as secured borrowings and involvements with consolidated VIEs see Note 8 (Securitizations and Variable Interest Entities) to Financial Statements in our 2013 Form 10-K.

114

 


 

      

Note 8:  Mortgage Banking Activities                                                                                                                       

Mortgage banking activities, included in the Community Banking and Wholesale Banking operating segments, consist of residential and commercial mortgage originations, sale activity and servicing.

We apply the amortization method to commercial MSRs and apply the fair value method to residential MSRs. The changes in MSRs measured using the fair value method were:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

  

 2014 

 2013 

  

 2014 

 2013 

Fair value, beginning of period

$

 14,953 

 12,061 

  

 15,580 

 11,538 

  

Servicing from securitizations or asset transfers

  

 271 

 1,060 

  

 560 

 1,995 

  

Sales

  

  

 - 

 (160) 

  

 - 

 (583) 

  

  

Net additions

  

 271 

 900 

  

 560 

 1,412 

  

Changes in fair value:

  

  

  

  

  

  

  

  

Due to changes in valuation model inputs or assumptions:

  

  

  

  

  

  

  

  

  

Mortgage interest rates (1)

  

 (876) 

 2,223 

  

 (1,385) 

 3,253 

  

  

  

Servicing and foreclosure costs (2)

  

 23 

 (82) 

  

 (11) 

 (140) 

  

  

  

Discount rates (3)

  

 (55) 

 - 

  

 (55) 

 - 

  

  

  

Prepayment estimates and other (4)

  

 73 

 (274) 

  

 175 

 (485) 

  

  

  

  

Net changes in valuation model inputs or assumptions

  

 (835) 

 1,867 

  

 (1,276) 

 2,628 

  

  

Other changes in fair value (5)

  

 (489) 

 (643) 

  

 (964) 

 (1,393) 

  

  

  

Total changes in fair value

  

 (1,324) 

 1,224 

  

 (2,240) 

 1,235 

Fair value, end of period

$

 13,900 

 14,185 

  

 13,900 

 14,185 

  

  

  

  

  

  

  

  

  

  

  

(1)   Primarily represents prepayment speed changes due to changes in mortgage interest rates, but also includes other valuation changes due to changes in mortgage interest rates (such as changes in estimated interest earned on custodial deposit balances).

(2)   Includes costs to service and unreimbursed foreclosure costs.

(3)   Reflects discount rate assumption change, excluding portion attributable to changes in mortgage interest rates.

(4)   Represents changes driven by other valuation model inputs or assumptions including prepayment speed estimation changes and other assumption updates. Prepayment speed estimation changes are influenced by observed changes in borrower behavior that occur independent of interest rate changes.

(5)   Represents changes due to collection/realization of expected cash flows over time.

 

The changes in amortized MSRs were:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

 2013 

Balance, beginning of period

$

 1,219 

 1,181 

  

 1,229 

 1,160 

  

Purchases

  

 32 

 26 

  

 72 

 53 

  

Servicing from securitizations or asset transfers

  

 24 

 31 

  

 38 

 87 

  

Amortization

  

 (79) 

 (62) 

  

 (143) 

 (124) 

Balance, end of period (1)

$

 1,196 

 1,176 

  

 1,196 

 1,176 

Fair value of amortized MSRs (2):

  

  

  

  

  

  

  

Beginning of period

$

 1,624 

 1,404 

  

 1,575 

 1,400 

  

End of period

  

 1,577 

 1,533 

  

 1,577 

 1,533 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Commercial amortized MSRs are evaluated for impairment purposes by the following risk strata: agency (GSEs) and non-agency. There was no valuation allowance recorded for the periods presented on the commercial amortized MSRs.

(2)   Represent commercial amortized MSRs.

115

 


 

      

We present the components of our managed servicing portfolio in the following table at unpaid principal balance for loans serviced and subserviced for others and at book value for owned loans serviced.

 

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

Dec. 31,

(in billions)

  

  

 2014 

  

 2013 

Residential mortgage servicing:

  

  

  

  

  

Serviced for others

$

 1,451 

  

 1,485 

  

Owned loans serviced

  

 341 

  

 338 

  

Subserviced for others

  

 5 

  

 6 

  

  

Total residential servicing

  

 1,797 

  

 1,829 

Commercial mortgage servicing:

  

  

  

  

  

Serviced for others

  

 429 

  

 419 

  

Owned loans serviced

  

 109 

  

 107 

  

Subserviced for others

  

 7 

  

 7 

  

  

Total commercial servicing

  

 545 

  

 533 

  

  

  

Total managed servicing portfolio

$

 2,342 

  

 2,362 

Total serviced for others

$

 1,880 

  

 1,904 

Ratio of MSRs to related loans serviced for others

  

 0.80 

%

 0.88 

  

  

  

  

  

  

  

  

  

 

The components of mortgage banking noninterest income were:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

 2013 

Servicing income, net:

  

  

  

  

  

  

  

Servicing fees:

  

  

  

  

  

  

  

  

Contractually specified servicing fees

$

 1,077 

 1,102 

  

 2,159 

 2,227 

  

  

Late charges

  

 48 

 58 

  

 104 

 118 

  

  

Ancillary fees

  

 87 

 85 

  

 167 

 167 

  

  

Unreimbursed direct servicing costs (1)

  

 (84) 

 (215) 

  

 (232) 

 (485) 

  

  

  

Net servicing fees

  

 1,128 

 1,030 

  

 2,198 

 2,027 

  

Changes in fair value of MSRs carried at fair value:

  

  

  

  

  

  

  

  

Due to changes in valuation model inputs or assumptions (2)

  

 (835) 

 1,867 

  

 (1,276) 

 2,628 

  

  

Other changes in fair value (3)

  

 (489) 

 (643) 

  

 (964) 

 (1,393) 

  

  

  

Total changes in fair value of MSRs carried at fair value

  

 (1,324) 

 1,224 

  

 (2,240) 

 1,235 

  

Amortization

  

 (79) 

 (62) 

  

 (143) 

 (124) 

  

Net derivative gains (losses) from economic hedges (4)

  

 1,310 

 (1,799) 

  

 2,158 

 (2,431) 

  

  

  

  

Total servicing income, net

  

 1,035 

 393 

  

 1,973 

 707 

Net gains on mortgage loan origination/sales activities

  

 688 

 2,409 

  

 1,260 

 4,889 

  

  

  

  

  

Total mortgage banking noninterest income

$

 1,723 

 2,802 

  

 3,233 

 5,596 

Market-related valuation changes to MSRs, net of hedge results (2) + (4)

$

 475 

 68 

  

 882 

 197 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Primarily associated with foreclosure expenses and unreimbursed interest advances to investors.

(2)   Refer to the changes in fair value of MSRs table in this Note for more detail.

(3)   Represents changes due to collection/realization of expected cash flows over time.

(4)   Represents results from free-standing derivatives (economic hedges) used to hedge the risk of changes in fair value of MSRs. See Note 12 (Derivatives) – Free-Standing Derivatives for additional discussion and detail.

116

 


 

Note 8:    Mortgage Banking Activities   (continued)  

 

The table below summarizes the changes in our liability for mortgage loan repurchase losses. This liability is in “Accrued expenses and other liabilities” in our consolidated balance sheet and the provision for repurchase losses reduces net gains on mortgage loan origination/sales activities in “Mortgage banking” in our consolidated income statement.

Because of the uncertainty in the various estimates underlying the mortgage repurchase liability, there is a range of losses in excess of the recorded mortgage repurchase liability that is reasonably possible. The estimate of the range of possible loss for representations and warranties does not represent a probable loss, and is based on currently available information, significant judgment, and a number of assumptions that are subject to change. The high end of this range of reasonably possible losses in excess of our recorded liability was $975 million at June 30, 2014, and was determined based upon modifying the assumptions (particularly to assume significant changes in investor repurchase demand practices) utilized in our best estimate of probable loss to reflect what we believe to be the high end of reasonably possible adverse assumptions.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter

  

Six months

  

  

  

  

  

  

ended June 30,

  

ended June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

 2013 

Balance, beginning of period

$

 799 

 2,317 

  

 899 

 2,206 

  

Provision for

  

  

  

  

  

  

  

  

repurchase losses:

  

  

  

  

  

  

  

  

Loan sales

  

 12 

 40 

  

 22 

 99 

  

  

Change in estimate (1)

 (38) 

 25 

  

 (42) 

 275 

  

  

  

Total additions (reductions)

 (26) 

 65 

  

 (20) 

 374 

  

Losses

  

 (7) 

 (160) 

  

 (113) 

 (358) 

Balance, end of period

$

 766 

 2,222 

  

 766 

 2,222 

  

  

  

  

  

  

  

  

  

  

  

(1)   Results from changes in investor demand, mortgage insurer practices, credit and the financial stability of correspondent lenders.

117

 


 

   

Note 9:  Intangible Assets                                                                                                                                           

The gross carrying value of intangible assets and accumulated amortization was:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

Gross

  

  

Net

  

Gross

  

  

Net

  

  

  

  

  

  

carrying

Accumulated

carrying

  

carrying

Accumulated

carrying

(in millions)

  

value

amortization

value

  

value

amortization

value

Amortized intangible assets (1):

  

  

  

  

  

  

  

  

  

  

  

MSRs (2)

$

 2,749 

  

 (1,553) 

 1,196 

  

 2,639 

  

 (1,410) 

 1,229 

  

Core deposit intangibles

  

 12,834 

  

 (8,717) 

 4,117 

  

 12,834 

  

 (8,160) 

 4,674 

  

Customer relationship and other intangibles

  

 3,151 

  

 (2,196) 

 955 

  

 3,145 

  

 (2,061) 

 1,084 

  

  

Total amortized intangible assets

$

 18,734 

  

 (12,466) 

 6,268 

  

 18,618 

  

 (11,631) 

 6,987 

Unamortized intangible assets:

  

  

  

  

  

  

  

  

  

  

  

MSRs (carried at fair value) (2)

$

 13,900 

  

  

  

  

 15,580 

  

  

  

  

Goodwill

  

 25,705 

  

  

  

  

 25,637 

  

  

  

  

Trademark

  

 14 

  

  

  

  

 14 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Excludes fully amortized intangible assets.

(2)   See Note 8 (Mortgage Banking Activities) for additional information on MSRs.

 

The following table provides the current year and estimated future amortization expense for amortized intangible assets. We based our projections of amortization expense shown below on existing asset balances at June 30, 2014. Future amortization expense may vary from these projections.


 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Customer

  

  

  

  

  

  

Core

relationship

  

  

  

  

Amortized

  

deposit

and other

  

  

(in millions)

  

MSRs

intangibles

intangibles

  

Total

Six months ended June 30, 2014 (actual)

$

 143 

  

 557 

  

 135 

  

 835 

Estimate for the remainder of 2014

$

 123 

  

 556 

  

 122 

  

 801 

Estimate for year ended December 31,

  

  

  

  

  

  

  

  

2015

  

 224 

  

 1,022 

  

 223 

  

 1,469 

2016

  

 185 

  

 919 

  

 209 

  

 1,313 

2017

  

 143 

  

 851 

  

 194 

  

 1,188 

2018

  

 111 

  

 769 

  

 185 

  

 1,065 

2019

  

 95 

  

 - 

  

 9 

  

 104 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

For our goodwill impairment analysis, we allocate all of the goodwill to the individual operating segments. We identify reporting units that are one level below an operating segment (referred to as a component), and distinguish these reporting units based on how the segments and components are managed, taking into consideration the economic characteristics, nature of the products and customers of the components. At the time we acquire a business, we allocate goodwill to applicable reporting units based on their relative fair value, and if we have a significant business reorganization, we may reallocate the goodwill . See Note 18 (Operating Segments) for further information on management reporting.

The following table shows the allocation of goodwill to our reportable operating segments for purposes of goodwill impairment testing.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wealth,

  

  

  

  

  

  

Community

  

Wholesale

Brokerage and

Consolidated

(in millions)

  

Banking

  

Banking

  

Retirement

  

Company

December 31, 2012 and June 30, 2013

$

 17,922 

  

 7,344 

  

 371 

  

 25,637 

December 31, 2013

$

 17,922 

  

 7,344 

  

 371 

  

 25,637 

  

Reduction in goodwill related to divested businesses

  

 - 

  

 (11) 

  

 - 

  

 (11) 

  

Goodwill from business combinations

  

 - 

  

 87 

  

 - 

  

 87 

  

Other

  

 (8) 

  

 - 

  

 - 

  

 (8) 

June 30, 2014

$

 17,914 

  

 7,420 

  

 371 

  

 25,705 

118

 


 

      

Note 10:  Guarantees, Pledged Assets and Collateral                                                                                              

Guarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of standby letters of credit, securities lending and other indemnifications, written put options, recourse obligations, and other types of arrangements. For complete descriptions of our guarantees, see Note 14 (Guarantees, Pledged Assets and Collateral) to Financial Statements in our 2013 Form 10-K. The following table shows carrying value, maximum exposure to loss on our guarantees and the related non-investment grade amounts.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

Maximum exposure to loss

  

  

  

  

  

  

  

Expires after

Expires after

  

  

  

  

  

  

  

  

  

Expires in

one year

three years

Expires

  

Non-

  

  

  

  

  

Carrying

one year

through

through

after five

  

investment

(in millions)

  

value

or less

three years

five years

years

Total

grade

Standby letters of credit (1)

$

 53 

 17,051 

 11,171 

 5,780 

 832 

 34,834 

 9,063 

Securities lending and

  

  

  

  

  

  

  

  

  

other indemnifications (2)

  

 - 

 - 

 7 

 24 

 3,248 

 3,279 

 37 

Written put options (3)

  

 946 

 7,560 

 4,911 

 2,332 

 2,421 

 17,224 

 5,726 

Loans and MHFS sold with recourse (4)

 75 

 108 

 454 

 841 

 5,060 

 6,463 

 3,508 

Factoring guarantees (5)

  

 - 

 1,236 

 - 

 - 

 - 

 1,236 

 1,236 

Other guarantees

  

 40 

 27 

 112 

 18 

 1,737 

 1,894 

 109 

  

Total guarantees

$

 1,114 

 25,982 

 16,655 

 8,995 

 13,298 

 64,930 

 19,679 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

Maximum exposure to loss

  

  

  

  

  

  

  

Expires after

Expires after

  

  

  

  

  

  

  

  

  

Expires in

one year

three years

  

  

Non-

  

  

  

  

  

Carrying

one year

through

through

Expires after

  

investment

(in millions)

  

value

or less

three years

five years

five years

Total

grade

Standby letters of credit (1)

$

 56 

 16,907 

 11,628 

 5,308 

 994 

 34,837 

 9,512 

Securities lending and

  

  

  

  

  

  

  

  

  

other indemnifications (2)

  

 - 

 - 

 3 

 18 

 3,199 

 3,220 

 25 

Written put options (3)

  

 907 

 4,775 

 2,967 

 3,521 

 2,725 

 13,988 

 4,311 

Loans and MHFS sold with recourse (4)

  

 86 

 116 

 418 

 849 

 5,014 

 6,397 

 3,674 

Factoring guarantees (5)

  

 - 

 2,915 

 - 

 - 

 - 

 2,915 

 2,915 

Other guarantees (6)

  

 33 

 34 

 111 

 16 

 971 

 1,132 

 113 

  

Total guarantees

$

 1,082 

 24,747 

 15,127 

 9,712 

 12,903 

 62,489 

 20,550 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Total maximum exposure to loss includes direct pay letters of credit (DPLCs) of $ 16.4  billion and $16.8 billion at June  30, 2014 and December 31, 2013, respectively. We issue DPLCs to provide credit enhancements for certain bond issuances. Beneficiaries (bond trustees) may draw upon these instruments to make scheduled principal and interest payments, redeem all outstanding bonds because a default event has occurred, or for other reasons as permitted by the agreement. We also originate multipurpose lending commitments under which borrowers have the option to draw on the facility in one of several forms, including as a standby letter of credit. Total maximum exposure to loss includes the portion of these facilities for which we have issued standby letters of credit under the commitments.

(2)   Includes $244 million and $337 million at June 30, 2014 and December 31, 2013, respectively, in debt and equity securities lent from participating institutional client portfolios to third-party borrowers. Also includes indemnifications provided to certain third-party clearing agents. Outstanding customer obligations under these arrangements were $951 million and $769 million with related collateral of $5.7 billion and $3.7 billion at June 30, 2014 and December 31, 2013, respectively. Estimated maximum exposure to loss was $3.0 billion and $2.9 billion as of the same periods, respectively.

(3)   Written put options, which are in the form of derivatives, are also included in the derivative disclosures in Note 12 (Derivatives).

(4)   Represent recourse provided, predominantly to the GSEs, on loans sold under various programs and arrangements. Under these arrangements, we repurchased $4 million and $5 million respectively, of loans associated with these agreements in the second quarter and first half of 2014, and $7 million and $18 million in the same periods of 2013, respectively.

(5)   Consists of guarantees made under certain factoring arrangements to purchase trade receivables from third parties, generally upon their request, if receivable debtors default on their payment obligations. See Note 1 (Summary of Significant Accounting Policies) for additional information.

(6)   Includes amounts for liquidity agreements and contingent consideration that were previously reported separately.

“Maximum exposure to loss” and “Non-investment grade” are required disclosures under GAAP. Non-investment grade represents those guarantees on which we have a higher risk of being required to perform under the terms of the guarantee. If the underlying assets under the guarantee are non-investment grade (that is, an external rating that is below investment grade or an internal credit default grade that is equivalent to a below investment grade external rating), we consider the risk of performance to be high. Internal credit default grades are determined based upon the same credit policies that we use to evaluate the risk of payment or performance when making loans and other extensions of credit. These credit policies are further described in Note 5 (Loans and Allowance for Credit Losses).

Maximum exposure to loss represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite what we believe is its extremely remote possibility, where the value of our interests and any associated collateral declines to zero. Maximum exposure to loss estimates in the table above do not reflect economic hedges or collateral we could use to offset or recover losses we may incur under our guarantee agreements. Accordingly, this required disclosure is not an indication of expected loss. We believe the carrying value, which is either fair value for derivative-related products or the allowance for lending- related commitments, is more representative of our exposure to loss than maximum exposure to loss.

 

119

 


 

      

Pledged Assets

As part of our liquidity management strategy, we pledge assets to secure trust and public deposits, borrowings and letters of credit from the FHLB and FRB, securities sold under agreements to repurchase (repurchase agreements), and for other purposes as required or permitted by law or insurance statutory requirements. The types of collateral we pledge include securities issued by federal agencies, GSEs, domestic and foreign companies and various commercial and consumer loans. The following table provides the total carrying amount of pledged assets by asset type, of which substantially all are pursuant to agreements that do not permit the secured party to sell or repledge the collateral. The table excludes pledged consolidated VIE assets of $7.2 billion and $8.1 billion at June 30, 2014, and December 31, 2013, respectively, which can only be used to settle the liabilities of those entities. The table also excludes $13.9 billion and $15.3 billion in assets pledged in transactions accounted for as secured borrowings at June 30, 2014 and December 31, 2013, respectively. See Note 7 (Securitizations and Variable Interest Entities) for additional information on consolidated VIE assets and secured borrowings.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

Dec. 31,

(in millions)

  

2014 

  

2013 

Trading assets and other (1)

$

 45,271 

  

 30,288 

Investment securities (2)

  

 87,832 

  

 85,468 

Loans (3)

  

 418,779 

  

 381,597 

  

Total pledged assets

$

 551,882 

  

 497,353 

  

  

  

  

  

  

  

  

(1)

Represent assets pledged to collateralize repurchase agreements and other securities financings. Balance includes $44.0 billion and $29.0 billion at June 30, 2014, and December 31, 2013, respectively, under agreements that permit the secured parties to sell or repledge the collateral.

(2)

Includes $7.1 billion and $8.7 billion in collateral for repurchase agreements at June 30, 2014, and December 31, 2013, respectively, which are pledged under agreements that do not permit the secured parties to sell or repledge the collateral.

(3)

Represent loans carried at amortized cost, which are pledged under agreements that do not permit the secured parties to sell or repledge the collateral. Amounts exclude $1.4 billion and $2.1 billion at June 30, 2014 and December 31, 2013, respectively, of pledged loans recorded on our balance sheet representing certain delinquent loans that are eligible for repurchase primarily from GNMA loan securitizations. See Note 7 (Securitizations and Variable Interest Entities) for additional information.

  

  

  

  

  

  

  

  

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Note 10:    Guarantees, Pledged Assets and Collateral   (continued)  

 

Offsetting of Resale and Repurchase Agreements and Securities Borrowing and Lending Agreements

The table below presents resale and repurchase agreements subject to master repurchase agreements (MRA) and securities borrowing and lending agreements subject to master securities lending agreements (MSLA). We account for transactions subject to these agreements as collateralized financings and those with a single counterparty are presented net on our balance sheet, provided certain criteria are met that permit balance sheet netting. Most transactions subject to these agreements do not meet those criteria and thus are not eligible for balance sheet netting.

Collateral we pledged consists of non-cash instruments, such as securities or loans, and is not netted on the balance sheet against the related collateralized liability. Collateral we received includes securities or loans and is not recognized on our balance sheet. Collateral received or pledged may be increased or decreased over time to maintain certain contractual thresholds as the assets underlying each arrangement fluctuate in value. Generally, these agreements require collateral to exceed the asset or liability recognized on the balance sheet. The following table includes the amount of collateral pledged or received related to exposures subject to enforceable MRAs or MSLAs. While these agreements are typically over-collateralized, U.S. GAAP requires disclosure in this table to limit the amount of such collateral to the amount of the related recognized asset or liability for  each counterparty.

In addition to the amounts included in the table below, we also have balance sheet netting related to derivatives that is disclosed within Note 12 (Derivatives).

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

Dec. 31,

(in millions)

  

 2014 

  

 2013 

Assets:

  

  

  

  

Resale and securities borrowing agreements

  

  

  

  

  

  

Gross amounts recognized

$

 45,890 

  

 38,635 

  

  

Gross amounts offset in consolidated balance sheet (1)

  

 (6,863) 

  

 (2,817) 

  

  

Net amounts in consolidated balance sheet (2)

  

 39,027 

  

 35,818 

  

  

Collateral not recognized in consolidated balance sheet (3)

  

 (38,973) 

  

 (35,768) 

  

Net amount (4)

$

 54 

  

 50 

Liabilities:

  

  

  

  

Repurchase and securities lending agreements

  

  

  

  

  

  

Gross amounts recognized

$

 51,432 

  

 38,032 

  

  

Gross amounts offset in consolidated balance sheet (1)

  

 (6,863) 

  

 (2,817) 

  

  

Net amounts in consolidated balance sheet (5)

  

 44,569 

  

 35,215 

  

  

Collateral pledged but not netted in consolidated balance sheet (6)

  

 (44,121) 

  

 (34,770) 

  

Net amount (7)

$

 448 

  

 445 

  

  

  

  

  

  

  

  

(1)

Represents recognized amount of resale and repurchase agreements with counterparties subject to enforceable MRAs or MSLAs that have been offset in the consolidated balance sheet.

(2)

At June 30, 2014 and December 31, 2013, includes $29.3 billion and $25.7 billion, respectively, classified on our consolidated balance sheet in Federal funds sold, securities purchased under resale agreements and other short-term investments and $9.7 billion and $10.1 billion, respectively, in Loans.

(3)

Represents the fair value of collateral we have received under enforceable MRAs or MSLAs, limited for table presentation purposes to the amount of the recognized asset due from each counterparty. At June 30, 2014 and December 31, 2013, we have received total collateral with a fair value of $52.4 billion and $43.3 billion, respectively, all of which, we have the right to sell or repledge. These amounts include securities we have sold or repledged to others with a fair value of $31.8 billion at June 30, 2014 and $23.8 billion at December 31, 2013.

(4)

Represents the amount of our exposure that is not collateralized and/or is not subject to an enforceable MRA or MSLA.

(5)

Amount is classified in Short-term borrowings on our consolidated balance sheet.

(6)

Represents the fair value of collateral we have pledged, related to enforceable MRAs or MSLAs, limited for table presentation purposes to the amount of the recognized liability owed to each counterparty. At June 30, 2014 and December 31, 2013, we have pledged total collateral with a fair value of $52.4 billion and $39.0 billion, respectively, of which, the counterparty does not have the right to sell or repledge $8.4 billion as of June 30, 2014 and $10.0 billion as of December 31, 2013.

(7)

Represents the amount of our exposure that is not covered by pledged collateral and/or is not subject to an enforceable MRA or MSLA.

  

  

  

  

  

  

  

  

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Note 11:  Legal Actions                                                                                                                                               

The following supplements our discussion of certain matters previously reported in Note 15 (Legal Actions) to Financial Statements in our 2013 Form 10-K and Note 11 (Legal Actions) to Financial Statements in our 2014 first quarter Quarterly Report on Form 10-Q for events occurring during second quarter 2014.

 

FHA IN S U R ANCE  L ITI G A T I O   On  October  9,  2 0 12,  the  Un i ted States fi l e compla i nt,  capti o ned  U ni t e Stat e o A m e r i ca  v . Wel l Fa r go  Ban k N .A. i the  U.S.  Di s trict  C o urt  f o the S o uth e rn  Di s trict  of  N e Y o r k T h c o mp l ai n mak e c l aims  w ith r e spect  to  W e l l F ar go’s  F e de r a Hous i n A d minist ra tion  ( F HA) lend i n pr og ram  fo the  p e riod  2001  to  20 1 0.  T h c o m p l a i nt a lleg e s a m o n o t h e al leg a ti o ns t ha We l l F ar go  im p r o p e rl y c e rti f i e c e rtain  FHA  m o rtga g lo a n f o U n it e Stat e s Dep ar tment  of  H o us i n a n U r b a Deve l o pment  ( HUD) insu ra nce  t ha did  not  qu a l ify  f o t h p r og ra m,  a n t h e r efo r e Wel l F ar go  s h oul no ha v r eceive i nsu ra nc p r o c eed f ro m HUD w h en  s o me  o the  l o ans  la ter  defau l ted.  T h c o m p l a int f urth e a lle g e W e l l Fargo  k n e s o me  of  the  m o rtgag e did no t qualify f o insurance  a n did  n o disc l ose  t h defici e n cies  to HUD bef o re  mak i n i n surance  claims.  On December 1,  2012, Wel l F ar go  f i led  m o tion  i t h U .S.  Dist r ict  Cou r f o t h e Dist r ict  of  C olumbia  seek i n to enfo r c r e le as o W e lls  F ar go given by  t h U n ited  St a t e s w h i ch  w a denied  on Feb r u ar 12,  2013.  On  Ap r il  11,  2013,  W e l l F ar go  a ppe a l ed  t h e deci s i o to  the  U.S.  C o urt  o A ppea l f o the  Di s trict  o f C o l u mbia Circuit. The Court affirmed the denial of Wells Fargo’s motion on June 20, 2014.

 

M A R Y LAND  M O R TG A GE  L E NDING  L ITI G A T ION   On  Ju l 8,  2008,  c l ass  acti o c o mp l a int  capti o n e Stacey and B r adley  Pet r y,  et  al., v. W e lls  Fa r go  Bank,  N . A .,  et  a l ., w as filed T h com p l a i n al leg e t ha Wel l F ar go  a n o t h e r vi ola t ed t h Mar yl a nd  Finde r ’s  Fee  Act  in  t h cl o sing  of  m o r tg a ge  l o a n in Mary l a nd.  On  March  1 3 201 3 the  C o urt  h el the  p l aint i f c l a s s did n o have  s u ff ic i ent  evi d en c to  pr o ceed  to  tria l w h ich  w a s p r eviou s ly  set for Mar ch  18,  2013.  On  Ju n 20,  20 1 3 t h C o u r t entered judg m e nt  in favor o t h defendan t s T h plaintiffs  app e a le d. The U.S. Court of Appeals for the Fourth Circuit affirmed the judgment in favor of the defendants on July 10, 2014.

 

SECURITIES LENDING LITIGATION   Wells Fargo Bank, N.A. is involved in five separate pending actions brought by securities lending customers of Wells Fargo and Wachovia Bank in various courts. In general, each of the cases alleges that Wells Fargo violated fiduciary and contractual duties by investing collateral for loaned securities in investments that suffered losses. One of the cases, filed on March 27, 2012, is composed of a class of Wells Fargo securities lending customers in a case captioned City of Farmington Hills Employees Retirement System v. Wells Fargo Bank, N.A. The class action is pending in the U.S. District Court for the District of Minnesota. On April 12, 2014, the parties reached a settlement in principle of the class action case. The settlement was preliminarily approved by the Court on June 5, 2014. A hearing on final approval is set for August 14, 2014.  

 

OUTLOOK   When establishing a liability for contingent litigation losses, the Company determines a range of potential losses for each matter that is both probable and estimable, and records the amount it considers to be the best estimate within the range. The high end of the range of reasonably possible potential litigation losses in excess of the Company’s liability for probable and estimable losses was $1.2 billion as of June 30, 2014. For these matters and others where an unfavorable outcome is reasonably possible but not probable, there may be a range of possible losses in excess of the established liability that cannot be estimated. Based on information currently available, advice of counsel, available insurance coverage and established reserves, Wells Fargo believes that the eventual outcome of the actions against Wells Fargo and/or its subsidiaries, including the matters described above, will not, individually or in the aggregate, have a material adverse effect on Wells Fargo’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to Wells Fargo’s results of operations for any particular period.

122

 


 

      

Note 12:  Derivatives                                                                                                                                                   

We primarily use derivatives to manage exposure to market risk, including interest rate risk, credit risk and foreign currency risk, and to assist customers with their risk management objectives. We designate derivatives either as hedging instruments in a qualifying hedge accounting relationship (fair value or cash flow hedge) or as free-standing derivatives. Free-standing derivatives include economic hedges that do not qualify for hedge accounting and derivatives held for customer accommodation or other trading purposes. For more information on our derivative activities, see Note 16 (Derivatives) to Financial Statements in our 2013 Form 10-K.

The following table presents the total notional or contractual amounts and fair values for our derivatives. Derivative transactions can be measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged, but is used only as the basis on which interest and other payments are determined. Derivatives designated as qualifying hedge contracts and free-standing derivatives (economic hedges) are recorded on the balance sheet at fair value in other assets or other liabilities. Customer accommodation, trading and other free-standing derivatives are recorded on the balance sheet at fair value in trading assets, other assets or other liabilities.

 

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

Notional or

  

  

Fair value

Notional or

  

Fair value

  

  

  

  

  

  

contractual

  

  

Asset

Liability

contractual

  

Asset

Liability

(in millions)

  

  

amount

  

derivatives

derivatives

  

amount

  

derivatives

derivatives

Derivatives designated as hedging instruments

  

  

  

  

  

  

  

  

  

  

  

  

Interest rate contracts (1)

$

 113,454 

  

  

 4,848 

 2,049 

  

 100,412 

  

 4,315 

 2,528 

  

Foreign exchange contracts

  

 26,255 

  

  

 1,402 

 696 

  

 26,483 

  

 1,091 

 847 

Total derivatives designated as

  

  

  

  

  

  

  

  

  

  

  

  

qualifying hedging instruments

  

  

  

  

 6,250 

 2,745 

  

  

  

 5,406 

 3,375 

Derivatives not designated as hedging instruments

  

  

  

  

  

  

  

  

  

  

  

  

Free-standing derivatives (economic hedges):

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest rate contracts (2)

  

 218,327 

  

  

 731 

 653 

  

 220,577 

  

 595 

 897 

  

  

Equity contracts

  

 4,689 

  

  

 507 

 52 

  

 3,273 

  

 349 

 206 

  

  

Foreign exchange contracts

  

 22,866 

  

  

 62 

 187 

  

 10,064 

  

 21 

 35 

  

  

Other derivatives

  

 2,093 

  

  

 1 

 14 

  

 2,160 

  

 13 

 16 

  

  

  

Subtotal

  

  

  

  

 1,301 

 906 

  

  

  

 978 

 1,154 

  

Customer accommodation, trading and other

  

  

  

  

  

  

  

  

  

  

  

  

  

free-standing derivatives:

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

  

 4,153,432 

  

  

 44,171 

 46,403 

  

 4,030,068 

  

 50,936 

 53,113 

  

  

Commodity contracts

  

 97,695 

  

  

 3,314 

 3,188 

  

 96,889 

  

 2,673 

 2,603 

  

  

Equity contracts

  

 129,754 

  

  

 9,402 

 8,642 

  

 96,379 

  

 7,475 

 7,588 

  

  

Foreign exchange contracts

  

 209,464 

  

  

 2,680 

 2,270 

  

 164,160 

  

 3,731 

 3,626 

  

  

Credit contracts - protection sold

  

 15,612 

  

  

 281 

 1,156 

  

 19,501 

  

 354 

 1,532 

  

  

Credit contracts - protection purchased

  

 19,683 

  

  

 887 

 294 

  

 23,314 

  

 1,147 

 368 

  

  

  

Subtotal

  

  

  

  

 60,735 

 61,953 

  

  

  

 66,316 

 68,830 

Total derivatives not designated as hedging instruments

  

  

  

  

 62,036 

 62,859 

  

  

  

 67,294 

 69,984 

Total derivatives before netting

  

  

  

  

 68,286 

 65,604 

  

  

  

 72,700 

 73,359 

Netting (3)

  

  

  

  

 (50,874) 

 (56,574) 

  

  

  

 (56,894) 

 (63,739) 

  

  

  

  

Total

  

  

  

$

 17,412 

 9,030 

  

  

  

 15,806 

 9,620 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Notional amounts presented exclude $3.2 billion and $1.9 billion at June 30, 2014 and December 31, 2013, respectively, of certain derivatives that are combined for designation as a hedge on a single instrument.

(2)   Includes free-standing derivatives (economic hedges) used to hedge the risk of changes in the fair value of residential MSRs, MHFS, loans, derivative loan commitments and other interests held.

(3)   Represents balance sheet netting of derivative asset and liability balances, and related cash collateral. See the next table in this Note for further information.

 

The following table provides information on the gross fair values of derivative assets and liabilities, the balance sheet netting adjustments and the resulting net fair value amount recorded on our balance sheet, as well as the non-cash collateral associated with such arrangements. We execute substantially all of our derivative transactions under master netting arrangements. We reflect all derivative balances and related cash collateral subject to enforceable master netting arrangements on a net basis within the balance sheet. The “Gross amounts recognized” column in the following table include $54.0 billion and $58.2 billion of gross derivative assets and liabilities, respectively, at June 30, 2014, and $59.8 billion and $66.1   billion, respectively, at December 31, 2013, with counterparties subject to enforceable master netting arrangements that are carried on the balance sheet net of offsetting amounts. The remaining gross derivative assets and liabilities of $14.3 billion and $7.4 billion, respectively, at June 30, 2014 and $12.9 billion and $7.3 billion, respectively, at December 31, 2013, include those with counterparties subject to master netting arrangements for which we have not assessed the enforceability because they are with counterparties where we do not currently have positions to offset, those subject to master netting arrangements where we have not been able to confirm the enforceability and those not subject to master netting

123

 


 

      

arrangements. As such, we do not net derivative balances or collateral within the balance sheet for these counterparties.

We determine the balance sheet netting adjustments based on the terms specified within each master netting arrangement. We disclose the balance sheet netting amounts within the column titled “Gross amounts offset in consolidated balance sheet.” Balance sheet netting adjustments are determined at the counterparty level for which there may be multiple contract types. For disclosure purposes, we allocate these adjustments to the contract type for each counterparty proportionally based upon the “Gross amounts recognized” by counterparty. As a result, the net amounts disclosed by contract type may not represent the actual exposure upon settlement of the contracts.

Balance sheet netting does not include non-cash collateral that we pledge.  For disclosure purposes, we present these amounts in the column titled “Gross amounts not offset in consolidated balance sheet (Disclosure-only netting)” within the table. We determine and allocate the Disclosure-only netting amounts in the same manner as balance sheet netting amounts.


The “Net amounts” column within the following table represents the aggregate of our net exposure to each counterparty after considering the balance sheet and Disclosure-only netting adjustments. We manage derivative exposure by monitoring the credit risk associated with each counterparty using counterparty specific credit risk limits, using master netting arrangements and obtaining collateral. Derivative contracts executed in over-the-counter markets include bilateral contractual arrangements that are not cleared through a central clearing organization but are typically subject to master netting arrangements. The percentage of our bilateral derivative transactions outstanding at period end in such markets, based on gross fair value, is provided within the following table. Other derivative contracts executed in over-the-counter or exchange-traded markets are settled through a central clearing organization and are excluded from this percentage. In addition to the netting amounts included in the table, we also have balance sheet netting related to resale and repurchase agreements that are disclosed within Note 10 (Guarantees, Pledged Assets and Collateral).

124

 


 

Note 12:    Derivatives   (continued)  

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Gross amounts

  

  

  

  

  

  

Gross amounts

  

not offset in

  

  

  

  

  

  

  

  

  

  

offset in

Net amounts in

consolidated

  

Percent

  

  

  

  

  

  

  

Gross

consolidated

consolidated

balance sheet

  

traded in

  

  

  

  

  

  

amounts

balance

balance

(Disclosure-only

Net

over-the-counter

  

(in millions)

  

recognized

sheet (1)

sheet (2)

netting) (3)

amounts

market (4)

  

June 30, 2014

  

  

  

  

  

  

  

  

Derivative assets

  

  

  

  

  

  

  

  

  

Interest rate contracts

$

 49,750 

 (41,549) 

 8,201 

 (744) 

 7,457 

 59 

%

  

Commodity contracts

  

 3,314 

 (679) 

 2,635 

 (75) 

 2,560 

 64 

  

  

Equity contracts

  

 9,909 

 (4,016) 

 5,893 

 (380) 

 5,513 

 71 

  

  

Foreign exchange contracts

  

 4,144 

 (3,580) 

 564 

 (2) 

 562 

 100 

  

  

Credit contracts-protection sold

  

 281 

 (255) 

 26 

 - 

 26 

 96 

  

  

Credit contracts-protection purchased

 887 

 (795) 

 92 

 (28) 

 64 

 100 

  

  

Other contracts

  

 1 

 - 

 1 

 - 

 1 

 100 

  

  

  

Total derivative assets

$

 68,286 

 (50,874) 

 17,412 

 (1,229) 

 16,183 

  

  

Derivative liabilities

  

  

  

  

  

  

  

  

  

Interest rate contracts

$

 49,105 

 (47,039) 

 2,066 

 (629) 

 1,437 

 57 

%

  

Commodity contracts

  

 3,188 

 (947) 

 2,241 

 (1) 

 2,240 

 54 

  

  

Equity contracts

  

 8,694 

 (4,426) 

 4,268 

 (166) 

 4,102 

 90 

  

  

Foreign exchange contracts

  

 3,153 

 (2,746) 

 407 

 - 

 407 

 100 

  

  

Credit contracts-protection sold

  

 1,156 

 (1,151) 

 5 

 - 

 5 

 100 

  

  

Credit contracts-protection purchased

 294 

 (265) 

 29 

 - 

 29 

 94 

  

  

Other contracts

  

 14 

 - 

 14 

 - 

 14 

 100 

  

  

  

Total derivative liabilities

$

 65,604 

 (56,574) 

 9,030 

 (796) 

 8,234 

  

  

December 31, 2013

  

  

  

  

  

  

  

  

Derivative assets

  

  

  

  

  

  

  

  

  

Interest rate contracts

$

 55,846 

 (48,271) 

 7,575 

 (1,101) 

 6,474 

 65 

%

  

Commodity contracts

  

 2,673 

 (659) 

 2,014 

 (72) 

 1,942 

 52 

  

  

Equity contracts

  

 7,824 

 (3,254) 

 4,570 

 (239) 

 4,331 

 81 

  

  

Foreign exchange contracts

  

 4,843 

 (3,567) 

 1,276 

 (9) 

 1,267 

 100 

  

  

Credit contracts-protection sold

  

354 

 (302) 

52 

 - 

 52 

 92 

  

  

Credit contracts-protection purchased

  

 1,147 

 (841) 

 306 

 (33) 

 273 

 100 

  

  

Other contracts

  

 13 

 - 

 13 

 - 

 13 

 100 

  

  

  

Total derivative assets

$

 72,700 

 (56,894) 

 15,806 

 (1,454) 

 14,352 

  

  

Derivative liabilities

  

  

  

  

  

  

  

  

  

Interest rate contracts

$

 56,538 

 (53,902) 

 2,636 

 (482) 

 2,154 

 66 

%

  

Commodity contracts

  

 2,603 

 (952) 

 1,651 

 (11) 

 1,640 

 73 

  

  

Equity contracts

  

 7,794 

 (3,502) 

 4,292 

 (124) 

 4,168 

 94 

  

  

Foreign exchange contracts

  

 4,508 

 (3,652) 

 856 

 - 

 856 

 100 

  

  

Credit contracts-protection sold

  

 1,532 

 (1,432) 

 100 

 - 

 100 

 100 

  

  

Credit contracts-protection purchased

  

 368 

 (299) 

 69 

 - 

 69 

 89 

  

  

Other contracts

  

 16 

 - 

 16 

 - 

 16 

 100 

  

  

  

Total derivative liabilities

$

 73,359 

 (63,739) 

 9,620 

 (617) 

 9,003 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Represents amounts with counterparties subject to enforceable master netting arrangements that have been offset in the consolidated balance sheet, including related cash collateral and portfolio level counterparty valuation adjustments. Counterparty valuation adjustments were $207 million and $236 million related to derivative assets and $49 million and $67 million related to derivative liabilities as of June 30, 2014 and December 31, 2013, respectively. Cash collateral totaled $4.7 billion and $10.6 billion, netted against derivative assets and liabilities, respectively, at June 30, 2014, and $4.3 billion and $11.3 billion, respectively, at December 31, 2013.

  

(2)

Net derivative assets of $12.4 billion and $14.4 billion are classified in Trading assets as of June 30, 2014 and December 31, 2013, respectively. $5.0 billion and $1.4 billion are classified in Other assets in the consolidated balance sheet as of June 30, 2014 and December 31, 2013, respectively. Net derivative liabilities are classified in Accrued expenses and other liabilities in the consolidated balance sheet.

  

(3)

Represents non-cash collateral pledged and received against derivative assets and liabilities with the same counterparty that are subject to enforceable master netting arrangements. U.S. GAAP does not permit netting of such non-cash collateral balances in the consolidated balance sheet but requires disclosure of these amounts.

  

(4)

Represents derivatives executed in over-the-counter markets not settled through a central clearing organization. Over-the-counter percentages are calculated based on Gross amounts recognized as of the respective balance sheet date. The remaining percentage represents derivatives settled through a central clearing organization, which are executed in either over-the-counter or exchange-traded markets.

  

125

 


 

      

Fair Value Hedges

We use derivatives to hedge against changes in fair value of certain financial instruments, including available-for-sale debt securities, mortgages held for sale, and long-term debt. For more information on fair value hedges, see Note 16 (Derivatives) to Financial Statements in our 2013 Form 10-K.

The following table shows the net gains (losses) recognized in the income statement related to derivatives in fair value hedging relationships. The entire derivative gain or loss is included in the assessment of hedge effectiveness for all fair value hedge relationships, except for those involving foreign-currency denominated available-for-sale securities and long-term debt hedged with foreign currency forward derivatives for which the time value component of the derivative gain or loss related to the changes in the difference between the spot and forward price is excluded from the assessment of hedge effectiveness.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest rate

  

Foreign exchange

Total net

  

  

  

  

  

  

contracts hedging:

  

contracts hedging:

gains

  

  

  

  

  

  

  

  

  

  

  

  

(losses)

  

  

  

  

  

  

Available-

Mortgages

  

  

Available-

  

on fair

  

  

  

  

  

  

for-sale

held for

Long-term

  

for-sale

Long-term

value

(in millions)

  

securities

sale

debt

  

securities

debt

hedges

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30, 2014

  

  

  

  

  

  

  

  

Net interest income (expense) recognized on derivatives

$

 (178) 

 (7) 

 456 

  

 (6) 

 77 

 342 

  

  

  

  

  

  

  

  

  

  

  

  

  

Gains (losses) recorded in noninterest income

  

  

  

  

  

  

  

  

  

Recognized on derivatives

  

 (440) 

 (11) 

 795 

  

 (5) 

 340 

 679 

  

Recognized on hedged item

  

 427 

 8 

 (714) 

  

 4 

 (300) 

 (575) 

  

  

Net recognized on fair value hedges (ineffective portion) (1) 

$

 (13) 

 (3) 

 81 

  

 (1) 

 40 

 104 

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30, 2013

  

  

  

  

  

  

  

  

Net interest income (expense) recognized on derivatives

$

 (136) 

 2 

 395 

  

 (2) 

 69 

 328 

  

  

  

  

  

  

  

  

  

  

  

  

  

Gains (losses) recorded in noninterest income

  

  

  

  

  

  

  

  

  

Recognized on derivatives

  

 899 

 (11) 

 (1,666) 

  

 104 

 (607) 

 (1,281) 

  

Recognized on hedged item

  

 (890) 

 4 

 1,576 

  

 (100) 

 557 

 1,147 

  

  

Net recognized on fair value hedges (ineffective portion) (1)

$

 9 

 (7) 

 (90) 

  

 4 

 (50) 

 (134) 

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30, 2014

  

  

  

  

  

  

  

  

Net interest income (expense) recognized on derivatives

$

 (353) 

 (10) 

 904 

  

 (8) 

 150 

 683 

  

  

  

  

  

  

  

  

  

  

  

  

  

Gains (losses) recorded in noninterest income

  

  

  

  

  

  

  

  

  

Recognized on derivatives

  

 (945) 

 (26) 

 1,783 

  

 (19) 

 414 

 1,207 

  

Recognized on hedged item

  

 924 

 19 

 (1,567) 

  

 15 

 (374) 

 (983) 

  

  

Net recognized on fair value hedges (ineffective portion) (1)

$

 (21) 

 (7) 

 216 

  

 (4) 

 40 

 224 

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30, 2013

  

  

  

  

  

  

  

  

Net interest income (expense) recognized on derivatives

$

 (261) 

 3 

 792 

  

 (2) 

 137 

 669 

  

  

  

  

  

  

  

  

  

  

  

  

  

Gains (losses) recorded in noninterest income

  

  

  

  

  

  

  

  

  

Recognized on derivatives

  

 1,203 

 (9) 

 (2,394) 

  

 312 

 (1,380) 

 (2,268) 

  

Recognized on hedged item

  

 (1,178) 

 (1) 

 2,264 

  

 (303) 

 1,328 

 2,110 

  

  

Net recognized on fair value hedges (ineffective portion) (1)

$

 25 

 (10) 

 (130) 

  

 9 

 (52) 

 (158) 

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)     Both the second quarter and first half of 2014 included $0   million  and the second quarter and first half of 2013 included $(1) million and $(4)   million, respectively, of the time value component recognized as net interest income (expense) on forward derivatives hedging foreign currency available-for-sale securities and long-term debt that were excluded from the assessment of hedge effectiveness.

Cash Flow Hedges

We use derivatives to hedge certain financial instruments against future interest rate increases and to limit the variability of cash flows on certain financial instruments due to changes in the benchmark interest rate. For more information on cash flow hedges, see Note 16 (Derivatives) to Financial Statements in our 2013 Form 10-K.

Based upon current interest rates, we estimate that $290 million (pre tax) of deferred net gains on derivatives in OCI at June 30, 2014, will be reclassified into net interest income during the next twelve months. Future changes to interest rates may significantly change actual amounts reclassified to earnings. We are hedging our exposure to the variability of future cash flows for all forecasted transactions for a maximum of 7 years for both hedges of floating-rate debt and floating-rate commercial loans.

The following table shows the net gains (losses) recognized related to derivatives in cash flow hedging relationships.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter

  

Six months

  

  

  

  

ended June 30,

  

 ended June 30,

(in millions)

  

2014 

2013 

  

 2014 

2013 

Gains (losses) (pre tax) recognized in OCI on derivatives

$

 212 

 (10) 

  

 256 

 (3) 

Gains (pre tax) reclassified from cumulative OCI into net income (1)

  

 115 

 69 

  

 221 

 156 

Gains (losses) (pre tax) recognized in noninterest income for hedge ineffectiveness (2)

  

 1 

 1 

  

 1 

 1 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)     See Note 17 (Other Comprehensive Income) for detail on components of net income.

(2)     None of the change in value of the derivatives was excluded from the assessment of hedge effectiveness.  

 

126

 


 

Note 12:    Derivatives   (continued)  

 

Free-Standing Derivatives

We use free-standing derivatives (economic hedges) to hedge the risk of changes in the fair value of certain residential MHFS, certain loans held for investment, residential MSRs measured at fair value, derivative loan commitments and other interests held. The resulting gain or loss on these economic hedges is reflected in mortgage banking noninterest income, net gains (losses) from equity investments and other noninterest income.

The derivatives used to hedge MSRs measured at fair value, resulted in net derivative gains of $1.3 billion and $ 2.2 billion in  second quarter and first half of 2014, respectively, and net derivative losses of $1.8 billion and $2.4 billion in second quarter and first half of 2013, respectively, which are included in mortgage banking noninterest income. The aggregate fair value of these derivatives was a net asset  of $492 million at June 30, 2014 and a net liability of $531 million at December 31, 2013. The change in fair value of these derivatives for each period end is due to changes in the underlying market indices and interest rates as well as the purchase and sale of derivative financial instruments throughout the period as part of our dynamic MSR risk management process.

Interest rate lock commitments for residential mortgage loans that we intend to sell are considered free-standing derivatives. The aggregate fair value of derivative loan commitments on the balance sheet was a net asset of $124  million and a net liability of $26 million at June 30, 2014 and December 31, 2013, respectively, and is included in the caption “Interest rate contracts” under “Customer accommodation, trading and other free-standing derivatives” in the first table in this Note.

For more information on freestanding derivatives, see Note 16 (Derivatives) to Financial Statements in our 2013 Form 10-K.

The following table shows the net gains recognized in the income statement related to derivatives not designated as hedging instruments.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter

  

Six months

  

  

  

  

  

  

  

ended June 30,

  

ended June 30,

(in millions)

  

  

 2014 

 2013 

  

 2014 

 2013 

Net gains (losses) recognized on free-standing derivatives (economic hedges):

  

  

  

  

  

  

Interest rate contracts

  

  

  

  

  

  

  

  

Recognized in noninterest income:

  

  

  

  

  

  

  

  

  

Mortgage banking (1)

$

 475 

 1,347 

  

 841 

 1,728 

  

  

  

Other (2)

  

 (66) 

 74 

  

 (125) 

 98 

  

Equity contracts (3)

  

 47 

 (24) 

  

 123 

 (38) 

  

Foreign exchange contracts (2)

  

 (117) 

 12 

  

 (48) 

 20 

  

Credit contracts (2)

  

 - 

 (2) 

  

 - 

 (6) 

  

Other (2)

  

 (2) 

 -   

  

 (9) 

 - 

  

  

  

  

  

Subtotal

  

 337 

 1,407 

  

 782 

 1,802 

Net gains (losses) recognized on customer accommodation, trading

  

  

  

  

  

  

  

and other free-standing derivatives:

  

  

  

  

  

  

  

  

Interest rate contracts

  

  

  

  

  

  

  

  

  

Recognized in noninterest income:

  

  

  

  

  

  

  

  

  

  

Mortgage banking (4)

  

 498 

 (1,176) 

  

 788 

 (906) 

  

  

  

  

Other (5)

  

 (337) 

 376 

  

 (728) 

 581 

  

  

Commodity contracts (5)

  

 (13) 

 63 

  

 37 

 224 

  

  

Equity contracts (5)

  

 (214) 

 (7) 

  

 (308) 

 (257) 

  

  

Foreign exchange contracts (5)

  

 152 

 138 

  

 414 

 415 

  

  

Credit contracts (5)

  

 5 

 28 

  

 32 

 (20) 

  

  

  

  

  

Subtotal

  

 91 

 (578) 

  

 235 

 37 

  

Net gains recognized related to derivatives not designated

  

  

  

  

  

  

  

  

as hedging instruments

$

 428 

 829 

  

 1,017 

 1,839 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Predominantly mortgage banking noninterest income including gains (losses) on the derivatives used as economic hedges of MSRs measured at fair value, interest rate lock commitments and mortgages held for sale.

(2)   Predominantly included in other noninterest income.

(3)   Predominantly included in net gains (losses) from equity investments in noninterest income.

(4)   Predominantly mortgage banking noninterest income including gains (losses) on interest rate lock commitments.

(5)   Predominantly included in net gains from trading activities in noninterest income.

127

 


 

      

Credit Derivatives

We use credit derivatives primarily to assist customers with their risk management objectives. We may also use credit derivatives in structured product transactions or liquidity agreements written to special purpose vehicles. The maximum exposure of sold credit derivatives is managed through posted collateral, purchased credit derivatives and similar products in order to achieve our desired credit risk profile. This credit risk management provides an ability to recover a significant portion of any amounts that would be paid under the sold credit derivatives. We would be required to perform under the noted credit derivatives in the event of default by the referenced obligors. Events of default include events such as bankruptcy, capital restructuring or lack of principal and/or interest payment. In certain cases, other triggers may exist, such as the credit downgrade of the referenced obligors or the inability of the special purpose vehicle for which we have provided liquidity to obtain funding.

The following table provides details of sold and purchased credit derivatives.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Notional amount

  

  

  

  

  

  

  

  

  

Protection

  

Protection

  

  

  

  

  

  

  

  

  

  

  

sold -

  

purchased

Net

  

  

  

  

  

  

  

  

  

  

non-

  

with

protection

Other

  

  

  

  

  

  

  

Fair value

Protection

investment

  

identical

sold

protection

Range of

(in millions)

  

liability

sold (A)

grade

underlyings (B)

(A) - (B)

purchased

maturities

June 30, 2014

  

  

  

  

  

  

  

  

  

Credit default swaps on:

  

  

  

  

  

  

  

  

  

  

Corporate bonds

$

 36 

 8,859 

 4,388 

  

 5,725 

 3,134 

 4,316 

2014-2021

  

Structured products

  

 828 

 1,319 

 1,024 

  

 758 

 561 

 379 

2017-2052

Credit protection on:

  

  

  

  

  

  

  

  

  

  

Default swap index

  

 - 

 1,927 

 234 

  

 1,575 

 352 

 582 

2014-2019

  

Commercial mortgage-

  

  

  

  

  

  

  

  

  

  

  

backed securities index

  

 271 

 1,062 

 - 

  

 651 

 411 

 332 

2047-2063

  

Asset-backed securities index

  

 21 

 53 

 - 

  

 1 

 52 

 85 

2045-2046

Other

  

 - 

 2,392 

 2,392 

  

 - 

 2,392 

 5,279 

2014-2025

  

Total credit derivatives

$

 1,156 

 15,612 

 8,038 

  

 8,710 

 6,902 

 10,973 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

Credit default swaps on:

  

  

  

  

  

  

  

  

  

  

Corporate bonds

$

 48 

 10,947 

 5,237 

  

 6,493 

 4,454 

 5,557 

2014-2021

  

Structured products

  

 1,091 

 1,553 

 1,245 

  

 894 

 659 

 389 

2016-2052

Credit protection on:

  

  

  

  

  

  

  

  

  

  

Default swap index

  

 - 

 3,270 

 388 

  

 2,471 

 799 

 898 

2014-2018

  

Commercial mortgage-backed securities index (1)

  

 344 

 1,106 

 1 

  

 535 

 571 

 535 

2049-2052

  

Asset-backed securities index (1)

  

 48 

 55 

 - 

  

 1 

 54 

 87 

2045-2046

Other

  

 1 

 2,570 

 2,570 

  

 3 

 2,567 

 5,451 

2014-2025

  

Total credit derivatives

$

 1,532 

 19,501 

 9,441 

  

 10,397 

 9,104 

 12,917 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Amounts previously reported for "Protection sold - non-investment grade" have been revised to reflect a corrected determination of the investment grade status of sold credit protection.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Protection sold represents the estimated maximum exposure to loss that would be incurred under an assumed hypothetical circumstance, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. We believe this hypothetical circumstance to be an extremely remote possibility and accordingly, this required disclosure is not an indication of expected loss. The amounts under non-investment grade represent the notional amounts of those credit derivatives on which we have a higher risk of being required to perform under the terms of the credit derivative and are a function of the underlying assets.


We consider the risk of performance to be high if the underlying assets under the credit derivative have an external rating that is below investment grade or an internal credit default grade that is equivalent thereto. We believe the net protection sold, which is representative of the net notional amount of protection sold and purchased with identical underlyings, in combination with other protection purchased, is more representative of our exposure to loss than either non-investment grade or protection sold. Other protection purchased represents additional protection, which may offset the exposure to loss for protection sold, that was not purchased with an identical underlying of the protection sold.

128

 


 

Note 12:    Derivatives   (continued)  

 

 

Credit-Risk Contingent Features

Certain of our derivative contracts contain provisions whereby if the credit rating of our debt were to be downgraded by certain major credit rating agencies, the counterparty could demand additional collateral or require termination or replacement of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a net liability position was $11.4 billion at June 30, 2014, and $14.3 billion at December 31, 2013, respectively, for which we posted $9.9 billion and $12.2  billion, respectively, in collateral in the normal course of business. If the credit rating of our debt had been downgraded below investment grade, which is the credit-risk-related contingent feature that if triggered requires the maximum amount of collateral to be posted, on June 30, 2014, or December 31, 2013, we would have been required to post additional collateral of $1.5 billion or $2.5 billion, respectively, or potentially settle the contract in an amount equal to its fair value.

 


Counterparty Credit Risk

By using derivatives, we are exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is equal to the amount reported as a derivative asset on our balance sheet. The amounts reported as a derivative asset are derivative contracts in a gain position, and to the extent subject to legally enforceable master netting arrangements, net of derivatives in a loss position with the same counterparty and cash collateral received. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. To the extent the master netting arrangements and other criteria meet the applicable requirements, including determining the legal enforceability of the arrangement, it is our policy to present derivative balances and related cash collateral amounts net on the balance sheet. We incorporate credit valuation adjustments (CVA) to reflect counterparty credit risk and our own credit risk in determining the fair value of our derivatives. Such adjustments, which consider the effects of enforceable master netting agreements and collateral arrangements, reflect market-based views of the credit quality of each counterparty. Our CVA calculation is determined based on observed credit spreads in the credit default swap market and indices indicative of the credit quality of the counterparties to our derivatives.  

129

 


 

   

Note 13:  Fair Values of Assets and Liabilities                                                                                                         

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Assets and liabilities recorded at fair value on a recurring basis are presented in the recurring table in this Note. From time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as certain residential and commercial MHFS, certain LHFS, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.

See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2013 Form 10-K for discussion of how we determine fair value. For descriptions of the valuation methodologies we use for assets and liabilities recorded at fair value on a recurring or nonrecurring basis and for estimating fair value for financial instruments not recorded at fair value, see Note 17 (Fair Values of Assets and Liabilities) to Financial Statements in our 2013 Form 10-K.

 

Fair Value Hierarchy     We group our assets and liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

·          Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

·          Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

·          Level 3 – Valuation is generated from techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

Fair Value Measurements from Brokers or Third Party Pricing Services

For certain assets and liabilities, we obtain fair value measurements from brokers or third party pricing services and record the unadjusted fair value in our financial statements. The detail by level is shown in the table below. Fair value measurements obtained from brokers or third party pricing services that we have adjusted to determine the fair value recorded in our financial statements are not included in the following table.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Brokers

  

Third party pricing services

(in millions)

  

Level 1

Level 2

Level 3

  

Level 1

Level 2

Level 3

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

Trading assets (excluding derivatives)

$

 - 

 - 

 - 

  

 1,913 

 185 

 - 

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 - 

 - 

 - 

  

 537 

 5,876 

 - 

  

Securities of U.S. states and political subdivisions

  

 - 

 - 

 - 

  

 - 

 41,600 

 89 

  

Mortgage-backed securities

  

 - 

 377 

 - 

  

 - 

 145,882 

 177 

  

Other debt securities (1)

  

 - 

 304 

 703 

  

 - 

 44,393 

 683 

  

  

Total debt securities

  

 - 

 681 

 703 

  

 537 

 237,751 

 949 

  

  

Total marketable equity securities

  

 - 

 - 

 - 

  

 3 

 589 

 - 

  

  

  

Total available-for-sale securities

  

 - 

 681 

 703 

  

 540 

 238,340 

 949 

Derivatives (trading and other assets)

  

 - 

 4 

 - 

  

 - 

 315 

 1 

Derivatives (liabilities)

  

 - 

 (6) 

 - 

  

 - 

 (318) 

 - 

Other liabilities

  

 - 

 - 

 - 

  

 - 

 - 

 - 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

Trading assets (excluding derivatives)

$

 - 

 122 

 1 

  

 1,804 

 652 

 3 

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies

  

 - 

 - 

 - 

  

 557 

 5,723 

 - 

  

Securities of U.S. states and political subdivisions

  

 - 

 - 

 - 

  

 - 

 39,257 

 63 

  

Mortgage-backed securities

  

 - 

 621 

 - 

  

 - 

 148,074 

 180 

  

Other debt securities (1)

  

 - 

 1,537 

 722 

  

 - 

 44,681 

 746 

  

  

Total debt securities

  

 - 

 2,158 

 722 

  

 557 

 237,735 

 989 

  

  

Total marketable equity securities

  

 - 

 - 

 - 

  

 - 

 630 

 - 

  

  

  

Total available-for-sale securities

  

 - 

 2,158 

 722 

  

 557 

 238,365 

 989 

Derivatives (trading and other assets)

  

 - 

 5 

 - 

  

 - 

 417 

 3 

Derivatives (liabilities)

  

 - 

 (12) 

 - 

  

 - 

 (418) 

 - 

Other liabilities

  

 - 

 (115) 

 - 

  

 - 

 (36) 

 - 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Includes corporate debt securities, collateralized loan and other debt obligations, asset-backed securities, and other debt securities.

130

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following two tables present the balances of assets and liabilities recorded at fair value on a recurring basis.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in millions)  

  

Level 1

Level 2

Level 3

  

Netting

  

Total

June 30, 2014  

  

  

  

  

  

  

  

  

Trading assets (excluding derivatives)  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies  

$

 13,073 

 3,982 

 - 

  

 - 

  

 17,055 

  

Securities of U.S. states and political subdivisions  

  

 - 

 2,433 

 8 

  

 - 

  

 2,441 

  

Collateralized loan and other debt obligations (1)

  

 - 

 146 

 581 

  

 - 

  

 727 

  

Corporate debt securities  

  

 1 

 8,470 

 62 

  

 - 

  

 8,533 

  

Mortgage-backed securities  

  

 - 

 16,147 

 1 

  

 - 

  

 16,148 

  

Asset-backed securities  

  

 - 

 756 

 91 

  

 - 

  

 847 

  

Equity securities  

  

 8,525 

 25 

 13 

  

 - 

  

 8,563 

  

  

Total trading securities (2)

  

 21,599 

 31,959 

 756 

  

 - 

  

 54,314 

  

Other trading assets  

  

 2,808 

 2,056 

 49 

  

 - 

  

 4,913 

  

  

  

Total trading assets (excluding derivatives)  

  

 24,407 

 34,015 

 805 

  

 - 

  

 59,227 

Securities of U.S. Treasury and federal agencies  

  

 537 

 5,877 

 - 

  

 - 

  

 6,414 

Securities of U.S. states and political subdivisions  

  

 - 

 41,610 

 3,169 

(3)

 - 

  

 44,779 

Mortgage-backed securities:  

  

  

  

  

  

  

  

  

  

Federal agencies  

  

 - 

 116,908 

 - 

  

 - 

  

 116,908 

  

Residential  

  

 - 

 11,178 

 41 

  

 - 

  

 11,219 

  

Commercial  

  

 - 

 18,078 

 136 

  

 - 

  

 18,214 

  

  

Total mortgage-backed securities  

  

 - 

 146,164 

 177 

  

 - 

  

 146,341 

Corporate debt securities  

  

 85 

 19,210 

 284 

  

 - 

  

 19,579 

Collateralized loan and other debt obligations (4)

  

 - 

 19,505 

 1,326 

(3)

 - 

  

 20,831 

Asset-backed securities:  

  

  

  

  

  

  

  

  

  

Auto loans and leases  

  

 - 

 41 

 272 

(3)

 - 

  

 313 

  

Home equity loans  

  

 - 

 845 

 - 

  

 - 

  

 845 

  

Other asset-backed securities  

  

 - 

 5,409 

 1,295 

(3)

 - 

  

 6,704 

  

  

Total asset-backed securities  

  

 - 

 6,295 

 1,567 

  

 - 

  

 7,862 

Other debt securities  

  

 - 

 40 

 - 

  

 - 

  

 40 

  

  

  

Total debt securities  

  

 622 

 238,701 

 6,523 

  

 - 

  

 245,846 

Marketable equity securities:  

  

  

  

  

  

  

  

  

  

Perpetual preferred securities (5) 

  

 477 

 585 

 700 

(3)

 - 

  

 1,762 

  

Other marketable equity securities  

  

 1,349 

 4 

 - 

  

 - 

  

 1,353 

  

  

  

Total marketable equity securities  

  

 1,826 

 589 

 700 

  

 - 

  

 3,115 

  

  

  

  

Total available-for-sale securities  

  

 2,448 

 239,290 

 7,223 

  

 - 

  

 248,961 

Mortgages held for sale   

  

 - 

 14,052 

 2,396 

  

 - 

  

 16,448 

Loans held for sale  

  

 - 

 1 

 - 

  

 - 

  

 1 

Loans  

  

 - 

 - 

 5,926 

  

 - 

  

 5,926 

Mortgage servicing rights (residential)  

  

 - 

 - 

 13,900 

  

 - 

  

 13,900 

Derivative assets:  

  

  

  

  

  

  

  

  

  

Interest rate contracts  

  

 29 

 49,292 

 429 

  

 - 

  

 49,750 

  

Commodity contracts  

  

 - 

 3,308 

 6 

  

 - 

  

 3,314 

  

Equity contracts  

  

 2,888 

 5,332 

 1,689 

  

 - 

  

 9,909 

  

Foreign exchange contracts  

  

 129 

 4,012 

 3 

  

 - 

  

 4,144 

  

Credit contracts  

  

 - 

 605 

 563 

  

 - 

  

 1,168 

  

Other derivative contracts  

  

 - 

 - 

 1 

  

 - 

  

 1 

  

  

Netting  

  

 - 

 - 

 - 

  

 (50,874) 

(6)

 (50,874) 

  

  

  

Total derivative assets (7) 

  

 3,046 

 62,549 

 2,691 

  

 (50,874) 

  

 17,412 

Other assets  

  

 - 

 - 

 2,005 

  

 - 

  

 2,005 

  

  

  

  

  

Total assets recorded at fair value  

$

 29,901 

 349,907 

 34,946 

  

 (50,874) 

  

 363,880 

Derivative liabilities:  

  

  

  

  

  

  

  

  

  

Interest rate contracts  

$

 (24) 

 (48,835) 

 (246) 

  

 - 

  

 (49,105) 

  

Commodity contracts  

  

 - 

 (3,184) 

 (4) 

  

 - 

  

 (3,188) 

  

Equity contracts  

  

 (845) 

 (6,110) 

 (1,739) 

  

 - 

  

 (8,694) 

  

Foreign exchange contracts  

  

 (119) 

 (3,033) 

 (1) 

  

 - 

  

 (3,153) 

  

Credit contracts  

  

 - 

 (621) 

 (829) 

  

 - 

  

 (1,450) 

  

Other derivative contracts  

  

 - 

 - 

 (14) 

  

 - 

  

 (14) 

  

  

Netting  

  

 - 

 - 

 - 

  

 56,574 

(6)

 56,574 

  

  

  

Total derivative liabilities (7) 

  

 (988) 

 (61,783) 

 (2,833) 

  

 56,574 

  

 (9,030) 

Short sale liabilities:  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies  

  

 (6,028) 

 (1,937) 

 - 

  

 - 

  

 (7,965) 

  

Securities of U.S. states and political subdivisions

  

 - 

 (24) 

 - 

  

 - 

  

 (24) 

  

Corporate debt securities  

  

 - 

 (5,164) 

 - 

  

 - 

  

 (5,164) 

  

Equity securities  

  

 (1,954) 

 (6) 

 - 

  

 - 

  

 (1,960) 

  

Other securities  

  

 - 

 (25) 

 - 

  

 - 

  

 (25) 

  

  

Total short sale liabilities  

  

 (7,982) 

 (7,156) 

 - 

  

 - 

  

 (15,138) 

Other liabilities (excluding derivatives)  

  

 - 

 - 

 (45) 

  

 - 

  

 (45) 

  

  

  

  

  

Total liabilities recorded at fair value  

$

 (8,970) 

 (68,939) 

 (2,878) 

  

 56,574 

  

 (24,213) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Includes collateralized debt obligations of $1 million. 

(2)   Net gains (losses) from trading activities recognized in the income statement for the first half of 2014 and 2013 include $216 million  and $(646) million in net unrealized gains (losses) on trading securities held at June 30, 2014 and 2013, respectively.

(3)   Balances consist of securities that are mostly investment grade based on ratings received from the ratings agencies or internal credit grades categorized as investment grade if external ratings are not available. The securities are classified as Level 3 due to limited market activity.

(4)   Includes collateralized debt obligations of $580 million. 

(5)   Perpetual preferred securities include ARS and corporate preferred securities. See Note 7 (Securitizations and Variable Interest Entities) for additional information.

(6)   Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 12 (Derivatives) for additional information.

(7)   Derivative assets and derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets and trading liabilities, respectively.

 

(continued on following page)

131

 


 

      

 

  

(continued from previous page)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in millions)  

  

Level 1

Level 2

Level 3

  

Netting

  

Total

December 31, 2013  

  

  

  

  

  

  

  

  

Trading assets (excluding derivatives)  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies  

$

 8,301 

 3,669 

 - 

  

 - 

  

 11,970 

  

Securities of U.S. states and political subdivisions  

  

 - 

 2,043 

 39 

  

 - 

  

 2,082 

  

Collateralized loan and other debt obligations (1)

  

 - 

 212 

 541 

  

 - 

  

 753 

  

Corporate debt securities  

  

 - 

 7,052 

 53 

  

 - 

  

 7,105 

  

Mortgage-backed securities  

  

 - 

 14,608 

 1 

  

 - 

  

 14,609 

  

Asset-backed securities  

  

 - 

 487 

 122 

  

 - 

  

 609 

  

Equity securities  

  

 5,908 

 87 

 13 

  

 - 

  

 6,008 

  

  

Total trading securities (2)

  

 14,209 

 28,158 

 769 

  

 - 

  

 43,136 

  

Other trading assets  

  

 2,694 

 2,487 

 54 

  

 - 

  

 5,235 

  

  

  

Total trading assets (excluding derivatives)  

  

 16,903 

 30,645 

 823 

  

 - 

  

 48,371 

Securities of U.S. Treasury and federal agencies  

  

 557 

 5,723 

 - 

  

 - 

  

 6,280 

Securities of U.S. states and political subdivisions  

  

 - 

 39,322 

 3,214 

(3)

 - 

  

 42,536 

Mortgage-backed securities:  

  

  

  

  

  

  

  

  

  

Federal agencies  

  

 - 

 117,591 

 - 

  

 - 

  

 117,591 

  

Residential  

  

 - 

 12,389 

 64 

  

 - 

  

 12,453 

  

Commercial  

  

 - 

 18,609 

 138 

  

 - 

  

 18,747 

  

  

Total mortgage-backed securities  

  

 - 

 148,589 

 202 

  

 - 

  

 148,791 

Corporate debt securities  

  

 113 

 20,833 

 281 

  

 - 

  

 21,227 

Collateralized loan and other debt obligations (4)

  

 - 

 18,739 

 1,420 

(3)

 - 

  

 20,159 

Asset-backed securities:  

  

  

  

  

  

  

  

  

  

Auto loans and leases  

  

 - 

 21 

 492 

(3)

 - 

  

 513 

  

Home equity loans  

  

 - 

 843 

 - 

  

 - 

  

 843 

  

Other asset-backed securities  

  

 - 

 6,577 

 1,657 

(3)

 - 

  

 8,234 

  

  

Total asset-backed securities  

  

 - 

 7,441 

 2,149 

  

 - 

  

 9,590 

Other debt securities  

  

 - 

 39 

 - 

  

 - 

  

 39 

  

  

  

Total debt securities  

  

 670 

 240,686 

 7,266 

  

 - 

  

 248,622 

Marketable equity securities:  

  

  

  

  

  

  

  

  

  

Perpetual preferred securities (5)

  

 508 

 628 

 729 

(3)

 - 

  

 1,865 

  

Other marketable equity securities  

  

 1,511 

 9 

 - 

  

 - 

  

 1,520 

  

  

  

Total marketable equity securities  

  

 2,019 

 637 

 729 

  

 - 

  

 3,385 

  

  

  

  

Total available-for-sale securities  

  

 2,689 

 241,323 

 7,995 

  

 - 

  

 252,007 

Mortgages held for sale   

  

 - 

 11,505 

 2,374 

  

 - 

  

 13,879 

Loans held for sale  

  

 - 

 1 

 - 

  

 - 

  

 1 

Loans  

  

 - 

 272 

 5,723 

  

 - 

  

 5,995 

Mortgage servicing rights (residential)  

  

 - 

 - 

 15,580 

  

 - 

  

 15,580 

Derivative assets:  

  

  

  

  

  

  

  

  

  

Interest rate contracts  

  

 36 

 55,466 

 344 

  

 - 

  

 55,846 

  

Commodity contracts  

  

 - 

 2,667 

 6 

  

 - 

  

 2,673 

  

Equity contracts  

  

 1,522 

 4,221 

 2,081 

  

 - 

  

 7,824 

  

Foreign exchange contracts  

  

 44 

 4,789 

 10 

  

 - 

  

 4,843 

  

Credit contracts  

  

 - 

 782 

 719 

  

 - 

  

 1,501 

  

Other derivative contracts  

  

 - 

 - 

 13 

  

 - 

  

 13 

  

  

Netting  

  

 - 

 - 

 - 

  

 (56,894) 

(6)

 (56,894) 

  

  

  

Total derivative assets (7)

  

 1,602 

 67,925 

 3,173 

  

 (56,894) 

  

 15,806 

Other assets  

  

 - 

 - 

 1,503 

  

 - 

  

 1,503 

  

  

  

  

  

Total assets recorded at fair value  

$

 21,194 

 351,671 

 37,171 

  

 (56,894) 

  

 353,142 

Derivative liabilities:  

  

  

  

  

  

  

  

  

  

Interest rate contracts  

$

 (26) 

 (56,128) 

 (384) 

  

 - 

  

 (56,538) 

  

Commodity contracts  

  

 - 

 (2,587) 

 (16) 

  

 - 

  

 (2,603) 

  

Equity contracts  

  

 (449) 

 (5,218) 

 (2,127) 

  

 - 

  

 (7,794) 

  

Foreign exchange contracts  

  

 (75) 

 (4,432) 

 (1) 

  

 - 

  

 (4,508) 

  

Credit contracts  

  

 - 

 (806) 

 (1,094) 

  

 - 

  

 (1,900) 

  

Other derivative contracts  

  

 - 

 - 

 (16) 

  

 - 

  

 (16) 

  

  

Netting  

  

 - 

 - 

 - 

  

 63,739 

(6)

 63,739 

  

  

  

Total derivative liabilities (7)

  

 (550) 

 (69,171) 

 (3,638) 

  

 63,739 

  

 (9,620) 

Short sale liabilities:  

  

  

  

  

  

  

  

  

  

Securities of U.S. Treasury and federal agencies  

  

 (4,311) 

 (2,063) 

 - 

  

 - 

  

 (6,374) 

  

Securities of U.S. states and political subdivisions  

  

 - 

 (24) 

 - 

  

 - 

  

 (24) 

  

Corporate debt securities  

  

 - 

 (4,683) 

 - 

  

 - 

  

 (4,683) 

  

Equity securities  

  

 (1,788) 

 (48) 

 - 

  

 - 

  

 (1,836) 

  

Other securities  

  

 - 

 (95) 

 - 

  

 - 

  

 (95) 

  

  

Total short sale liabilities  

  

 (6,099) 

 (6,913) 

 - 

  

 - 

  

 (13,012) 

Other liabilities (excluding derivatives)  

  

 - 

 - 

 (39) 

  

 - 

  

 (39) 

  

  

  

  

  

Total liabilities recorded at fair value  

$

 (6,649) 

 (76,084) 

 (3,677) 

  

 63,739 

  

 (22,671) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Includes  collateralized debt obligations of $2 million.

(2)   Net gains from trading activities recognized in the income statement for the year ended December 31, 2013, include $(29) million in net unrealized losses on trading securities held at December 31, 2013.

(3)   Balances consist of securities that are mostly investment grade based on ratings received from the ratings agencies or internal credit grades categorized as investment grade if external ratings are not available. The securities are classified as Level 3 due to limited market activity.

(4)   Includes collateralized debt obligations of $693 million.

(5)   Perpetual preferred securities include ARS and corporate preferred securities. See Note 7 (Securitizations and Variable Interest Entities) for additional information.

(6)   Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 12 (Derivatives) for additional information.

(7)   Derivative assets and derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets and trading liabilities, respectively.

132

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

Changes in Fair Value Levels

We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between Level 1, Level 2, and Level 3 accordingly. Observable market data includes but is not limited to quoted prices and market transactions. Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changing the valuation technique used, are generally the cause of transfers between Level 1, Level 2, and Level 3.

Transfers into and out of Level 1, Level 2, and Level 3 for the periods presented are provided within the following table. The amounts reported as transfers represent the fair value as of the beginning of the quarter in which the transfer occurred.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Transfers Between Fair Value Levels

  

  

  

  

Level 1

  

Level 2

  

Level 3 (1)

  

(in millions)

  

In

Out

  

In

Out

  

In

Out

 Total  

Quarter ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

Trading assets (excluding derivatives)

 $  

 - 

 - 

  

 38 

 - 

  

 - 

 (38) 

 - 

Available-for-sale securities

  

 - 

 - 

  

 97 

 (53) 

  

 53 

 (97) 

 - 

Mortgages held for sale

  

 - 

 - 

  

 98 

 (139) 

  

 139 

 (98) 

 - 

Loans

  

 - 

 - 

  

 - 

 (270) 

  

 270 

 - 

 - 

Net derivative assets and liabilities

  

 - 

 - 

  

 (132) 

 3 

  

 (3) 

 132 

 - 

  

Total transfers

 $  

 - 

 - 

  

 101 

 (459) 

  

 459 

 (101) 

 - 

Quarter ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

Trading assets (excluding derivatives)

 $  

 - 

 (246) 

  

 266 

 (1) 

  

 1 

 (20) 

 - 

Available-for-sale securities

  

 - 

 - 

  

 165 

 - 

  

 - 

 (165) 

 - 

Mortgages held for sale

  

 - 

 - 

  

 46 

 (81) 

  

 81 

 (46) 

 - 

Loans

  

 - 

 - 

  

 58 

 - 

  

 - 

 (58) 

 - 

Net derivative assets and liabilities

  

 - 

 - 

  

 70 

 - 

  

 - 

 (70) 

 - 

  

Total transfers

 $  

 - 

 (246) 

  

 605 

 (82) 

  

 82 

 (359) 

 - 

Six months ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

Trading assets (excluding derivatives)

 $  

 - 

 - 

  

 40 

 (28) 

  

 28 

 (40) 

 - 

Available-for-sale securities

  

 - 

 (8) 

  

 105 

 (148) 

  

 148 

 (97) 

 - 

Mortgages held for sale

  

 - 

 - 

  

 122 

 (196) 

  

 196 

 (122) 

 - 

Loans

  

 - 

 - 

  

 49 

 (270) 

  

 270 

 (49) 

 - 

Net derivative assets and liabilities

  

 - 

 - 

  

 (87) 

 - 

  

 - 

 87 

 - 

  

Total transfers

 $  

 - 

 (8) 

  

 229 

 (642) 

  

 642 

 (221) 

 - 

Six months ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

Trading assets (excluding derivatives) (2)

 $  

 - 

 (246) 

  

 468 

 (26) 

  

 26 

 (222) 

 - 

Available-for-sale securities (2)

  

 17 

 - 

  

 10,841 

 (17) 

  

 - 

 (10,841) 

 - 

Mortgages held for sale

  

 - 

 - 

  

 139 

 (178) 

  

 178 

 (139) 

 - 

Loans

  

 - 

 - 

  

 106 

 - 

  

 - 

 (106) 

 - 

Net derivative assets and liabilities

  

 - 

 - 

  

 49 

 - 

  

 - 

 (49) 

 - 

  

Total transfers

 $  

 17 

 (246) 

  

 11,603 

 (221) 

  

 204 

 (11,357) 

 - 

  

  

  

  

  

  

  

  

  

  

  

  

(1)   All transfers in and out of Level 3 are disclosed within the recurring Level 3 rollforward table in this Note.

(2)   For the first half of 2013, consists of $202 million of collateralized loan obligations classified as trading assets and $10.6 billion classified as available-for-sale securities that we transferred from Level 3 to Level 2 in first quarter 2013 as a result of increased observable market data in the valuation of such instruments.

133

 


 

      

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2014, are summarized as follows:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net unrealized  

  

  

  

  

  

  

  

  

  

  

Total net gains

Purchases,

  

  

  

gains (losses)  

  

  

  

  

  

  

  

  

  

  

(losses) included in

sales,

  

  

  

included in  

  

  

  

  

  

  

  

  

  

  

  

Other

issuances

  

  

  

income related  

  

  

  

  

  

  

  

  

  

Balance,

  

compre-

and

Transfers

Transfers

Balance,

to assets and  

  

  

  

  

  

  

  

  

beginning

Net

hensive

settlements,

into

out of

end of

liabilities held  

  

(in millions)

  

  

of period

income

income

net (1)

Level 3

Level 3

period

at period end   

(2)

Quarter ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

Trading assets

  

  

  

  

  

  

  

  

  

  

  

(excluding derivatives):

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

$

 40 

 - 

 - 

 (1) 

 - 

 (31) 

 8 

 -   

  

  

Collateralized loan and other debt obligations

  

 608 

 3 

 - 

 (26) 

 - 

 (4) 

 581 

 (10)   

  

  

Corporate debt securities

  

 86 

 (4) 

 - 

 (20) 

 - 

 - 

 62 

 1   

  

  

Mortgage-backed securities

  

 1 

 - 

 - 

 - 

 - 

 - 

 1 

 -   

  

  

Asset-backed securities

  

 97 

 12 

 - 

 (15) 

 - 

 (3) 

 91 

 12   

  

  

Equity securities

  

 13 

 - 

 - 

 - 

 - 

 - 

 13 

 -   

  

  

  

Total trading securities

  

 845 

 11 

 - 

 (62) 

 - 

 (38) 

 756 

 3   

  

  

Other trading assets

  

 52 

 (3) 

 - 

 - 

 - 

 - 

 49 

 (1)   

  

  

  

  

Total trading assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(excluding derivatives)

  

 897 

 8 

 - 

 (62) 

 - 

 (38) 

 805 

 2   

(3)

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

  

 3,099 

 - 

 7 

 107 

 53 

 (97) 

 3,169 

 (2)   

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

Residential

  

 41 

 - 

 1 

 (1) 

 - 

 - 

 41 

 -   

  

  

  

Commercial

  

 141 

 (2) 

 (3) 

 - 

 - 

 - 

 136 

 (1)   

  

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 182 

 (2) 

 (2) 

 (1) 

 - 

 - 

 177 

 (1)   

  

  

Corporate debt securities

  

 297 

 9 

 (12) 

 (10) 

 - 

 - 

 284 

 -   

  

  

Collateralized loan and other debt obligations

  

 1,420 

 27 

 (8) 

 (113) 

 - 

 - 

 1,326 

 (2)   

  

  

Asset-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

Auto loans and leases

  

 274 

 - 

 (2) 

 - 

 - 

 - 

 272 

 -   

  

  

  

Home equity loans

  

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 -   

  

  

  

Other asset-backed securities

  

 1,280 

 - 

 1 

 14 

 - 

 - 

 1,295 

 -   

  

  

  

  

Total asset-backed securities

  

 1,554 

 - 

 (1) 

 14 

 - 

 - 

 1,567 

 -   

  

  

  

  

  

Total debt securities

  

 6,552 

 34 

 (16) 

 (3) 

 53 

 (97) 

 6,523 

 (5)   

(4)

  

Marketable equity securities:

  

  

  

  

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 708 

 1 

 (6) 

 (3) 

 - 

 - 

 700 

 -   

  

  

  

Other marketable equity securities

  

 - 

 4 

 - 

 (4) 

 - 

 - 

 - 

 -   

  

  

  

  

  

Total marketable

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

equity securities

  

 708 

 5 

 (6) 

 (7) 

 - 

 - 

 700 

 -   

(5)

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 7,260 

 39 

 (22) 

 (10) 

 53 

 (97) 

 7,223 

 (5)   

  

Mortgages held for sale

  

 2,363 

 21 

 - 

 (29) 

 139 

 (98) 

 2,396 

 24   

(6)

Loans

  

 5,689 

 3 

 - 

 (36) 

 270 

 - 

 5,926 

 7   

(6)

Mortgage servicing rights (residential) (7)

  

 14,953 

 (1,324) 

 - 

 271 

 - 

 - 

 13,900 

 (835)   

(6)

Net derivative assets and liabilities:

  

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

  

 58 

 551 

 - 

 (426) 

 - 

 - 

 183 

 199   

  

  

Commodity contracts

  

 (43) 

 10 

 - 

 (2) 

 - 

 37 

 2 

 -   

  

  

Equity contracts

  

 (24) 

 (3) 

 - 

 (115) 

 (3) 

 95 

 (50) 

 (50)   

  

  

Foreign exchange contracts

  

 6 

 3 

 - 

 (7) 

 - 

 - 

 2 

 (3)   

  

  

Credit contracts

  

 (268) 

 2 

 - 

 - 

 - 

 - 

 (266) 

 (14)   

  

  

Other derivative contracts

  

 (11) 

 (2) 

 - 

 - 

 - 

 - 

 (13) 

 -   

  

  

  

Total derivative contracts

  

 (282) 

 561 

 - 

 (550) 

 (3) 

 132 

 (142) 

 132   

(8)

Other assets

  

 2,040 

 (30) 

 - 

 (5) 

 - 

 - 

 2,005 

 (2)   

(3)

Short sale liabilities

  

 (5) 

 (1) 

 - 

 6 

 - 

 - 

 - 

 -   

(3)

Other liabilities (excluding derivatives)

  

 (37) 

 (7) 

 - 

 (1) 

 - 

 - 

 (45) 

 -   

(6)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   See next page for detail.

(2)   Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.

(3)   Included in net gains (losses) from trading activities and other noninterest income in the income statement.

(4)   Included in net gains (losses) from debt securities in the income statement.

(5)   Included in net gains (losses) from equity investments in the income statement.

(6)   Included in mortgage banking and other noninterest income in the income statement.

(7)   For more information on the changes in mortgage servicing rights, see Note 8 (Mortgage Banking Activities).

(8)   Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.

 

(continued on following page)

134

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

 

(continued from previous page)

 

The following table presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2014.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in millions)

  

  

Purchases

Sales

Issuances

Settlements

Net

Quarter ended June 30, 2014

  

  

  

  

  

  

Trading assets

  

  

  

  

  

  

  

(excluding derivatives):

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

political subdivisions

$

 1 

 (1) 

 - 

 (1) 

 (1) 

  

Collateralized loan and other debt obligations

  

 127 

 (151) 

 - 

 (2) 

 (26) 

  

Corporate debt securities

  

 8 

 (34) 

 - 

 6 

 (20) 

  

Mortgage-backed securities

  

 - 

 - 

 - 

 - 

 - 

  

Asset-backed securities

  

 1 

 (6) 

 - 

 (10) 

 (15) 

  

Equity securities

  

 - 

 - 

 - 

 - 

 - 

  

  

Total trading securities

  

 137 

 (192) 

 - 

 (7) 

 (62) 

  

Other trading assets

  

 1 

 (1) 

 - 

 - 

 - 

  

  

  

Total trading assets

  

  

  

  

  

  

  

  

  

  

(excluding derivatives)

  

 138 

 (193) 

 - 

 (7) 

 (62) 

Available-for-sale securities:

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

political subdivisions

  

 - 

 - 

 257 

 (150) 

 107 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

Residential

  

 - 

 (1) 

 - 

 - 

 (1) 

  

  

Commercial

  

 - 

 - 

 - 

 - 

 - 

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

securities

  

 - 

 (1) 

 - 

 - 

 (1) 

  

Corporate debt securities

  

 7 

 (8) 

 (1) 

 (8) 

 (10) 

  

Collateralized loan and other debt obligations

  

 9 

 - 

 - 

 (122) 

 (113) 

  

Asset-backed securities:

  

  

  

  

  

  

  

  

Auto loans and leases

  

 - 

 - 

 - 

 - 

 - 

  

  

Home equity loans

  

 - 

 - 

 - 

 - 

 - 

  

  

Other asset-backed securities

  

 75 

 - 

 50 

 (111) 

 14 

  

  

  

Total asset-backed securities

  

 75 

 - 

 50 

 (111) 

 14 

  

  

  

  

Total debt securities

  

 91 

 (9) 

 306 

 (391) 

 (3) 

  

Marketable equity securities:

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 - 

 - 

 - 

 (3) 

 (3) 

  

  

Other marketable equity securities

  

 - 

 (4) 

 - 

 - 

 (4) 

  

  

  

  

Total marketable

  

  

  

  

  

  

  

  

  

  

  

equity securities

  

 - 

 (4) 

 - 

 (3) 

 (7) 

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 91 

 (13) 

 306 

 (394) 

 (10) 

Mortgages held for sale

  

 59 

 - 

 - 

 (88) 

 (29) 

Loans

  

 1 

 - 

 104 

 (141) 

 (36) 

Mortgage servicing rights (residential)

  

 - 

 - 

 271 

 - 

 271 

Net derivative assets and liabilities:

  

  

  

  

  

  

  

Interest rate contracts

  

 - 

 - 

 - 

 (426) 

 (426) 

  

Commodity contracts

  

 - 

 - 

 - 

 (2) 

 (2) 

  

Equity contracts

  

 - 

 (57) 

 - 

 (58) 

 (115) 

  

Foreign exchange contracts

  

 - 

 - 

 - 

 (7) 

 (7) 

  

Credit contracts

  

 2 

 72 

 - 

 (74) 

 - 

  

Other derivative contracts

  

 - 

 - 

 - 

 - 

 - 

  

  

Total derivative contracts

  

 2 

 15 

 - 

 (567) 

 (550) 

Other assets

  

 1 

 (1) 

 - 

 (5) 

 (5) 

Short sale liabilities

  

 11 

 (5) 

 - 

 - 

 6 

Other liabilities (excluding derivatives)

  

 - 

 - 

 - 

 (1) 

 (1) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

135

 


 

      

 

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2013, are summarized as follows:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net unrealized

  

  

  

  

  

  

  

  

  

  

Total net gains

Purchases,

  

  

  

gains (losses)

  

  

  

  

  

  

  

  

  

  

(losses) included in

sales,

  

  

  

included in

  

  

  

  

  

  

  

  

  

  

  

Other

issuances

  

  

  

income related

  

  

  

  

  

  

  

  

  

Balance,

  

compre-

and

Transfers

Transfers

Balance,

to assets and

  

  

  

  

  

  

  

  

beginning

Net

hensive

settlements,

into

out of

end of

liabilities held

  

(in millions)

  

  

of period

income

income

net (1)

Level 3

Level 3

period

at period end

(2)

Quarter ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

Trading assets

  

  

  

  

  

  

  

  

  

  

  

(excluding derivatives):

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

$

 36 

 (1) 

 - 

 5 

 - 

 - 

 40 

 - 

  

  

Collateralized loan and other debt obligations

  

 505 

 25 

 - 

 (35) 

 - 

 - 

 495 

 (13) 

  

  

Corporate debt securities

  

 29 

 - 

 - 

 (16) 

 1 

 - 

 14 

 (1) 

  

  

Mortgage-backed securities

  

 5 

 1 

 - 

 3 

 - 

 - 

 9 

 - 

  

  

Asset-backed securities

  

 143 

 (3) 

 - 

 (11) 

 - 

 (20) 

 109 

 (10) 

  

  

Equity securities

  

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 - 

  

  

  

Total trading securities

  

 718 

 22 

 - 

 (54) 

 1 

 (20) 

 667 

 (24) 

  

  

Other trading assets

  

 70 

 (7) 

 - 

 - 

 - 

 - 

 63 

 (2) 

  

  

  

  

Total trading assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(excluding derivatives)

  

 788 

 15 

 - 

 (54) 

 1 

 (20) 

 730 

 (26) 

(3)

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

  

 3,529 

 2 

 (58) 

 451 

 - 

 (165) 

 3,759 

 - 

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

Residential

  

 95 

 1 

 5 

 (3) 

 - 

 - 

 98 

 - 

  

  

  

Commercial

  

 192 

 (4) 

 9 

 (3) 

 - 

 - 

 194 

 (3) 

  

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 287 

 (3) 

 14 

 (6) 

 - 

 - 

 292 

 (3) 

  

  

Corporate debt securities

  

 281 

 2 

 (17) 

 (23) 

 - 

 - 

 243 

 - 

  

  

Collateralized loan and other debt obligations

  

 2,938 

 (3) 

 22 

 270 

 - 

 - 

 3,227 

 - 

  

  

Asset-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

Auto loans and leases

  

 5,704 

 - 

 (34) 

 (798) 

 - 

 - 

 4,872 

 - 

  

  

  

Home equity loans

  

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 - 

  

  

  

Other asset-backed securities

  

 3,436 

 (4) 

 5 

 (489) 

 - 

 - 

 2,948 

 (7) 

  

  

  

  

Total asset-backed securities

  

 9,140 

 (4) 

 (29) 

 (1,287) 

 - 

 - 

 7,820 

 (7) 

  

  

  

  

  

Total debt securities

  

 16,175 

 (6) 

 (68) 

 (595) 

 - 

 (165) 

 15,341 

 (10) 

(4)

  

Marketable equity securities:

  

  

  

  

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 807 

 2 

 2 

 (23) 

 - 

 - 

 788 

 - 

  

  

  

Other marketable equity securities

  

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 - 

  

  

  

  

  

Total marketable

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

equity securities

  

 807 

 2 

 2 

 (23) 

 - 

 - 

 788 

 - 

(5)

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 16,982 

 (4) 

 (66) 

 (618) 

 - 

 (165) 

 16,129 

 (10) 

  

Mortgages held for sale

  

 3,187 

 34 

 - 

 (615) 

 81 

 (46) 

 2,641 

 (54) 

(6)

Loans

  

 5,975 

 (107) 

 - 

 50 

 - 

 (58) 

 5,860 

 (99) 

(6)

Mortgage servicing rights (residential) (7)

  

 12,061 

 1,225 

 - 

 899 

 - 

 - 

 14,185 

 1,867 

(6)

Net derivative assets and liabilities:

  

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

  

 558 

 (1,251) 

 - 

 132 

 - 

 - 

 (561) 

 (707) 

  

  

Commodity contracts

  

 (3) 

 (3) 

 - 

 (8) 

 - 

 2 

 (12) 

 20 

  

  

Equity contracts

  

 (129) 

 10 

 - 

 218 

 - 

 (72) 

 27 

 (3) 

  

  

Foreign exchange contracts

  

 (34) 

 (1) 

 - 

 6 

 - 

 - 

 (29) 

 9 

  

  

Credit contracts

  

 (1,025) 

 - 

 - 

 226 

 - 

 - 

 (799) 

 30 

  

  

Other derivative contracts

  

 (52) 

 15 

 - 

 1 

 - 

 - 

 (36) 

 - 

  

  

  

Total derivative contracts

  

 (685) 

 (1,230) 

 - 

 575 

 - 

 (70) 

 (1,410) 

 (651) 

(8)

Other assets

  

 348 

 38 

 - 

 345 

 - 

 - 

 731 

 16 

(3)

Short sale liabilities

  

 (8) 

 - 

 - 

 8 

 - 

 - 

 - 

 - 

(3)

Other liabilities (excluding derivatives)

  

 (48) 

 5 

 - 

 - 

 - 

 - 

 (43) 

 4 

(6)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   See next page for detail.

(2)   Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.

(3)   Included in net gains (losses) from trading activities and other noninterest income in the income statement.

(4)   Included in net gains (losses) from debt securities in the income statement.

(5)   Included in net gains (losses) from equity investments in the income statement.

(6)   Included in mortgage banking and other noninterest income in the income statement.

(7)   For more information on the changes in mortgage servicing rights, see Note 8 (Mortgage Banking Activities).

(8)   Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.

 

(continued on following page)

136

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

 

(continued from previous page)

 

The following table presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2013.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in millions)

  

  

Purchases

Sales

Issuances

Settlements

Net

Quarter ended June 30, 2013

  

  

  

  

  

  

Trading assets

  

  

  

  

  

  

  

(excluding derivatives):

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

political subdivisions

$

 46 

 (41) 

 - 

 - 

 5 

  

Collateralized loan and other debt obligations

  

 270 

 (302) 

 - 

 (3) 

 (35) 

  

Corporate debt securities

  

 8 

 (24) 

 - 

 - 

 (16) 

  

Mortgage-backed securities

  

 4 

 (1) 

 - 

 - 

 3 

  

Asset-backed securities

  

 6 

 (7) 

 - 

 (10) 

 (11) 

  

Equity securities

  

 - 

 - 

 - 

 - 

 - 

  

  

Total trading securities

  

 334 

 (375) 

 - 

 (13) 

 (54) 

  

Other trading assets

  

 - 

 - 

 - 

 - 

 - 

  

  

  

Total trading assets

  

  

  

  

  

  

  

  

  

  

(excluding derivatives)

  

 334 

 (375) 

 - 

 (13) 

 (54) 

Available-for-sale securities:

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

political subdivisions

  

 - 

 - 

 630 

 (179) 

 451 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

Residential

  

 - 

 - 

 - 

 (3) 

 (3) 

  

  

Commercial

  

 - 

 - 

 - 

 (3) 

 (3) 

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

securities

  

 - 

 - 

 - 

 (6) 

 (6) 

  

Corporate debt securities

  

 - 

 - 

 - 

 (23) 

 (23) 

  

Collateralized loan and other debt obligations

  

 371 

 - 

 - 

 (101) 

 270 

  

Asset-backed securities:

  

  

  

  

  

  

  

  

Auto loans and leases

  

 1 

 - 

 156 

 (955) 

 (798) 

  

  

Home equity loans

  

 - 

 - 

 - 

 - 

 - 

  

  

Other asset-backed securities

  

 11 

 (2) 

 306 

 (804) 

 (489) 

  

  

  

Total asset-backed securities

  

 12 

 (2) 

 462 

 (1,759) 

 (1,287) 

  

  

  

  

Total debt securities

  

 383 

 (2) 

 1,092 

 (2,068) 

 (595) 

  

Marketable equity securities:

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 - 

 (20) 

 - 

 (3) 

 (23) 

  

  

Other marketable equity securities

  

 - 

 - 

 - 

 - 

 - 

  

  

  

  

Total marketable

  

  

  

  

  

  

  

  

  

  

  

equity securities

  

 - 

 (20) 

 - 

 (3) 

 (23) 

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 383 

 (22) 

 1,092 

 (2,071) 

 (618) 

Mortgages held for sale

  

 101 

 (572) 

 - 

 (144) 

 (615) 

Loans

  

 21 

 - 

 115 

 (86) 

 50 

Mortgage servicing rights (residential)

  

 - 

 (161) 

 1,060 

 - 

 899 

Net derivative assets and liabilities:

  

  

  

  

  

  

  

Interest rate contracts

  

 - 

 8 

 - 

 124 

 132 

  

Commodity contracts

  

 1 

 (1) 

 - 

 (8) 

 (8) 

  

Equity contracts

  

 170 

 (142) 

 - 

 190 

 218 

  

Foreign exchange contracts

  

 - 

 - 

 - 

 6 

 6 

  

Credit contracts

  

 8 

 (2) 

 - 

 220 

 226 

  

Other derivative contracts

  

 - 

 - 

 - 

 1 

 1 

  

  

Total derivative contracts

  

 179 

 (137) 

 - 

 533 

 575 

Other assets

  

 360 

 (1) 

 - 

 (14) 

 345 

Short sale liabilities

  

 8 

 - 

 - 

 - 

 8 

Other liabilities (excluding derivatives)

  

 - 

 - 

 (1) 

 1 

 - 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

137

 


 

      

 

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the first half of 2014 are summarized as follows:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net unrealized  

  

  

  

  

  

  

  

  

  

  

Total net gains

Purchases,

  

  

  

gains (losses)  

  

  

  

  

  

  

  

  

  

  

(losses) included in

sales,

  

  

  

included in  

  

  

  

  

  

  

  

  

  

  

  

Other

issuances

  

  

  

income related  

  

  

  

  

  

  

  

  

  

Balance,

  

compre-

and

Transfers

Transfers

Balance,

to assets and  

  

  

  

  

  

  

  

  

beginning

Net

hensive

settlements,

into

out of

end of

liabilities held  

  

(in millions)

  

  

of period

income

income

net (1)

Level 3

Level 3

period

at period end   

(2)

Six months ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

Trading assets

  

  

  

  

  

  

  

  

  

  

  

(excluding derivatives):

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

$

 39 

 - 

 - 

 - 

 - 

 (31) 

 8 

 -   

  

  

Collateralized loan and other debt obligations

  

 541 

 14 

 - 

 26 

 4 

 (4) 

 581 

 (23)   

  

  

Corporate debt securities

  

 53 

 (3) 

 - 

 (11) 

 24 

 (1) 

 62 

 1   

  

  

Mortgage-backed securities

  

 1 

 - 

 - 

 - 

 - 

 - 

 1 

 -   

  

  

Asset-backed securities

  

 122 

 26 

 - 

 (53) 

 - 

 (4) 

 91 

 26   

  

  

Equity securities

  

 13 

 - 

 - 

 - 

 - 

 - 

 13 

 -   

  

  

  

Total trading securities

  

 769 

 37 

 - 

 (38) 

 28 

 (40) 

 756 

 4   

  

  

Other trading assets

  

 54 

 (5) 

 - 

 - 

 - 

 - 

 49 

 -   

  

  

  

  

Total trading assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(excluding derivatives)

  

 823 

 32 

 - 

 (38) 

 28 

 (40) 

 805 

 4   

(3)

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

  

 3,214 

 9 

 9 

 (25) 

 59 

 (97) 

 3,169 

 (2)   

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

Residential

  

 64 

 10 

 (2) 

 (31) 

 - 

 - 

 41 

 -   

  

  

  

Commercial

  

 138 

 (1) 

 8 

 (9) 

 - 

 - 

 136 

 (1)   

  

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 202 

 9 

 6 

 (40) 

 - 

 - 

 177 

 (1)   

  

  

Corporate debt securities

  

 281 

 13 

 (5) 

 (5) 

 - 

 - 

 284 

 -   

  

  

Collateralized loan and other debt obligations

  

 1,420 

 70 

 (21) 

 (143) 

 - 

 - 

 1,326 

 (2)   

  

  

Asset-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

Auto loans and leases

  

 492 

 - 

 (5) 

 (215) 

 - 

 - 

 272 

 -   

  

  

  

Home equity loans

  

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 -   

  

  

  

Other asset-backed securities

  

 1,657 

 1 

 (3) 

 (449) 

 89 

 - 

 1,295 

 -   

  

  

  

  

Total asset-backed securities

  

 2,149 

 1 

 (8) 

 (664) 

 89 

 - 

 1,567 

 -   

  

  

  

  

  

Total debt securities

  

 7,266 

 102 

 (19) 

 (877) 

 148 

 (97) 

 6,523 

 (5)   

(4)

  

Marketable equity securities:

  

  

  

  

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 729 

 4 

 (10) 

 (23) 

 - 

 - 

 700 

 -   

  

  

  

Other marketable equity securities

  

 - 

 4 

 - 

 (4) 

 - 

 - 

 - 

 -   

  

  

  

  

  

Total marketable

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

equity securities

  

 729 

 8 

 (10) 

 (27) 

 - 

 - 

 700 

 -   

(5)

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 7,995 

 110 

 (29) 

 (904) 

 148 

 (97) 

 7,223 

 (5)   

  

Mortgages held for sale

  

 2,374 

 23 

 - 

 (75) 

 196 

 (122) 

 2,396 

 22   

(6)

Loans

  

 5,723 

 5 

 - 

 (23) 

 270 

 (49) 

 5,926 

 12   

(6)

Mortgage servicing rights (residential) (7)

  

 15,580 

 (2,240) 

 - 

 560 

 - 

 - 

 13,900 

 (1,276)   

(6)

Net derivative assets and liabilities:

  

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

  

 (40) 

 913 

 - 

 (690) 

 - 

 - 

 183 

 236   

  

  

Commodity contracts

  

 (10) 

 (21) 

 - 

 (1) 

 (3) 

 37 

 2 

 -   

  

  

Equity contracts

  

 (46) 

 19 

 - 

 (76) 

 3 

 50 

 (50) 

 64   

  

  

Foreign exchange contracts

  

 9 

 5 

 - 

 (12) 

 - 

 - 

 2 

 (5)   

  

  

Credit contracts

  

 (375) 

 13 

 - 

 96 

 - 

 - 

 (266) 

 (14)   

  

  

Other derivative contracts

  

 (3) 

 (10) 

 - 

 - 

 - 

 - 

 (13) 

 -   

  

  

  

Total derivative contracts

  

 (465) 

 919 

 - 

 (683) 

 - 

 87 

 (142) 

 281   

(8)

Other assets

  

 1,503 

 (93) 

 - 

 595 

 - 

 - 

 2,005 

 (7)   

(3)

Short sale liabilities

  

 - 

 (1) 

 - 

 1 

 - 

 - 

 - 

 -   

(3)

Other liabilities (excluding derivatives)

  

 (39) 

 (7) 

 - 

 1 

 - 

 - 

 (45) 

 (1)   

(6)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   See next page for detail.

(2)   Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.

(3)   Included in net gains (losses) from trading activities and other noninterest income in the income statement.

(4)   Included in net gains (losses) from debt securities in the income statement.

(5)   Included in net gains (losses) from equity investments in the income statement.

(6)   Included in mortgage banking and other noninterest income in the income statement.

(7)   For more information on the changes in mortgage servicing rights, see Note 8 (Mortgage Banking Activities).

(8)   Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.

 

 

(continued on following page)

138

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

 

(continued from previous page)

 

The following table presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the first half of 2014.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in millions)

  

  

Purchases

Sales

Issuances

Settlements

Net

Six months ended June 30, 2014

  

  

  

  

  

  

Trading assets

  

  

  

  

  

  

  

(excluding derivatives):

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

political subdivisions

$

 6 

 (5) 

 - 

 (1) 

 - 

  

Collateralized loan and other debt obligations

  

 451 

 (421) 

 - 

 (4) 

 26 

  

Corporate debt securities

  

 23 

 (40) 

 - 

 6 

 (11) 

  

Mortgage-backed securities

  

 - 

 - 

 - 

 - 

 - 

  

Asset-backed securities

  

 11 

 (44) 

 - 

 (20) 

 (53) 

  

Equity securities

  

 - 

 - 

 - 

 - 

 - 

  

  

Total trading securities

  

 491 

 (510) 

 - 

 (19) 

 (38) 

  

Other trading assets

  

 1 

 (1) 

 - 

 - 

 - 

  

  

  

Total trading assets

  

  

  

  

  

  

  

  

  

  

(excluding derivatives)

  

 492 

 (511) 

 - 

 (19) 

 (38) 

Available-for-sale securities:

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

political subdivisions

  

 73 

 (55) 

 268 

 (311) 

 (25) 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

Residential

  

 - 

 (29) 

 - 

 (2) 

 (31) 

  

  

Commercial

  

 - 

 (8) 

 - 

 (1) 

 (9) 

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

securities

  

 - 

 (37) 

 - 

 (3) 

 (40) 

  

Corporate debt securities

  

 7 

 (9) 

 10 

 (13) 

 (5) 

  

Collateralized loan and other debt obligations

  

 133 

 (32) 

 - 

 (244) 

 (143) 

  

Asset-backed securities:

  

  

  

  

  

  

  

  

Auto loans and leases

  

 - 

 - 

 - 

 (215) 

 (215) 

  

  

Home equity loans

  

 - 

 - 

 - 

 - 

 - 

  

  

Other asset-backed securities

  

 87 

 (12) 

 114 

 (638) 

 (449) 

  

  

  

Total asset-backed securities

  

 87 

 (12) 

 114 

 (853) 

 (664) 

  

  

  

  

Total debt securities

  

 300 

 (145) 

 392 

 (1,424) 

 (877) 

  

Marketable equity securities:

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 - 

 - 

 - 

 (23) 

 (23) 

  

  

Other marketable equity securities

  

 - 

 (4) 

 - 

 - 

 (4) 

  

  

  

  

Total marketable

  

  

  

  

  

  

  

  

  

  

  

equity securities

  

 - 

 (4) 

 - 

 (23) 

 (27) 

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 300 

 (149) 

 392 

 (1,447) 

 (904) 

Mortgages held for sale

  

 106 

 (21) 

 - 

 (160) 

 (75) 

Loans

  

 2 

 - 

 206 

 (231) 

 (23) 

Mortgage servicing rights (residential)

  

 - 

 - 

 560 

 - 

 560 

Net derivative assets and liabilities:

  

  

  

  

  

  

  

Interest rate contracts

  

 - 

 - 

 - 

 (690) 

 (690) 

  

Commodity contracts

  

 - 

 - 

 - 

 (1) 

 (1) 

  

Equity contracts

  

 - 

 (115) 

 - 

 39 

 (76) 

  

Foreign exchange contracts

  

 - 

 - 

 - 

 (12) 

 (12) 

  

Credit contracts

  

 2 

 72 

 - 

 22 

 96 

  

Other derivative contracts

  

 - 

 - 

 - 

 - 

 - 

  

  

Total derivative contracts

  

 2 

 (43) 

 - 

 (642) 

 (683) 

Other assets

  

 609 

 (1) 

 - 

 (13) 

 595 

Short sale liabilities

  

 6 

 (5) 

 - 

 - 

 1 

Other liabilities (excluding derivatives)

  

 - 

 - 

 - 

 1 

 1 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

139

 


 

      

 

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the first half of 2013 are summarized as follows:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net unrealized  

  

  

  

  

  

  

  

  

  

  

Total net gains

Purchases,

  

  

  

gains (losses)  

  

  

  

  

  

  

  

  

  

  

(losses) included in

sales,

  

  

  

included in  

  

  

  

  

  

  

  

  

  

  

  

Other

issuances

  

  

  

income related  

  

  

  

  

  

  

  

  

  

Balance,

  

compre-

and

Transfers

Transfers

Balance,

to assets and  

  

  

  

  

  

  

  

  

beginning

Net

hensive

settlements,

into

out of

end of

liabilities held  

  

(in millions)

  

  

of period

income

income

net (1)

Level 3

Level 3

period

at period end   

(2)

Six months ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

Trading assets

  

  

  

  

  

  

  

  

  

  

  

(excluding derivatives):

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

$

 46 

 2 

 - 

 (8) 

 - 

 - 

 40 

 -   

  

  

Collateralized loan and other debt obligations

  

 742 

 64 

 - 

 (109) 

 - 

 (202) 

 495 

 (11)   

  

  

Corporate debt securities

  

 52 

 2 

 - 

 (41) 

 1 

 - 

 14 

 -   

  

  

Mortgage-backed securities

  

 6 

 1 

 - 

 2 

 - 

 - 

 9 

 1   

  

  

Asset-backed securities

  

 138 

 2 

 - 

 (36) 

 25 

 (20) 

 109 

 (9)   

  

  

Equity securities

  

 3 

 - 

 - 

 (3) 

 - 

 - 

 - 

 -   

  

  

  

Total trading securities

  

 987 

 71 

 - 

 (195) 

 26 

 (222) 

 667 

 (19)   

  

  

Other trading assets

  

 76 

 (13) 

 - 

 - 

 - 

 - 

 63 

 (4)   

  

  

  

  

Total trading assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(excluding derivatives)

  

 1,063 

 58 

 - 

 (195) 

 26 

 (222) 

 730 

 (23)   

(3)

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions

  

 3,631 

 4 

 (67) 

 356 

 - 

 (165) 

 3,759 

 -   

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

Residential

  

 94 

 (3) 

 11 

 (3) 

 - 

 (1) 

 98 

 -   

  

  

  

Commercial

  

 203 

 (7) 

 17 

 (8) 

 - 

 (11) 

 194 

 (3)   

  

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 297 

 (10) 

 28 

 (11) 

 - 

 (12) 

 292 

 (3)   

  

  

Corporate debt securities

  

 274 

 4 

 (9) 

 (23) 

 - 

 (3) 

 243 

 -   

  

  

Collateralized loan and other debt obligations

  

 13,188 

 (4) 

 91 

 565 

 - 

 (10,613) 

 3,227 

 -   

  

  

Asset-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

Auto loans and leases

  

 5,921 

 - 

 (25) 

 (1,024) 

 - 

 - 

 4,872 

 -   

  

  

  

Home equity loans

  

 51 

 3 

 (1) 

 (5) 

 - 

 (48) 

 - 

 -   

  

  

  

Other asset-backed securities

  

 3,283 

 24 

 - 

 (359) 

 - 

 - 

 2,948 

 (7)   

  

  

  

  

Total asset-backed securities

  

 9,255 

 27 

 (26) 

 (1,388) 

 - 

 (48) 

 7,820 

 (7)   

  

  

  

  

  

Total debt securities

  

 26,645 

 21 

 17 

 (501) 

 - 

 (10,841) 

 15,341 

 (10)   

(4)

  

Marketable equity securities:

  

  

  

  

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 794 

 3 

 23 

 (32) 

 - 

 - 

 788 

 -   

  

  

  

Other marketable equity securities

  

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 -   

  

  

  

  

  

Total marketable

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

equity securities

  

 794 

 3 

 23 

 (32) 

 - 

 - 

 788 

 -   

(5)

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 27,439 

 24 

 40 

 (533) 

 - 

 (10,841) 

 16,129 

 (10)   

  

Mortgages held for sale

  

 3,250 

 27 

 - 

 (675) 

 178 

 (139) 

 2,641 

 (62)   

(6)

Loans

  

 6,021 

 (154) 

 - 

 99 

 - 

 (106) 

 5,860 

 (137)   

(6)

Mortgage servicing rights (residential) (7)

  

 11,538 

 1,236 

 - 

 1,411 

 - 

 - 

 14,185 

 2,628   

(6)

Net derivative assets and liabilities:

  

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

  

 659 

 (983) 

 - 

 (237) 

 - 

 - 

 (561) 

 (710)   

  

  

Commodity contracts

  

 21 

 7 

 - 

 (31) 

 - 

 (9) 

 (12) 

 26   

  

  

Equity contracts

  

 (122) 

 (29) 

 - 

 218 

 - 

 (40) 

 27 

 (31)   

  

  

Foreign exchange contracts

  

 21 

 (54) 

 - 

 4 

 - 

 - 

 (29) 

 (46)   

  

  

Credit contracts

  

 (1,150) 

 (13) 

 - 

 364 

 - 

 - 

 (799) 

 37   

  

  

Other derivative contracts

  

 (78) 

 41 

 - 

 1 

 - 

 - 

 (36) 

 -   

  

  

  

Total derivative contracts

  

 (649) 

 (1,031) 

 - 

 319 

 - 

 (49) 

 (1,410) 

 (724)   

(8)

Other assets

  

 162 

 36 

 - 

 533 

 - 

 - 

 731 

 39   

(3)

Short sale liabilities

  

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 -   

(3)

Other liabilities (excluding derivatives)

  

 (49) 

 6 

 - 

 - 

 - 

 - 

 (43) 

 4   

(6)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   See next page for detail.

(2)   Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.

(3)   Included in net gains (losses) from trading activities and other noninterest income in the income statement.

(4)   Included in net gains (losses) from debt securities in the income statement.

(5)   Included in net gains (losses) from equity investments in the income statement.

(6)   Included in mortgage banking and other noninterest income in the income statement.

(7)   For more information on the changes in mortgage servicing rights, see Note 8 (Mortgage Banking Activities).

(8)   Included in mortgage banking, trading activities and other noninterest income in the income statement.

 

(continued on following page)

140

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

 

(continued from previous page)

 

The following table presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the first half of 2013.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(in millions)

  

  

Purchases

Sales

Issuances

Settlements

Net

Six months ended June 30, 2013

  

  

  

  

  

  

Trading assets

  

  

  

  

  

  

  

(excluding derivatives):

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

political subdivisions

$

 123 

 (131) 

 - 

 - 

 (8) 

  

Collateralized loan and other debt obligations

  

 519 

 (625) 

 - 

 (3) 

 (109) 

  

Corporate debt securities

  

 66 

 (107) 

 - 

 - 

 (41) 

  

Mortgage-backed securities

  

 4 

 (2) 

 - 

 - 

 2 

  

Asset-backed securities

  

 12 

 (27) 

 - 

 (21) 

 (36) 

  

Equity securities

  

 - 

 (3) 

 - 

 - 

 (3) 

  

  

Total trading securities

  

 724 

 (895) 

 - 

 (24) 

 (195) 

  

Other trading assets

  

 - 

 - 

 - 

 - 

 - 

  

  

  

Total trading assets

  

  

  

  

  

  

  

  

  

  

(excluding derivatives)

  

 724 

 (895) 

 - 

 (24) 

 (195) 

Available-for-sale securities:

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

political subdivisions

  

 - 

 (67) 

 705 

 (282) 

 356 

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

Residential

  

 - 

 - 

 - 

 (3) 

 (3) 

  

  

Commercial

  

 - 

 (1) 

 - 

 (7) 

 (8) 

  

  

  

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

securities

  

 - 

 (1) 

 - 

 (10) 

 (11) 

  

Corporate debt securities

  

 - 

 - 

 - 

 (23) 

 (23) 

  

Collateralized loan and other debt obligations

  

 773 

 (14) 

 - 

 (194) 

 565 

  

Asset-backed securities:

  

  

  

  

  

  

  

  

Auto loans and leases

  

 352 

 - 

 304 

 (1,680) 

 (1,024) 

  

  

Home equity loans

  

 - 

 (5) 

 - 

 - 

 (5) 

  

  

Other asset-backed securities

  

 522 

 (36) 

 608 

 (1,453) 

 (359) 

  

  

  

Total asset-backed securities

  

 874 

 (41) 

 912 

 (3,133) 

 (1,388) 

  

  

  

  

Total debt securities

  

 1,647 

 (123) 

 1,617 

 (3,642) 

 (501) 

  

Marketable equity securities:

  

  

  

  

  

  

  

  

Perpetual preferred securities

  

 - 

 (20) 

 - 

 (12) 

 (32) 

  

  

Other marketable equity securities

  

 - 

 - 

 - 

 - 

 - 

  

  

  

  

Total marketable

  

  

  

  

  

  

  

  

  

  

  

equity securities

  

 - 

 (20) 

 - 

 (12) 

 (32) 

  

  

  

  

  

Total available-for-sale

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 1,647 

 (143) 

 1,617 

 (3,654) 

 (533) 

Mortgages held for sale

  

 203 

 (572) 

 - 

 (306) 

 (675) 

Loans

  

 22 

 - 

 232 

 (155) 

 99 

Mortgage servicing rights (residential)

  

 - 

 (584) 

 1,995 

 - 

 1,411 

Net derivative assets and liabilities:

  

  

  

  

  

  

  

Interest rate contracts

  

 - 

 9 

 - 

 (246) 

 (237) 

  

Commodity contracts

  

 2 

 (2) 

 - 

 (31) 

 (31) 

  

Equity contracts

  

 269 

 (209) 

 - 

 158 

 218 

  

Foreign exchange contracts

  

 - 

 - 

 - 

 4 

 4 

  

Credit contracts

  

 5 

 (1) 

 - 

 360 

 364 

  

Other derivative contracts

  

 - 

 - 

 - 

 1 

 1 

  

  

Total derivative contracts

  

 276 

 (203) 

 - 

 246 

 319 

Other assets

  

 557 

 (1) 

 - 

 (23) 

 533 

Short sale liabilities

  

 8 

 (8) 

 - 

 - 

 - 

Other liabilities (excluding derivatives)

  

 - 

 - 

 (4) 

 4 

 - 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The following table provides quantitative information about the valuation techniques and significant unobservable inputs used in the valuation of substantially all of our Level 3 assets and liabilities measured at fair value on a recurring basis for which we use an internal model.

The significant unobservable inputs for Level 3 assets and liabilities that are valued using fair values obtained from third party vendors are not included in the table, as the specific inputs applied are not provided by the vendor. In addition, the table excludes the valuation techniques and significant unobservable inputs for certain classes of Level 3 assets and liabilities measured using an internal model that we consider, both individually and in the aggregate, insignificant relative to our overall Level 3 assets and liabilities. We made this determination based upon an evaluation of each class which considered the magnitude of the positions, nature of the unobservable inputs and potential for significant changes in fair value due to changes in those inputs. For information on how changes in significant unobservable inputs affect the fair values of Level 3 assets and liabilities, see Note 17 (Fair Values of Assets and Liabilities) to Financial Statements in our 2013 Form 10-K.  

141

 


 

      

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair Value

  

  

Significant

Range of

  

Weighted

($ in millions, except cost to service amounts)

Level 3

  

Valuation Technique(s)

Unobservable Input

 Inputs 

Average (1)

June 30, 2014

  

  

  

  

  

  

  

  

  

  

Trading and available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and

  

  

  

  

  

  

  

  

  

  

  

political subdivisions:

  

  

  

  

  

  

  

  

  

  

  

  

Government, healthcare and

  

  

  

  

  

  

  

  

  

  

  

  

  

other revenue bonds

$

 2,717 

  

Discounted cash flow

Discount rate

0.3 

-

5.7 

%

1.4 

  

  

  

  

  

  

 89 

  

Vendor priced

  

  

  

  

  

  

  

  

Auction rate securities and other municipal bonds

  

 371 

  

Discounted cash flow

Discount rate

1.4 

-

9.5 

  

4.0 

  

  

  

  

  

  

  

  

Weighted average life

1.9 

-

14.0 

yrs

3.6 

  

Collateralized loan and other debt obligations (2)

 746 

  

Market comparable pricing

Comparability adjustment

(24.5)

-

25.0 

%

3.4 

  

  

  

  

 1,161 

  

Vendor priced

  

  

  

  

  

  

  

Asset-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

Auto loans and leases

  

 272 

  

Discounted cash flow

Discount rate

0.7 

-

 0.7 

  

0.7 

  

  

Other asset-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

Diversified payment rights (3)

  

 737 

  

Discounted cash flow

Discount rate

0.8 

-

5.2 

  

2.5 

  

  

  

Other commercial and consumer

  

 580 

(4)

Discounted cash flow

Discount rate

0.2 

-

21.4 

  

5.0 

  

  

  

  

  

  

  

  

  

Weighted average life

1.0 

-

15.3 

yrs

3.8 

  

  

  

  

  

  

 69 

  

Vendor priced

  

  

  

  

  

  

  

Marketable equity securities: perpetual

  

  

  

  

  

  

  

  

  

  

  

preferred

  

 700 

(5)

Discounted cash flow

Discount rate

4.6 

-

7.6 

 % 

5.4 

  

  

  

  

  

  

  

  

Weighted average life

1.0 

-

15.0 

yrs

10.0 

Mortgages held for sale (residential)

  

 2,396 

  

Discounted cash flow

Default rate

0.5 

-

14.0 

%

2.7 

  

  

  

  

  

  

  

  

  

Discount rate

3.5 

-

7.9 

  

5.4 

  

  

  

  

  

  

  

  

  

Loss severity

0.7 

-

27.4 

  

20.1 

  

  

  

  

  

  

  

  

  

Prepayment rate

2.0 

-

13.6 

  

6.9 

Loans

  

 5,926 

(6)

Discounted cash flow

Discount rate

2.7 

-

3.7 

  

3.3 

  

  

  

  

  

  

  

  

  

Prepayment rate

0.6 

-

33.2 

  

4.9 

  

  

  

  

  

  

  

  

  

Utilization rate

0.0

-

2.0 

  

0.8 

Mortgage servicing rights (residential)

  

 13,900 

  

Discounted cash flow

Cost to service per loan (7)

$ 87 

-

729 

  

184 

  

  

  

  

  

  

  

  

  

Discount rate

5.3 

-

11.5 

%

7.7 

  

  

  

  

  

  

  

  

  

Prepayment rate (8)

8.1 

-

21.8 

  

12.1 

Net derivative assets and (liabilities):

  

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

  

 59 

  

Discounted cash flow

Default rate

0.1 

-

8.2 

  

1.7 

  

  

  

  

  

  

  

  

  

Loss severity

36.0 

-

50.0 

  

50.0 

  

  

  

  

  

  

  

  

  

Prepayment rate

14.0 

-

14.0 

  

14.0 

  

Interest rate contracts: derivative loan

  

  

  

  

  

  

  

  

  

  

  

  

commitments

  

 124 

  

Discounted cash flow

Fall-out factor

1.0 

-

99.0 

  

26.9 

  

  

  

  

  

  

  

Initial-value servicing

(39.9)

-

88.5 

bps

30.0 

  

Equity contracts

  

 210 

  

Discounted cash flow

Conversion factor

(19.0)

-

0.0

%

(14.4)

  

  

  

  

  

  

  

  

  

Weighted average life

0.8 

-

2.8 

yrs

1.5 

  

  

  

  

  

  

 (260) 

  

Option model

Correlation factor

(5.3)

-

92.0 

%

71.5 

  

  

  

  

  

  

  

  

  

Volatility factor

8.1 

-

69.0 

  

24.0 

  

Credit contracts

  

 (270) 

  

Market comparable pricing

Comparability adjustment

(33.8)

-

30.7 

  

4.2 

  

  

  

  

  

  

 4 

  

Option model

Credit spread

0.0

-

 11.8 

  

0.5 

  

  

  

  

  

  

Loss severity

10.5 

-

72.5 

  

46.4 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other assets: nonmarketable equity investments

  

 1,902 

  

Market comparable pricing

Comparability adjustment

(29.7)

-

(7.1)

  

(22.6)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Insignificant Level 3 assets,

  

  

  

  

  

  

  

  

  

  

  

net of liabilities

  

 635 

(9)

  

  

  

  

  

  

  

  

  

Total level 3 assets, net of liabilities

$

 32,068 

(10)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Weighted averages are calculated using outstanding unpaid principal balance for cash instruments such as loans and securities, and notional amounts for derivative instruments.

(2)   Includes $581 million of collateralized debt obligations.

(3)   Securities backed by specified sources of current and future receivables generated from foreign originators.

(4)   Consists primarily of investments in asset-backed securities that are revolving in nature, in which the timing of advances and repayments of principal are uncertain.

(5)   Consists of auction rate preferred equity securities with no maturity date that are callable by the issuer.

(6)   Consists predominantly of reverse mortgage loans securitized with GNMA which were accounted for as secured borrowing transactions.

(7)   The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $87 - $269.

(8)   Includes a blend of prepayment speeds and expected defaults. Prepayment speeds are influenced by mortgage interest rates as well as our estimation of drivers of borrower behavior.

(9)   Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes corporate debt securities, mortgage-backed securities, other marketable equity securities, other liabilities and certain net derivative assets and liabilities, such as commodity contracts, foreign exchange contracts and other derivative contracts.

(10)           Consists of total Level 3 assets of $34.9 billion and total Level 3 liabilities of $2.8 billion, before netting of derivative balances.

142

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair Value

  

  

Significant

Range of

  

Weighted   

($ in millions, except cost to service amounts)  

Level 3

  

Valuation Technique(s)

Unobservable Input

 Inputs 

  

Average (1)

December 31, 2013  

  

  

  

  

  

  

  

  

  

  

Trading and available-for-sale securities:  

  

  

  

  

  

  

  

  

  

  

  

Securities of U.S. states and  

  

  

  

  

  

  

  

  

  

  

  

political subdivisions:  

  

  

  

  

  

  

  

  

  

  

  

  

Government, healthcare and  

  

  

  

  

  

  

  

  

  

  

  

  

  

other revenue bonds  

$

 2,739 

  

Discounted cash flow

Discount rate

0.4 

-

6.4 

%

1.4  

  

  

  

  

  

  

 63 

  

Vendor priced

  

  

  

  

  

  

  

  

Auction rate securities and other municipal  

  

  

  

  

  

  

  

  

  

  

  

  

bonds

  

 451 

  

Discounted cash flow

Discount rate

0.4 

-

12.3 

  

4.6  

  

  

  

  

  

  

  

  

Weighted average life

1.4 

-

13.0 

yrs

4.4  

  

Collateralized loan and other debt obligations(2)

  

 612 

  

Market comparable pricing

Comparability adjustment

(12.0)

-

23.3 

%

8.5  

  

  

  

  

 1,349 

  

Vendor priced

  

  

  

  

  

  

  

Asset-backed securities:  

  

  

  

  

  

  

  

  

  

  

  

  

Auto loans and leases  

  

 492 

  

Discounted cash flow

Discount rate

0.6 

-

0.9 

  

0.8  

  

  

  

  

  

  

  

  

  

Weighted average life

1.4 

-

1.6 

yrs

1.5  

  

  

Other asset-backed securities:  

  

  

  

  

  

  

  

  

  

  

  

  

  

Diversified payment rights(3)

  

 757 

  

Discounted cash flow

Discount rate

1.4 

-

4.7 

%

3.0  

  

  

  

Other commercial and consumer  

  

 944 

(4)

Discounted cash flow

Discount rate

0.6 

-

21.2 

  

4.0  

  

  

  

  

  

  

  

  

  

Weighted average life

0.6 

-

7.6 

yrs

2.2  

  

  

  

  

  

  

 78 

  

Vendor priced

  

  

  

  

  

  

  

Marketable equity securities: perpetual  

  

  

  

  

  

  

  

  

  

  

  

  

preferred  

  

 729 

(5)

Discounted cash flow

Discount rate

4.8 

-

8.3 

 % 

7.4  

  

  

  

  

  

  

  

  

Weighted average life

1.0 

-

15.0 

yrs

12.2  

Mortgages held for sale (residential)  

  

 2,374 

  

Discounted cash flow

Default rate

0.6 

-

12.4 

%

2.8  

  

  

  

  

  

  

  

  

  

Discount rate

3.8 

-

7.9 

  

5.5  

  

  

  

  

  

  

  

  

  

Loss severity

1.3 

-

32.5 

  

21.5  

  

  

  

  

  

  

  

  

  

Prepayment rate

2.0 

-

9.9 

  

5.4  

Loans  

  

 5,723 

(6)

Discounted cash flow

Discount rate

2.4 

-

3.9 

  

3.3  

  

  

  

  

  

  

  

  

  

Prepayment rate

3.3 

-

37.8 

  

12.2  

  

  

  

  

  

  

  

  

  

Utilization rate

0.0

-

2.0 

  

0.8  

Mortgage servicing rights (residential)  

  

 15,580 

  

Discounted cash flow

Cost to service per loan (7)

$ 86 

-

773 

  

191  

  

  

  

  

  

  

  

  

  

Discount rate

5.4 

-

11.2 

%

7.8  

  

  

  

  

  

  

  

  

  

Prepayment rate (8)

7.5 

-

19.4 

  

10.7  

Net derivative assets and (liabilities):  

  

  

  

  

  

  

  

  

  

  

  

Interest rate contracts  

  

 (14) 

  

Discounted cash flow

Default rate

0.0

-

16.5 

  

5.0  

  

  

  

  

  

  

  

  

  

Loss severity

44.9 

-

50.0 

  

50.0  

  

  

  

  

  

  

  

  

  

Prepayment rate

11.1 

-

15.6 

  

15.6  

  

Interest rate contracts: derivative loan   

  

  

  

  

  

  

  

  

  

  

  

  

commitments  

  

 (26) 

  

Discounted cash flow

Fall-out factor

1.0 

-

99.0 

  

21.8  

  

  

  

  

  

  

  

Initial-value servicing

(21.5)

-

81.6 

bps

32.6  

  

Equity contracts  

  

 199 

  

Discounted cash flow

Conversion factor

(18.4)

-

0.0

%

(14.1)  

  

  

  

  

  

  

  

  

  

Weighted average life

0.3 

-

3.3 

yrs

1.8  

  

  

  

 (245) 

  

Option model

Correlation factor

(5.3)

-

87.6 

%

72.2  

  

  

  

  

  

  

  

  

  

Volatility factor

6.8 

-

81.2 

  

25.4  

  

Credit contracts  

  

 (378) 

  

Market comparable pricing

Comparability adjustment

(31.3)

-

30.4 

  

(0.1)  

  

  

  

  

  

  

 3 

  

Option model

Credit spread

0.0

-

12.2 

  

0.7  

  

  

  

  

  

  

  

  

  

Loss severity

10.5 

-

72.5 

  

47.4  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other assets: nonmarketable equity investments  

  

 1,386 

  

Market comparable pricing

Comparability adjustment

(30.6)

-

(5.4)

  

(21.9)  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Insignificant Level 3 assets,  

  

  

  

  

  

  

  

  

  

  

  

net of liabilities  

  

 678 

(9)

  

  

  

  

  

  

  

  

  

Total level 3 assets, net of liabilities  

$

 33,494 

(10)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Weighted averages are calculated using outstanding unpaid principal balance for cash instruments such as loans and securities, and notional amounts for derivative instruments.

(2)   Includes $695 million of collateralized debt obligations.

(3)   Securities backed by specified sources of current and future receivables generated from foreign originators.

(4)   Consists primarily of investments in asset-backed securities that are revolving in nature, in which the timing of advances and repayments of principal are uncertain.

(5)   Consists of auction rate preferred equity securities with no maturity date that are callable by the issuer.

(6)   Consists predominantly of reverse mortgage loans securitized with GNMA which were accounted for as secured borrowing transactions.

(7)   The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $86 - $302.

(8)   Includes a blend of prepayment speeds and expected defaults. Prepayment speeds are influenced by mortgage interest rates as well as our estimation of drivers of borrower behavior.

(9)   Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes corporate debt securities, mortgage-backed securities, asset-backed securities backed by home equity loans, other marketable equity securities, other assets, other liabilities and certain net derivative assets and liabilities, such as commodity contracts, foreign exchange contracts and other derivative contracts. 

(10)           Consists of total Level 3 assets of $37.2 billion and total Level 3 liabilities of $3.7 billion, before netting of derivative balances.

143

 


 

      

The valuation techniques used for our Level 3 assets and liabilities, as presented in the previous table, are described as follows:  

·          Discounted cash flow - Discounted cash flow valuation techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of an instrument and then discounting those cash flows at a rate of return that results in the fair value amount.

·          Option model - Option model valuation techniques are generally used for instruments in which the holder has a contingent right or obligation based on the occurrence of a future event, such as the price of a referenced asset going above or below a predetermined strike price. Option models estimate the likelihood of the specified event occurring by incorporating assumptions such as volatility estimates, price of the underlying instrument and expected rate of return.

·          Market comparable pricing - Market comparable pricing valuation techniques are used to determine the fair value of certain instruments by incorporating known inputs, such as recent transaction prices, pending transactions, or prices of other similar investments that require significant adjustment to reflect differences in instrument characteristics.

·          Vendor-priced  – Prices obtained from third party pricing vendors or brokers that are used to record the fair value of the asset or liability, of which the related valuation technique and significant unobservable inputs are not provided.

 

Significant unobservable inputs presented in the previous table are those we consider significant to the fair value of the Level 3 asset or liability. We consider unobservable inputs to be significant, if by their exclusion, the fair value of the Level 3 asset or liability would be impacted by a predetermined percentage change or based on qualitative factors, such as nature of the instrument, type of valuation technique used, and the significance of the unobservable inputs relative to other inputs used within the valuation. Following is a description of the significant unobservable inputs provided in the table.

 

·          Comparability adjustment – is an adjustment made to observed market data, such as a transaction price in order to reflect dissimilarities in underlying collateral, issuer, rating, or other factors used within a market valuation approach, expressed as a percentage of an observed price.

·          Conversion Factor – is the risk-adjusted rate in which a particular instrument may be exchanged for another instrument upon settlement, expressed as a percentage change from a specified rate.

·          Correlation factor - is the likelihood of one instrument changing in price relative to another based on an established relationship expressed as a percentage of relative change in price over a period over time.

·          Cost to service - is the expected cost per loan of servicing a portfolio of loans, which includes estimates for unreimbursed expenses (including delinquency and foreclosure costs) that may occur as a result of servicing such loan portfolios.

·          Credit spread – is the portion of the interest rate in excess of a benchmark interest rate, such as OIS, LIBOR or U.S. Treasury rates, that when applied to an investment captures changes in the obligor’s creditworthiness.

·          Default rate – is an estimate of the likelihood of not collecting contractual amounts owed expressed as a constant default rate (CDR).

·          Discount rate – is a rate of return used to present value the future expected cash flow to arrive at the fair value of an instrument. The discount rate consists of a benchmark rate component and a risk premium component. The benchmark rate component, for example, OIS, LIBOR or U.S. Treasury rates, is generally observable within the market and is necessary to appropriately reflect the time value of money. The risk premium component reflects the amount of compensation market participants require due to the uncertainty inherent in the instruments’ cash flows resulting from risks such as credit and liquidity.

·          Fall-out factor - is the expected percentage of loans associated with our interest rate lock commitment portfolio that are likely of not funding.

·          Initial-value servicing - is the estimated value of the underlying loan, including the value attributable to the embedded servicing right, expressed in basis points of outstanding unpaid principal balance.

·          Loss severity – is the percentage of contractual cash flows lost in the event of a default.

·          Prepayment rate – is the estimated rate at which forecasted prepayments of principal of the related loan or debt instrument are expected to occur, expressed as a constant prepayment rate (CPR).

·              Utilization rate – is the estimated rate in which incremental portions of existing reverse mortgage credit lines are expected to be drawn by borrowers, expressed as an annualized rate.

·          Volatility factor – is the extent of change in price an item is estimated to fluctuate over a specified period of time expressed as a percentage of relative change in price over a period over time.

·          Weighted average life – is the weighted average number of years an investment is expected to remain outstanding based on its expected cash flows reflecting the estimated date the issuer will call or extend the maturity of the instrument or otherwise reflecting an estimate of the timing of an instrument’s cash flows whose timing is not contractually fixed.

144

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of LOCOM accounting or write-downs of individual assets. The following table provides the fair value hierarchy and carrying amount of all assets that were still held as of June 30, 2014,  and December 31, 2013, and for which a nonrecurring fair value adjustment was recorded during the periods presented.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

(in millions)

  

  

Level 1

Level 2

Level 3

Total

  

Level 1

Level 2

Level 3

Total

Mortgages held for sale (LOCOM) (1)

$

 - 

 2,328 

 1,327 

 3,655 

  

 - 

 1,126 

 893 

 2,019 

Loans held for sale

  

 - 

 10 

 - 

 10 

  

 - 

 14 

 - 

 14 

Loans:

  

  

  

  

  

  

  

  

  

  

  

Commercial

  

 - 

 190 

 - 

 190 

  

 - 

 414 

 - 

 414 

  

Consumer

  

 - 

 1,375 

 5 

 1,380 

  

 - 

 3,690 

 7 

 3,697 

  

  

Total loans (2)

  

 - 

 1,565 

 5 

 1,570 

  

 - 

 4,104 

 7 

 4,111 

Other assets (3)

  

 - 

 293 

 464 

 757 

  

 - 

 445 

 740 

 1,185 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Predominantly real estate 1-4 family first mortgage loans.

(2)   Represents carrying value of loans for which adjustments are based on the appraised value of the collateral.

(3)   Includes the fair value of foreclosed real estate, other collateral owned and nonmarketable equity investments.

 

The following table presents the increase (decrease) in value of certain assets for which a nonrecurring fair value adjustment has been recognized during the periods presented.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

(in millions)

  

2014 

  

2013 

Mortgages held for sale (LOCOM)

$

 57 

  

 (23) 

Loans:

  

  

  

  

  

Commercial

  

 (72) 

  

 (195) 

  

Consumer (1)

  

 (781) 

  

 (1,380) 

  

  

Total loans

  

 (853) 

  

 (1,575) 

Other assets (2)

  

 (205) 

  

 (151) 

  

  

  

Total

$

 (1,001) 

  

 (1,749) 

  

  

  

  

  

  

  

  

  

  

  

(1)   Represents write-downs of loans based on the appraised value of the collateral.

(2)   Includes the losses on foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets. Also includes impairment losses on nonmarketable equity investments.  

145

 


 

      

 

The table below provides quantitative information about the valuation techniques and significant unobservable inputs used in the valuation of substantially all of our Level 3 assets and liabilities measured at fair value on a nonrecurring basis for which we use an internal model.

We have excluded from the table classes of Level 3 assets and liabilities measured using an internal model that we consider, both individually and in the aggregate, insignificant relative to our overall Level 3 nonrecurring measurements. We made this determination based upon an evaluation of each class which considered the magnitude of the positions, nature of the unobservable inputs and potential for significant changes in fair value due to changes in those inputs.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair Value

  

  

Significant

  

Range

  

Weighted

  

($ in millions)

  

Level 3

  

Valuation Technique(s) (1)

Unobservable Inputs (1)

  

of inputs

  

Average (2)

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

Residential mortgages

  

  

  

  

  

  

  

  

  

  

  

  

  

held for sale (LOCOM)

$

 1,327 

(3)

Discounted cash flow

Default rate

(5)

0.9 

-

4.0 

%

1.9 

%

  

  

  

  

  

  

  

  

  

  

  

Discount rate

  

0.0

-

11.7 

  

11.5 

  

  

  

  

  

  

  

  

  

  

  

  

Loss severity

  

1.7 

-

36.3 

  

4.4 

  

  

  

  

  

  

  

  

  

  

  

  

Prepayment rate

(6)

2.0 

-

100.0 

  

56.3 

  

Other assets: private equity

  

  

  

  

  

  

  

  

  

  

  

  

  

 fund investments (4)

  

 203 

  

Market comparable pricing

Comparability adjustment

  

6.0 

-

6.0 

  

6.0 

  

Insignificant level 3 assets

  

 266 

  

  

  

  

  

  

  

  

  

  

  

Total

  

  

  

 1,796 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

Residential mortgages

  

  

  

  

  

  

  

  

  

  

  

  

  

held for sale (LOCOM)

$

893 

(3)

Discounted cash flow

Default rate

(5)

1.2 

-

4.4 

%

2.7 

%

  

  

  

  

  

  

Discount rate

  

4.3 

-

12.0 

  

10.9 

  

  

  

  

  

  

  

  

  

  

  

  

Loss severity

  

1.6 

-

48.2 

  

5.2 

  

  

  

  

  

  

  

  

  

  

  

  

Prepayment rate

(6)

2.0 

-

100.0 

  

67.2 

  

Other assets: private equity

  

  

  

  

  

  

  

  

  

  

  

  

  

 fund investments (4)

  

 505 

  

Market comparable pricing

Comparability adjustment

  

4.6 

-

4.6 

  

4.6 

  

Insignificant level 3 assets

  

 242 

  

  

  

  

  

  

  

  

  

  

  

Total

  

  

  

 1,640 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Refer to the narrative following the recurring quantitative Level 3 table of this Note for a definition of the valuation technique(s) and significant unobservable inputs.

(2)   For residential MHFS, weighted averages are calculated using outstanding unpaid principal balance of the loans.

(3)   Consists of approximately $1.2 billion and $825 million government insured/guaranteed loans purchased from GNMA-guaranteed mortgage securitizations, at June 30, 2014 and December 31, 2013, respectively and $82 million and $68 million of other mortgage loans which are not government insured/guaranteed at June 30, 2014 and December 31, 2013, respectively.

(4)   Represents a single investment. For additional information, see the “Alternative Investments” section in this Note.

(5)   Applies only to non-government insured/guaranteed loans.

(6)   Includes the impact on prepayment rate of expected defaults for the government insured/guaranteed loans, which affects the frequency and timing of early resolution of loans.

 

146

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

Alternative Investments

The following table summarizes our investments in various types of funds for which we use net asset values (NAVs) per share as a practical expedient to measure fair value on recurring and nonrecurring bases. The investments are included in trading assets, available-for-sale securities, and other assets. The table excludes those investments that are probable of being sold at an amount different from the funds’ NAVs.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Redemption

  

  

  

  

  

  

  

  

Fair

Unfunded

Redemption

notice

(in millions)

  

value

commitments

frequency

period

June 30, 2014

  

  

  

  

  

Offshore funds

$

 172 

 - 

Daily - Quarterly

1 - 180 days

Hedge funds

  

 1 

 - 

Monthly - Quarterly

45-90 days

Private equity funds (1)(2)

  

 1,451 

 275 

N/A

N/A

Venture capital funds (2)

  

 86 

 12 

N/A

N/A

  

Total (3)

$

 1,710 

 287 

  

  

December 31, 2013

  

  

  

  

  

Offshore funds

$

 308 

 - 

Daily - Quarterly

1 - 180 days

Hedge funds

  

 2 

 - 

Monthly - Semi Annually

5 - 95 days

Private equity funds (1)(2)

  

 1,496 

 316 

N/A

N/A

Venture capital funds (2)

  

 63 

 14 

N/A

N/A

  

Total (3)

$

 1,869 

 330 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

N/A - Not applicable

(1)   Excludes a private equity fund investment of $203 million and $505 million at June 30, 2014, and December 31, 2013, respectively, for which we recorded nonrecurring fair value adjustments during the periods then ended. This investment is probable of being sold for an amount different from the fund’s NAV; therefore, the investment’s fair value has been estimated using recent transaction information. This investment is subject to the Volcker Rule, which includes provisions that restrict banking entities from owning interests in certain types of funds.

(2)   Includes certain investments subject to the Volcker Rule that we may have to divest.

(3)   June 30, 2014, and December 31, 2013, include $1.6 billion and 1.5 billion, respectively, of fair value for nonmarketable equity investments carried at cost for which we use NAVs as a practical expedient to determine nonrecurring fair value adjustments. The fair values of investments that had nonrecurring fair value adjustments were $72 million and $88 million at June 30, 2014, and December 31, 2013, respectively.

 

Offshore funds primarily invest in foreign mutual funds. Redemption restrictions are in place for these investments with a fair value of $32 million and $144 million at June 30, 2014 and December 31, 2013, respectively, due to lock-up provisions that will remain in effect until October 2015.

Private equity funds invest in equity and debt securities issued by private and publicly-held companies in connection with leveraged buyouts, recapitalizations and expansion opportunities. Substantially all of these investments do not allow redemptions. Alternatively, we receive distributions as the underlying assets of the funds liquidate, which we expect to occur over the next 6 years.

Venture capital funds invest in domestic and foreign companies in a variety of industries, including information technology, financial services and healthcare. These investments can never be redeemed with the funds. Instead, we receive distributions as the underlying assets of the fund liquidate, which we expect to occur over the next 5 years.

147

 


 

      

 

Fair Value Option

We elect the fair value option to account for certain financial instruments. For more information, including the basis for the elections, see Note 17 (Fair Values of Assets and Liabilities) to Financial Statements in our 2013 Form 10-K.

The following table reflects differences between the fair value carrying amount of certain assets and liabilities for which we have elected the fair value option and the contractual aggregate unpaid principal amount at maturity.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

  

Fair value

  

  

  

Fair value

  

  

  

  

  

  

  

carrying

  

  

  

carrying

  

  

  

  

  

  

  

amount

  

  

  

amount

  

  

  

  

  

  

  

less

  

  

  

less

  

  

  

  

Fair value

Aggregate

aggregate

  

Fair value

Aggregate

aggregate

  

  

  

  

  

carrying

unpaid

unpaid

  

carrying

unpaid

unpaid

  

(in millions)

  

amount

principal

principal

  

amount

principal

principal

  

Mortgages held for sale:

  

  

  

  

  

  

  

  

  

  

Total loans

$

 16,448 

 16,090 

 358 

  

 13,879 

 13,966 

 (87) 

  

  

Nonaccrual loans

  

 216 

 329 

 (113) 

  

 205 

 359 

 (154) 

  

  

Loans 90 days or more past due and still accruing

  

 33 

 37 

 (4) 

  

 39 

 46 

 (7) 

  

Loans held for sale:

  

  

  

  

  

  

  

  

  

  

Total loans

  

 1 

 9 

 (8) 

  

 1 

 9 

 (8) 

  

  

Nonaccrual loans

  

 1 

 9 

 (8) 

  

 1 

 9 

 (8) 

  

Loans:

  

  

  

  

  

  

  

  

  

  

Total loans

  

 5,926 

 5,604 

 322 

  

 5,995 

 5,674 

 321 

  

  

Nonaccrual loans

  

 250 

 250 

 - 

  

 188 

 188 

 - 

  

Other assets (1)

  

 1,902 

n/a

n/a

  

 1,386 

n/a

n/a

  

Long-term debt

  

 - 

 - 

 - 

  

 - 

 (199) 

 199 

(2)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Consists of nonmarketable equity investments carried at fair value. See Note 6 (Other Assets) for more information.

(2)   Represents collateralized, non-recourse debt securities issued by certain of our consolidated securitization VIEs that are held by third party investors. To the extent cash flows from the underlying collateral are not sufficient to pay the unpaid principal amount of the debt, those third party investors absorb losses.

148

 


 

Note 13:    Fair Values of Assets and Liabilities   (continued)  

 

The assets and liabilities accounted for under the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The changes in fair value related to initial measurement and subsequent changes in fair value included in earnings for these assets and liabilities measured at fair value are shown below by income statement line item.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 2014 

  

 2013 

  

  

  

Net gains

  

  

  

Net gains

  

  

  

Mortgage

(losses)

  

  

Mortgage

(losses)

  

  

  

banking

from

Other

  

banking

from

Other

  

  

noninterest

trading

noninterest

  

noninterest

trading

noninterest

(in millions)

  

income

activities

income

  

income

activities

income

Quarter ended June 30,

  

  

  

  

  

  

  

  

Mortgages held for sale

$

 694 

 -   

 -   

  

 61 

 - 

 - 

Loans

  

 -   

 -   

 1 

  

 - 

 - 

 (107) 

Other assets

  

 -   

 -   

 (31) 

  

 - 

 - 

 25 

Other interests held (1)

  

 -   

 (4) 

 1 

  

 - 

 (6) 

 - 

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

  

  

  

  

  

  

  

  

Mortgages held for sale

$

 1,200 

 -   

 -   

  

 1,034 

 - 

 - 

Loans

  

 -   

 -   

 1 

  

 - 

 - 

 (154) 

Other assets

  

 -   

 -   

 (92) 

  

 - 

 - 

 39 

Other interests held (1)

  

 -   

 (5) 

 -   

  

 - 

 (13) 

 6 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Consists of retained interests in securitizations and changes in fair value of letters of credit.

  

  

  

  

  

  

  

  

  

  

For performing loans, instrument-specific credit risk gains or losses were derived principally by determining the change in fair value of the loans due to changes in the observable or implied credit spread. Credit spread is the market yield on the loans less the relevant risk-free benchmark interest rate. For nonperforming loans, we attribute all changes in fair value to instrument-specific credit risk. The following table shows the estimated gains and losses from earnings attributable to instrument-specific credit risk related to assets accounted for under the fair value option.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

 2014 

 2013 

  

 2014 

 2013 

Gains (losses) attributable to instrument-specific credit risk:

  

  

  

  

  

  

  

Mortgages held for sale

$

 45 

 88 

  

 55 

 125 

  

  

Total

$

 45 

 88 

  

 55 

 125 

  

  

  

  

  

  

  

  

  

149

 


 

      

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments, excluding financial instruments recorded at fair value on a recurring basis, as they are included within the Assets and Liabilities Recorded at Fair Value on a Recurring Basis table included earlier in this Note. The carrying amounts in the following table are recorded on the balance sheet under the indicated captions.

We have not included assets and liabilities that are not financial instruments in our disclosure, such as the value of the long-term relationships with our deposit, credit card and trust customers, amortized MSRs, premises and equipment, goodwill and other intangibles, deferred taxes and other liabilities. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Estimated fair value

  

(in millions)

  

Carrying amount

  

Level 1

  

Level 2

  

Level 3

  

Total

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financial assets

  

  

  

  

  

  

  

  

  

  

  

  

Cash and due from banks (1)

$

 20,635 

  

 20,635 

  

 - 

  

 - 

  

 20,635 

  

  

Federal funds sold, securities purchased under resale

  

  

  

  

  

  

  

  

  

  

  

  

  

agreements and other short-term investments (1)

  

 238,719 

  

 7,642 

  

 231,077 

  

 - 

  

 238,719 

  

  

Held-to-maturity securities

  

 30,108 

  

 17,914 

  

 7,348 

  

 5,124 

  

 30,386 

  

  

Mortgages held for sale (2)

  

 4,616 

  

 - 

  

 3,298 

  

 1,327 

  

 4,625 

  

  

Loans held for sale (2)

  

 9,761 

  

 - 

  

 9,810 

  

 - 

  

 9,810 

  

  

Loans, net (3)

  

 798,168 

  

 - 

  

 60,825 

  

 747,511 

  

 808,336 

  

  

Nonmarketable equity investments (cost method)

  

 6,856 

  

 - 

  

 - 

  

 8,056 

  

 8,056 

  

Financial liabilities

  

  

  

  

  

  

  

  

  

  

  

  

Deposits

  

 1,118,577 

  

 - 

  

 1,080,295 

  

 38,574 

  

 1,118,869 

  

  

Short-term borrowings (1)

  

 61,849 

  

 - 

  

 61,849 

  

 - 

  

 61,849 

  

  

Long-term debt (4)

  

 167,868 

  

 - 

  

 162,129 

  

 9,835 

  

 171,964 

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financial assets

  

  

  

  

  

  

  

  

  

  

  

  

Cash and due from banks (1)

$

 19,919 

  

 19,919 

  

 - 

  

 - 

  

 19,919 

  

  

Federal funds sold, securities purchased under resale

  

  

  

  

  

  

  

  

  

  

  

  

  

agreements and other short-term investments (1)

  

 213,793 

  

 5,160 

  

 208,633 

  

 - 

  

 213,793 

  

  

Held-to-maturity securities

  

 12,346 

  

 - 

  

 6,205 

  

 6,042 

  

 12,247 

  

  

Mortgages held for sale (2)

  

 2,884 

  

 - 

  

 2,009 

  

 893 

  

 2,902 

  

  

Loans held for sale (2)

  

 132 

  

 - 

  

 136 

  

 - 

  

 136 

  

  

Loans, net (3)

  

 789,850 

  

 - 

  

 58,350 

  

 736,551 

  

 794,901 

  

  

Nonmarketable equity investments (cost method)

  

 6,978 

  

 - 

  

 - 

  

 8,635 

  

 8,635 

  

Financial liabilities

  

 - 

  

 - 

  

 - 

  

 - 

  

  

  

  

Deposits

  

 1,079,177 

  

 - 

  

 1,037,448 

  

 42,079 

  

 1,079,527 

  

  

Short-term borrowings (1)

  

 53,883 

  

 - 

  

 53,883 

  

 - 

  

 53,883 

  

  

Long-term debt (4)

  

 152,987 

  

 - 

  

 144,984 

  

 10,879 

  

 155,863 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Amounts consist of financial instruments in which carrying value approximates fair value.

(2)   Balance reflects MHFS and LHFS, as applicable, other than those MHFS and LHFS for which election of the fair value option was made.

(3)   Loans exclude balances for which the fair value option was elected and also exclude lease financing with a carrying amount of $11.9 billion and $12.0 billion at June 30, 2014 and December 31, 2013, respectively.

(4)   The carrying amount and fair value exclude balances for which the fair value option was elected and obligations under capital leases of $10 million and $11 million at June 30, 2014 and December 31, 2013, respectively.

 

Loan commitments, standby letters of credit and commercial and similar letters of credit are not included in the table above.   A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related allowance, which totaled $856 million and $597 million at June 30, 2014 and December 31, 2013, respectively.

150

 


 

      

Note 14:  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. If issued, preference shares would be limited to one vote per share. Our total authorized, issued and outstanding preferred stock is presented in the following two tables. The Employee Stock Ownership Plan (ESOP) Cumulative Convertible Preferred Stock is presented in the two tables  below and in the table on the following page.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

  

  

Liquidation

Shares

  

  

Liquidation

Shares

  

  

  

  

  

  

  

  

preference

authorized

  

  

preference

authorized

  

  

per share

and designated

  

  

per share

and designated

DEP Shares

  

  

  

  

  

  

  

Dividend Equalization Preferred Shares (DEP)

$

 10 

 97,000 

  

$

 10 

 97,000 

Series G

  

  

  

  

  

  

  

7.25% Class A Preferred Stock

  

 15,000 

 50,000 

  

  

 15,000 

 50,000 

Series H

  

  

  

  

  

  

  

Floating Class A Preferred Stock

  

 20,000 

 50,000 

  

  

 20,000 

 50,000 

Series I

  

  

  

  

  

  

  

Floating Class A Preferred Stock

  

 100,000 

 25,010 

  

  

 100,000 

 25,010 

Series J

  

  

  

  

  

  

  

8.00% Non-Cumulative Perpetual Class A Preferred Stock

  

 1,000 

 2,300,000 

  

  

 1,000 

 2,300,000 

Series K

  

  

  

  

  

  

  

7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

  

 1,000 

 3,500,000 

  

  

 1,000 

 3,500,000 

Series L

  

  

  

  

  

  

  

7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock

  

 1,000 

 4,025,000 

  

  

 1,000 

 4,025,000 

Series N

  

  

  

  

  

  

  

5.20% Non-Cumulative Perpetual Class A Preferred Stock

  

 25,000 

 30,000 

  

  

 25,000 

 30,000 

Series O

  

  

  

  

  

  

  

5.125% Non-Cumulative Perpetual Class A Preferred Stock

  

 25,000 

 27,600 

  

  

 25,000 

 27,600 

Series P

  

  

  

  

  

  

  

5.25% Non-Cumulative Perpetual Class A Preferred Stock

  

 25,000 

 26,400 

  

  

 25,000 

 26,400 

Series Q

  

  

  

  

  

  

  

5.85% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

  

 25,000 

 69,000 

  

  

 25,000 

 69,000 

Series R

  

  

  

  

  

  

  

6.625% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

  

 25,000 

 34,500 

  

  

 25,000 

 34,500 

Series S

  

  

  

  

  

  

  

5.900% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

  

 25,000 

 80,000 

  

  

 - 

 - 

ESOP

  

  

  

  

  

  

  

Cumulative Convertible Preferred Stock (1)

  

 - 

 1,586,965 

  

  

 - 

 1,105,664 

  

Total

  

  

 11,901,475 

  

  

  

 11,340,174 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   See the following page for additional information about the liquidation preference for the ESOP Cumulative Preferred Stock.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

  

Shares

  

  

  

  

  

Shares

  

  

  

  

  

issued and

  

Par

Carrying

  

  

issued and

  

Par

Carrying

  

(in millions, except shares)

outstanding

  

value

value

Discount

  

outstanding

  

 value 

value

Discount

DEP Shares

  

  

  

  

  

  

  

  

  

  

  

Dividend Equalization Preferred Shares (DEP)

 96,546 

$

 - 

 - 

 - 

  

 96,546 

$

 - 

 - 

 - 

Series I (1) 

  

  

  

  

  

  

  

  

  

  

  

Floating Class A Preferred Stock

 25,010 

  

 2,501 

 2,501 

 - 

  

 25,010 

  

 2,501 

 2,501 

 - 

Series J (1) 

  

  

  

  

  

  

  

  

  

  

  

8.00% Non-Cumulative Perpetual Class A Preferred Stock

 2,150,375 

  

 2,150 

 1,995 

 155 

  

 2,150,375 

  

 2,150 

 1,995 

 155 

Series K (1) 

  

  

  

  

  

  

  

  

  

  

  

7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

 3,352,000 

  

 3,352 

 2,876 

 476 

  

 3,352,000 

  

 3,352 

 2,876 

 476 

Series L (1) 

  

  

  

  

  

  

  

  

  

  

  

7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock

 3,968,000 

  

 3,968 

 3,200 

 768 

  

 3,968,000 

  

 3,968 

 3,200 

 768 

Series N (1) 

  

  

  

  

  

  

  

  

  

  

  

5.20% Non-Cumulative Perpetual Class A Preferred Stock

 30,000 

  

 750 

 750 

 - 

  

 30,000 

  

 750 

 750 

 - 

Series O (1) 

  

  

  

  

  

  

  

  

  

  

  

5.125% Non-Cumulative Perpetual Class A Preferred Stock

 26,000 

  

 650 

 650 

 - 

  

 26,000 

  

 650 

 650 

 - 

Series P (1) 

  

  

  

  

  

  

  

  

  

  

  

5.25% Non-Cumulative Perpetual Class A Preferred Stock

 25,000 

  

 625 

 625 

 - 

  

 25,000 

  

 625 

 625 

 - 

Series Q (1)

  

  

  

  

  

  

  

  

  

  

  

5.85% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

 69,000 

  

 1,725 

 1,725 

 - 

  

 69,000 

  

 1,725 

 1,725 

 - 

Series R (1)

  

  

  

  

  

  

  

  

  

  

  

6.625% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

 33,600 

  

 840 

 840 

 - 

  

 33,600 

  

 840 

 840 

 - 

Series S (1)

  

  

  

  

  

  

  

  

  

  

  

5.900% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock

 80,000 

  

 2,000 

 2,000 

 - 

  

 - 

  

 - 

 - 

 - 

ESOP

  

  

  

  

  

  

  

  

  

  

  

Cumulative Convertible Preferred Stock

 1,586,965 

  

 1,587 

 1,587 

 - 

  

 1,105,664 

  

 1,105 

 1,105 

 - 

  

Total

 11,442,496 

$

 20,148 

 18,749 

 1,399 

  

 10,881,195 

$

 17,666 

 16,267 

 1,399 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Preferred shares qualify as Tier 1 capital.

151

 


 

      

In April 2014, we issued 2 million Depositary Shares, each representing a 1/25 th interest in a share of   Non-Cumulative Perpetual Class A Preferred Stock, Series S, for an aggregate public offering price of $2.0 billion.

See Note 7 (Securitizations and Variable Interest Entities) for additional information on our trust preferred securities. We do not have a commitment to issue Series G or H preferred stock.

 

ESOP Cumulative Convertible Preferred Stock   All shares of our ESOP Cumulative Convertible Preferred Stock (ESOP Preferred Stock) were issued to a trustee acting on behalf of the Wells Fargo & Company 401(k) Plan (the 401(k) Plan). Dividends on the ESOP Preferred Stock are cumulative from the date of initial issuance and are payable quarterly at annual rates based upon the year of issuance. Each share of ESOP Preferred Stock released from the unallocated reserve of the 401(k) Plan is converted into shares of our common stock based on the stated value of the ESOP Preferred Stock and the then current market price of our common stock. The ESOP Preferred Stock is also convertible at the option of the holder at any time, unless previously redeemed. We have the option to redeem the ESOP Preferred Stock at any time, in whole or in part, at a redemption price per share equal to the higher of (a) $1,000 per share plus accrued and unpaid dividends or (b) the fair market value, as defined in the Certificates of Designation for the ESOP Preferred Stock.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Shares issued and outstanding

  

  

Carrying value

  

  

  

  

  

  

  

  

  

June 30,

Dec. 31,

  

  

June 30,

  

Dec. 31,

  

Adjustable dividend rate

(in millions, except shares)

 2014 

 2013 

  

  

 2014 

  

 2013 

  

Minimum

Maximum

ESOP Preferred Stock

  

  

  

  

  

  

  

  

  

  

  

$1,000 liquidation preference per share

  

  

  

  

  

  

  

  

  

  

  

  

2014

  

  

  

 568,304 

 - 

  

$

 568 

  

 - 

  

 8.70 

%

 9.70 

  

2013

  

  

  

 312,000 

 349,788 

  

  

 312 

  

 350 

  

 8.50 

  

 9.50 

  

2012

  

  

  

 208,004 

 217,404 

  

  

 208 

  

 217 

  

 10.00 

  

 11.00 

  

2011

  

  

  

 229,263 

 241,263 

  

  

 229 

  

 241 

  

 9.00 

  

 10.00 

  

2010

  

  

  

 161,011 

 171,011 

  

  

 161 

  

 171 

  

 9.50 

  

 10.50 

  

2008

  

  

  

 52,614 

 57,819 

  

  

 53 

  

 58 

  

 10.50 

  

 11.50 

  

2007

  

  

  

 34,408 

 39,248 

  

  

 35 

  

 39 

  

 10.75 

  

 11.75 

  

2006

  

  

  

 16,999 

 21,139 

  

  

 17 

  

 21 

  

 10.75 

  

 11.75 

  

2005

  

  

  

 4,362 

 7,992 

  

  

 4 

  

 8 

  

 9.75 

  

 10.75 

Total ESOP Preferred Stock (1)

 1,586,965 

 1,105,664 

  

$

 1,587 

  

 1,105 

  

  

  

  

Unearned ESOP shares (2)

  

  

  

$

 (1,724) 

  

 (1,200) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   At June 30, 2014 and December 31, 2013, additional paid-in capital included $137 million and $95 million, respectively, related to ESOP preferred stock.  

(2)   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.

152

 


 

      

Note 15: Employee Benefits                                                                                                                                       

We sponsor a noncontributory qualified defined benefit retirement plan, the Wells Fargo & Company Cash Balance Plan (Cash Balance Plan), which covers eligible employees of Wells Fargo. Benefits accrued under the Cash Balance Plan were frozen effective July 1, 2009.

The net periodic benefit cost was:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 2014 

  

 2013 

  

  

  

  

  

  

Pension benefits

  

  

Pension benefits

  

  

  

  

  

  

  

  

Non-

Other

  

  

Non-

Other

(in millions)

Qualified

qualified

benefits

  

Qualified

qualified

benefits

Quarter ended June 30,

  

  

  

  

Service cost

$

 - 

 - 

 2 

  

 - 

 - 

 2 

Interest cost

  

 117 

 8 

 9 

  

 113 

 7 

 12 

Expected return on plan assets

  

 (158) 

 - 

 (9) 

  

 (170) 

 - 

 (9) 

Amortization of net actuarial (gain) loss

  

 23 

 2 

 (7) 

  

 42 

 3 

 - 

Settlement

  

 - 

 2 

 - 

  

 68 

 - 

 - 

  

Net periodic benefit cost (income)

$

 (18) 

 12 

 (5) 

  

 53 

 10 

 5 

Six months ended June 30,

  

  

  

  

Service cost

$

 - 

 - 

 4 

  

 - 

 - 

 5 

Interest cost

  

 233 

 14 

 20 

  

 226 

 14 

 24 

Expected return on plan assets

  

 (315) 

 - 

 (18) 

  

 (341) 

 - 

 (18) 

Amortization of net actuarial (gain) loss

  

 46 

 5 

 (14) 

  

 84 

 7 

 - 

Amortization of prior service credit

  

 - 

 - 

 (1) 

  

 - 

 - 

 (1) 

Settlement

  

 - 

 2 

 - 

  

 68 

 4 

 - 

  

Net periodic benefit cost (income)

$

 (36) 

 21 

 (9) 

  

 37 

 25 

 10 

  

  

  

  

  

  

  

  

  

  

  

  

  

We recognize settlement losses for our Cash Balance Plan based on an assessment of whether our estimated lump sum payments related to the Cash Balance Plan will, in aggregate for the year, exceed the sum of its annual service and interest cost (threshold). As of June 30, 2014, it was not considered probable that lump sum payments will exceed this threshold in 2014. In 2013, lump sum payments exceeded this threshold. Settlement losses of $68 million were recognized in second quarter 2013, representing the pro rata portion of the net loss remaining in cumulative other comprehensive income based on the percentage reduction in the Cash Balance Plan’s projected benefit obligation. A remeasurement of the Cash Balance liability and related plan assets occurs at the end of each quarter in which settlement losses are recognized.

153

 


 

   

Note 16:   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. See Note 1 (Summary of Significant Accounting Policies) for discussion of private share repurchases and the Consolidated Statement of Changes in Equity.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions, except per share amounts)

  

2014 

  

2013 

  

2014 

  

2013 

Wells Fargo net income

$

 5,726 

  

 5,519 

  

 11,619 

  

 10,690 

Less:

Preferred stock dividends and other

  

 302 

  

 247 

  

 588 

  

 487 

Wells Fargo net income applicable to common stock (numerator)

$

5,424 

  

5,272 

  

11,031 

  

10,203 

Earnings per common share

  

  

  

  

  

  

  

  

Average common shares outstanding (denominator)

  

 5,268.4 

  

 5,304.7 

  

 5,265.6 

  

 5,291.9 

Per share

$

 1.02 

  

 1.00 

  

 2.09 

  

 1.93 

Diluted earnings per common share

  

  

  

  

  

  

  

  

Average common shares outstanding

  

 5,268.4 

  

 5,304.7 

  

 5,265.6 

  

 5,291.9 

Add:  

Stock options

  

 33.4 

  

 32.2 

  

 33.7 

  

 30.9 

  

  

Restricted share rights

  

 36.4 

  

 42.7 

  

 42.3 

  

 43.6 

  

  

Warrants

  

 12.6 

  

 5.0 

  

 11.6 

  

 3.5 

Diluted average common shares outstanding (denominator)

  

 5,350.8 

  

 5,384.6 

  

 5,353.2 

  

 5,369.9 

Per share

$

 1.01 

  

 0.98 

  

 2.06 

  

 1.90 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The following table presents any outstanding options and warrants to purchase shares of common stock that were anti-dilutive (the exercise price was higher than the weighted-average market price), and therefore not included in the calculation of diluted earnings per common share.  

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Weighted-average shares

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

2014 

  

2013 

  

2014 

  

2013 

Options

 7.8 

  

 10.9 

  

 8.6 

  

 11.9 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

154

 


 

      

Note 17:  Other Comprehensive Income                                                                                                                   

The components of other comprehensive income (OCI), reclassifications to net income by income statement line item, and the related tax effects were:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

  

  

  

  

  

  

  

  

  

 2014 

  

 2013 

  

 2014 

  

 2013 

  

  

  

  

  

  

  

  

  

Before

Tax

  

Net of

  

Before

Tax

Net of

  

Before

Tax

  

Net of

  

Before

Tax

Net of

(in millions)

  

tax

effect

  

tax

  

tax

effect

tax

  

tax

effect

  

tax

  

tax

effect

tax

Investment securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net unrealized gains (losses)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

arising during the period

$

 2,085 

 (836) 

  

 1,249 

  

 (6,130) 

 2,300 

 (3,830) 

  

 4,810 

 (1,829) 

  

 2,981 

  

 (6,764) 

 2,530 

 (4,234) 

  

Reclassification of net (gains) losses to:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest income on investment

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities (1)

  

 (11) 

 4 

  

 (7) 

  

 - 

 - 

 - 

  

 (26) 

 10 

  

 (16) 

  

 - 

 - 

 - 

  

  

  

Net (gains) losses on debt securities

 (71) 

 27 

  

 (44) 

  

 54 

 (20) 

 34 

  

 (154) 

 58 

  

 (96) 

  

 9 

 (3) 

 6 

  

  

  

Net gains from equity investments

 (68) 

 25 

  

 (43) 

  

 (24) 

 9 

 (15) 

  

 (364) 

 137 

  

 (227) 

  

 (92) 

 35 

 (57) 

  

  

  

  

  

Subtotal reclassifications

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

to net income

  

 (150) 

 56 

  

 (94) 

  

 30 

 (11) 

 19 

  

 (544) 

 205 

  

 (339) 

  

 (83) 

 32 

 (51) 

  

  

  

  

  

  

  

Net change

  

 1,935 

 (780) 

  

 1,155 

  

 (6,100) 

 2,289 

 (3,811) 

  

 4,266 

 (1,624) 

  

 2,642 

  

 (6,847) 

 2,562 

 (4,285) 

Derivatives and hedging activities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net unrealized gains (losses)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

arising during the period

  

 212 

 (80) 

  

 132 

  

 (10) 

 3 

 (7) 

  

 256 

 (97) 

  

 159 

  

 (3) 

 1 

 (2) 

  

Reclassification of net (gains) losses to:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest income on investment

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

 (1) 

 1 

  

 - 

  

 - 

 - 

 - 

  

 (1) 

 1 

  

 - 

  

 - 

 - 

 - 

  

  

  

Interest income on loans

  

 (130) 

 49 

  

 (81) 

  

 (115) 

 40 

 (75) 

  

 (254) 

 96 

  

 (158) 

  

 (231) 

 87 

 (144) 

  

  

  

Interest expense on long-term debt

 16 

 (6) 

  

 10 

  

 27 

 (10) 

 17 

  

 34 

 (13) 

  

 21 

  

 54 

 (20) 

 34 

  

  

  

Noninterest income

  

 - 

 - 

  

 - 

  

 17 

 (6) 

 11 

  

 - 

 - 

  

 - 

  

 17 

 (6) 

 11 

  

  

  

Salaries expense

  

 - 

 - 

  

 - 

  

 2 

 (1) 

 1 

  

 - 

 - 

  

 - 

  

 4 

 (2) 

 2 

  

  

  

  

  

Subtotal reclassifications

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

to net income

 (115) 

 44 

  

 (71) 

  

 (69) 

 23 

 (46) 

  

 (221) 

 84 

  

 (137) 

  

 (156) 

 59 

 (97) 

  

  

  

  

  

  

  

Net change

 97 

 (36) 

  

 61 

  

 (79) 

 26 

 (53) 

  

 35 

 (13) 

  

 22 

  

 (159) 

 60 

 (99) 

Defined benefit plans adjustments:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net actuarial gains (losses) arising

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

during the period

  

 (12) 

 5 

  

 (7) 

  

 772 

 (291) 

 481 

  

 (12) 

 5 

  

 (7) 

  

 778 

 (293) 

 485 

  

Reclassification of amounts to net

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

periodic benefit costs (2):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Amortization of net actuarial loss

 18 

 (7) 

  

 11 

  

 45 

 (16) 

 29 

  

 37 

 (14) 

  

 23 

  

 91 

 (34) 

 57 

  

  

  

Settlements and other

  

 2 

 (1) 

  

 1 

  

 68 

 (26) 

 42 

  

 1 

 (1) 

  

 - 

  

 71 

 (27) 

 44 

  

  

  

  

  

Subtotal reclassifications to

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

net periodic benefit costs

 20 

 (8) 

  

 12 

  

 113 

 (42) 

 71 

  

 38 

 (15) 

  

 23 

  

 162 

 (61) 

 101 

  

  

  

  

  

  

  

Net change

 8 

 (3) 

  

 5 

  

 885 

 (333) 

 552 

  

 26 

 (10) 

  

 16 

  

 940 

 (354) 

 586 

Foreign currency translation adjustments:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net unrealized gains (losses) arising

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

during the period

  

 17 

 3 

  

 20 

  

 (21) 

 (8) 

 (29) 

  

 - 

 - 

  

 - 

  

 (39) 

 (6) 

 (45) 

  

Reclassification of net (gains) losses to:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Noninterest income

  

 - 

 - 

  

 - 

  

 (15) 

 5 

 (10) 

  

 6 

 - 

  

 6 

  

 (15) 

 5 

 (10) 

  

  

  

  

  

  

  

Net change

 17 

 3 

  

 20 

  

 (36) 

 (3) 

 (39) 

  

 6 

 - 

  

 6 

  

 (54) 

 (1) 

 (55) 

Other comprehensive income (loss)

$

 2,057 

 (816) 

  

 1,241 

  

 (5,330) 

 1,979 

 (3,351) 

  

 4,333 

 (1,647) 

  

 2,686 

  

 (6,120) 

 2,267 

 (3,853) 

Less: Other comprehensive loss from

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests, net of tax

  

  

  

 (124) 

  

  

  

 (3) 

  

  

  

  

 (45) 

  

  

  

 - 

  

  

Wells Fargo other comprehensive

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

income (loss), net of tax

  

  

  

$

 1,365 

  

  

  

 (3,348) 

  

  

  

  

 2,731 

  

  

  

 (3,853) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Represents unrealized gains amortized over the remaining lives of securities that were transferred from the available-for-sale portfolio to the held-to-maturity portfolio.

(2)

These items are included in the computation of net periodic benefit cost, which is recorded in employee benefits expense (see Note 15 (Employee Benefits) for additional details).

155

 


 

      

Cumulative OCI balances were:

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cumulative

  

  

  

  

  

  

  

Derivatives

  

Defined

  

Foreign

  

other

  

  

  

  

  

  

  

and

  

benefit

  

currency

  

compre-

  

  

  

  

  

Investment

  

hedging

  

plans

  

translation

  

hensive

(in millions)

  

securities

  

activities

  

adjustments

  

adjustments

  

income

Quarter ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

Balance, beginning of period

$

 3,746 

  

 41 

  

 (1,042) 

  

 7 

  

 2,752 

  

Net unrealized gains (losses)

  

  

  

  

  

  

  

  

  

  

  

  

arising during the period

  

 1,249 

  

 132 

  

 (7) 

  

 20 

  

 1,394 

  

Amounts reclassified from accumulated

  

  

  

  

  

  

  

  

  

  

  

  

other comprehensive income

  

 (94) 

  

 (71) 

  

 12 

  

 - 

  

 (153) 

  

Net change

  

 1,155 

  

 61 

  

 5 

  

 20 

  

 1,241 

  

Less:  Other comprehensive income (loss) from

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests

  

 (124) 

  

 - 

  

 - 

  

 - 

  

 (124) 

Balance, end of period

$

 5,025 

  

 102 

  

 (1,037) 

  

 27 

  

 4,117 

Quarter ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

Balance, beginning of period

$

 6,985 

  

 243 

  

 (2,147) 

  

 64 

  

 5,145 

  

Net unrealized gains (losses)

  

  

  

  

  

  

  

  

  

  

  

  

arising during the period

  

 (3,830) 

  

 (7) 

  

 481 

  

 (29) 

  

 (3,385) 

  

Amounts reclassified from accumulated

  

  

  

  

  

  

  

  

  

  

  

  

other comprehensive income

  

 19 

  

 (46) 

  

 71 

  

 (10) 

  

 34 

  

Net change

  

 (3,811) 

  

 (53) 

  

 552 

  

 (39) 

  

 (3,351) 

  

Less:  Other comprehensive income (loss) from

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests

  

 (3) 

  

 - 

  

 - 

  

 - 

  

 (3) 

Balance, end of period

$

 3,177 

  

 190 

  

 (1,595) 

  

 25 

  

 1,797 

Six months ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

Balance, beginning of period

$

 2,338 

  

 80 

  

 (1,053) 

  

 21 

  

 1,386 

  

Net unrealized gains (losses)

  

  

  

  

  

  

  

  

  

  

  

  

arising during the period

  

 2,981 

  

 159 

  

 (7) 

  

 - 

  

 3,133 

  

Amounts reclassified from accumulated

  

  

  

  

  

  

  

  

  

  

  

  

other comprehensive income

  

 (339) 

  

 (137) 

  

 23 

  

 6 

  

 (447) 

  

Net change

  

 2,642 

  

 22 

  

 16 

  

 6 

  

 2,686 

  

Less:  Other comprehensive income (loss) from

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests

  

 (45) 

  

 - 

  

 - 

  

 - 

  

 (45) 

Balance, end of period

$

 5,025 

  

 102 

  

 (1,037) 

  

 27 

  

 4,117 

Six months ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

Balance, beginning of period

$

 7,462 

  

 289 

  

 (2,181) 

  

 80 

  

 5,650 

  

Net unrealized gains (losses)

  

  

  

  

  

  

  

  

  

  

  

  

arising during the period

  

 (4,234) 

  

 (2) 

  

 485 

  

 (45) 

  

 (3,796) 

  

Amounts reclassified from accumulated

  

  

  

  

  

  

  

  

  

  

  

  

other comprehensive income

  

 (51) 

  

 (97) 

  

 101 

  

 (10) 

  

 (57) 

  

Net change

  

 (4,285) 

  

 (99) 

  

 586 

  

 (55) 

  

 (3,853) 

  

Less:  Other comprehensive income from

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests

  

 - 

  

 - 

  

 - 

  

 - 

  

 - 

Balance, end of period

$

 3,177 

  

 190 

  

 (1,595) 

  

 25 

  

 1,797 

156

 


 

      

Note 18:  Operating Segments                                                                                                                                    

We have three reportable operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. The results for these operating segments are based on our management accounting process, for which there is no comprehensive, authoritative guidance equivalent to GAAP for financial accounting. 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 segment. If the management structure and/or the allocation process changes, allocations, transfers and assignments may change. For a complete description of our operating segments, including the underlying management accounting process, see Note 24 (Operating Segments) to Financial Statements in our 2013 Form 10-K.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wealth,

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Brokerage

  

  

  

  

  

  

  

  

  

  

  

Community

  

Wholesale

  

  

and

  

  

  

  

Consolidated

(income/expense in millions,

  

 Banking 

  

Banking

  

Retirement

  

Other (1)

  

Company

average balances in billions)

  

2014 

2013 

  

2014 

2013 

  

2014 

2013 

  

2014 

2013 

  

2014 

2013 

Quarter ended June 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net interest income (2)

$

 7,386 

 7,251 

  

 2,953 

 3,101 

  

 775 

 700 

  

 (323) 

 (302) 

  

 10,791 

 10,750 

Provision (reversal of provision)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

for credit losses

  

 279 

 763 

  

 (49) 

 (118) 

  

 (25) 

 19 

  

 12 

 (12) 

  

 217 

 652 

Noninterest income

  

 5,220 

 5,691 

  

 2,993 

 3,034 

  

 2,775 

 2,561 

  

 (713) 

 (658) 

  

 10,275 

 10,628 

Noninterest expense

  

 7,020 

 7,213 

  

 3,203 

 3,183 

  

 2,695 

 2,542 

  

 (724) 

 (683) 

  

 12,194 

 12,255 

Income (loss) before income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

tax expense (benefit)

  

 5,307 

 4,966 

  

 2,792 

 3,070 

  

 880 

 700 

  

 (324) 

 (265) 

  

 8,655 

 8,471 

Income tax expense (benefit)

  

 1,820 

 1,633 

  

 838 

 1,065 

  

 334 

 266 

  

 (123) 

 (101) 

  

 2,869 

 2,863 

Net income (loss) before

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests

  

 3,487 

 3,333 

  

 1,954 

 2,005 

  

 546 

 434 

  

 (201) 

 (164) 

  

 5,786 

 5,608 

Less: Net income from

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests

  

 56 

 88 

  

 2 

 1 

  

 2 

 - 

  

 - 

 - 

  

 60 

 89 

Net income (loss) (3)

$

 3,431 

 3,245 

  

 1,952 

 2,004 

  

 544 

 434 

  

 (201) 

 (164) 

  

 5,726 

 5,519 

Average loans

$

 505.4 

 498.2 

  

 308.1 

 285.1 

  

 51.0 

 45.4 

  

 (33.5) 

 (30.3) 

  

 831.0 

 798.4 

Average assets

  

 918.1 

 820.9 

  

 532.4 

 498.1 

  

 187.6 

 177.1 

  

 (74.1) 

 (68.9) 

  

 1,564.0 

 1,427.2 

Average core deposits

  

 639.8 

 623.0 

  

 265.8 

 230.5 

  

 153.0 

 146.4 

  

 (66.9) 

 (63.8) 

  

 991.7 

 936.1 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six months ended June 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net interest income (2)

$

 14,661 

 14,370 

  

 5,844 

 6,106 

  

 1,543 

 1,369 

  

 (642) 

 (596) 

  

 21,406 

 21,249 

Provision (reversal of provision)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

for credit losses

  

 698 

 2,025 

  

 (142) 

 (176) 

  

 (33) 

 33 

  

 19 

 (11) 

  

 542 

 1,871 

Noninterest income

  

 10,538 

 11,471 

  

 5,682 

 6,115 

  

 5,475 

 5,089 

  

 (1,410) 

 (1,287) 

  

 20,285 

 21,388 

Noninterest expense

  

 13,794 

 14,590 

  

 6,418 

 6,274 

  

 5,406 

 5,181 

  

 (1,476) 

 (1,390) 

  

 24,142 

 24,655 

Income (loss) before income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

tax expense (benefit)

  

 10,707 

 9,226 

  

 5,250 

 6,123 

  

 1,645 

 1,244 

  

 (595) 

 (482) 

  

 17,007 

 16,111 

Income tax expense (benefit)

  

 3,196 

 2,921 

  

 1,552 

 2,072 

  

 624 

 473 

  

 (226) 

 (183) 

  

 5,146 

 5,283 

Net income (loss) before

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests

  

 7,511 

 6,305 

  

 3,698 

 4,051 

  

 1,021 

 771 

  

 (369) 

 (299) 

  

 11,861 

 10,828 

Less: Net income from

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests

  

 236 

 136 

  

 4 

 2 

  

 2 

 - 

  

 - 

 - 

  

 242 

 138 

Net income (loss) (3)

$

 7,275 

 6,169 

  

 3,694 

 4,049 

  

 1,019 

 771 

  

 (369) 

 (299) 

  

 11,619 

 10,690 

Average loans

$

 505.2 

 498.5 

  

 305.0 

 284.1 

  

 50.5 

 44.6 

  

 (33.3) 

 (29.7) 

  

 827.4 

 797.5 

Average assets

  

 905.5 

 810.3 

  

 524.9 

 496.4 

  

 189.1 

 178.7 

  

 (74.4) 

 (70.3) 

  

 1,545.1 

 1,415.1 

Average core deposits

  

 633.2 

 621.1 

  

 262.4 

 227.3 

  

 154.5 

 147.9 

  

 (67.3) 

 (65.3) 

  

 982.8 

 931.0 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   Includes corporate items not specific to a business segment and the elimination of certain items that are included in more than one business segment, substantially all of which represents products and services for wealth management customers provided in Community Banking stores

(2)   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.

(3)   Represents segment net income (loss) for Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement segments and Wells Fargo net income for the consolidated company.

157

 


 

   

Note 19:  Regulatory and Agency Capital Requirements                                                                                       

The Company and each of its subsidiary banks are subject to regulatory capital adequacy requirements promulgated by federal bank regulatory agencies. The Federal Reserve establishes capital requirements, including well capitalized standards, for the consolidated financial holding company, and the OCC has similar requirements for the Company’s national banks, including Wells Fargo Bank, N.A. (the Bank).

The following table presents regulatory capital information for Wells Fargo & Company and the Bank. Information presented for June 30, 2014, reflects the transition to Basel III capital requirements from previous regulatory capital adequacy guidelines under Basel I effective in 2013. Among other matters, Basel III revises the definition of capital, and changes will be phased-in effective January 1, 2014, through the end of 2021, with regulatory capital ratios determined using Basel III General Approach risk-weighted assets during 2014. Under the Basel III (General Approach), at June 30, 2014, the Company’s Common Equity Tier 1 capital was $134.8 billion, or 11.31% of risk-weighted assets, and the Bank’s Common Equity Tier 1 capital was $116.1 billion, or 10.70% of risk-weighted assets.

We do not consolidate our wholly-owned trust (the Trust) formed solely to issue trust preferred and preferred purchase securities (the Securities). Securities issued by the Trust includable in Tier 2 capital were $2.1 billion at June 30, 2014. During second quarter 2014, we did not redeem any trust preferred securities. Under the new Basel III capital requirements, our remaining trust preferred and preferred purchase securities will begin amortizing in 2016 and will no longer count as Tier 2 capital in 2022.

The Bank is an approved seller/servicer, and is required to maintain minimum levels of shareholders’ equity, as specified by various agencies, including the United States Department of Housing and Urban Development, GNMA, FHLMC and FNMA. At June 30, 2014, the Bank met these requirements. Other subsidiaries, including the Company’s insurance and broker-dealer subsidiaries, are also subject to various minimum capital levels, as defined by applicable industry regulations. The minimum capital levels for these subsidiaries, and related restrictions, are not significant to our consolidated operations.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wells Fargo & Company

  

  

Wells Fargo Bank, N.A.

  

  

  

  

  

  

  

  

Under

  

  

  

Under

  

  

  

  

  

  

  

  

  

  

Basel III

  

  

  

Basel III

  

  

  

  

  

  

  

  

  

  

(General

  

Under

  

(General

  

Under

  

  

  

  

  

  

  

  

Approach)

  

Basel I

  

Approach)

  

Basel I

  

Well-

  

Minimum

  

  

  

  

  

June 30,

  

Dec. 31,

  

  

June 30,

  

Dec. 31,

  

capitalized

  

capital

(in billions, except ratios)

  

 2014 

  

 2013 

  

  

 2014 

  

 2013 

  

ratios (1)

  

ratios (1)

Regulatory capital:

  

  

  

  

  

  

  

  

  

  

  

  

  

Tier 1

$

 151.7 

  

 140.7 

  

  

 116.1 

  

 110.0 

  

  

  

  

Total

  

 189.5 

  

 176.2 

  

  

 141.0 

  

 136.4 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Assets:

  

  

  

  

  

  

  

  

  

  

  

  

  

Risk-weighted

$

 1,192.5 

  

 1,141.5 

  

  

 1,085.7 

  

 1,057.3 

  

  

  

  

Adjusted average (2)

  

 1,538.1 

  

 1,466.7 

  

  

 1,384.1 

  

 1,324.0 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Regulatory capital ratios:

  

  

  

  

  

  

  

  

  

  

  

  

  

Tier 1 capital

  

 12.72 

%

 12.33 

  

  

 10.70 

  

 10.40 

  

 6.00 

  

 4.00 

Total capital

  

 15.89 

  

 15.43 

  

  

 12.98 

  

 12.90 

  

 10.00 

  

 8.00 

Tier 1 leverage (2)

  

 9.86 

  

 9.60 

  

  

 8.39 

  

 8.31 

  

 5.00 

  

 4.00 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)   As defined by the regulations issued by the Federal Reserve, OCC and FDIC.

(2)   The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations.

158

 


 

      

 

Glossary of Acronyms

  

  

  

  

  

  

  

  

  

  

  

  

ACL

Allowance for credit losses

HAMP

Home Affordability Modification Program

ALCO

Asset/Liability Management Committee

HPI

Home Price Index

ARM  

Adjustable-rate mortgage

HUD

U.S. Department of Housing and Urban Development

ARS  

Auction rate security

LHFS  

Loans held for sale

ASC  

Accounting Standards Codification

LIBOR  

London Interbank Offered Rate

ASU

Accounting Standards Update

LIHTC

Low-Income Housing Tax Credit

AVM

Automated valuation model

LOCOM

Lower of cost or market value

BCBS

Basel Committee on Bank Supervision

LTV  

Loan-to-value

BHC

Bank holding company

MBS

Mortgage-backed security

CCAR

Comprehensive Capital Analysis and Review

MHA

Making Home Affordable programs

CD

Certificate of deposit

MHFS  

Mortgages held for sale

CDO  

Collateralized debt obligation

MSR  

Mortgage servicing right

CDS

Credit default swaps

MTN

Medium-term note

CET1

Common Equity Tier 1

NAV  

Net asset value

CLO  

Collateralized loan obligation

NPA

Nonperforming asset

CLTV

Combined loan-to-value

OCC

Office of the Comptroller of the Currency

CMBS

Commercial mortgage-backed securities

OCI

Other comprehensive income

CPP  

Capital Purchase Program

OTC

Over-the-counter

CRE

Commercial real estate

OTTI  

Other-than-temporary impairment

DOJ

U.S. Department of Justice

PCI Loans

Purchased credit-impaired loans

DPD

Days past due

PTPP

Pre-tax pre-provision profit

ESOP

Employee Stock Ownership Plan

RBC

Risk-based capital

FAS

Statement of Financial Accounting Standards

RMBS

Residential mortgage-backed securities

FASB  

Financial Accounting Standards Board

ROA

Wells Fargo net income to average total assets

FDIC  

Federal Deposit Insurance Corporation

ROE

Wells Fargo net income applicable to common stock

FFELP

Federal Family Education Loan Program

  

to average Wells Fargo common stockholders' equity

FHA  

Federal Housing Administration

RWAs

Risk-weighted assets

FHLB  

Federal Home Loan Bank

SEC

Securities and Exchange Commission

FHLMC  

Federal Home Loan Mortgage Corporation

S&P

Standard & Poor’s Ratings Services

FICO

Fair Isaac Corporation (credit rating)

SPE

Special purpose entity

FNMA  

Federal National Mortgage Association

TARP

Troubled Asset Relief Program

FRB

Board of Governors of the Federal Reserve System

TDR

Troubled debt restructuring

FSB

Financial Stability Board

VA

Department of Veterans Affairs

GAAP

Generally accepted accounting principles

VaR  

Value-at-Risk

GNMA

Government National Mortgage Association

VIE

Variable interest entity

GSE

Government-sponsored entity

WFCC

Wells Fargo Canada Corporation

G-SIB

Globally systemic important bank

  

  

159

 


 

 

PART II – OTHER INFORMATION

 

Item 1.            Legal Proceedings

 

                       Information in response to this item can be found in Note 11 (Legal Actions) to Financial Statements in this Report which information is incorporated by reference into this item.

 

Item 1A.         Risk Factors

 

                       Information in response to this item can be found under the “Financial Review – Risk Factors” section in this Report which information is incorporated by reference into this item.  

 

Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table shows Company repurchases of its common stock for each calendar month in the quarter ended June 30, 2014.

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Maximum number of

  

  

  

  

  

Total number

  

  

shares that may yet

  

  

  

  

  

of shares

Weighted-average

be purchased under

Calendar month

repurchased (1)

price paid per share

the authorizations

April

 8,695,090 

  

$

 48.74 

  

 381,331,804 

May

 9,910,853 

  

  

 49.40 

  

 371,420,951 

June (2)

 20,791,552 

  

  

 50.01 

  

 350,629,399 

  

Total

 39,397,495 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

All shares were repurchased under an authorization covering up to 200 million shares of common stock approved by the Board of Directors and publicly announced by the Company on October 23, 2012, or an authorization covering up to an additional 350 million shares of common stock approved by the Board of Directors and publicly announced by the Company on March 26, 2014. Unless modified or revoked by the Board, these authorizations do not expire.

(2)

Includes a private repurchase transaction of 15,208,848 shares at a weighted-average price per share of $49.31.

  

  

  

  

  

  

  

  

  

  

  

The following table shows Company repurchases of the warrants for each calendar month in the quarter ended June 30, 2014.

 

  

  

  

  

  

  

  

  

  

  

  

 

  

  

  

  

  

  

  

  

  

  

  

 

  

  

  

  

  

Total number

  

  

Maximum dollar value

 

  

  

  

  

  

of warrants

Average price

of warrants that

 

Calendar month

repurchased (1)

paid per warrant

may yet be purchased

 

April

 - 

  

$

 - 

  

 451,944,402 

 

May

 - 

  

  

 - 

  

 451,944,402 

 

June

 - 

  

  

 - 

  

 451,944,402 

 

  

Total

 - 

  

  

  

  

  

 

  

  

  

  

  

  

  

  

  

  

  

 

  

  

  

  

  

  

  

  

  

  

  

 

(1)

Warrants are purchased under the authorization covering up to $1 billion in warrants approved by the Board of Directors (ratified and approved on June 22, 2010). Unless modified or revoked by the Board, this authorization does not expire.

 

  

  

  

  

  

  

  

  

  

  

  

 

160

 


 

      

Item 6.            Exhibits

 

A list of exhibits to this Form 10-Q is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.

 

The Company’s SEC file number is 001-2979. On and before November 2, 1998, the Company filed documents with the SEC under the name Norwest Corporation. The former Wells Fargo & Company filed documents under SEC file number 001-6214.

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: August 6, 2014                                                                        WELLS FARGO & COMPANY

 

 

By:       /s/ RICHARD D. LEVY                                    

Richard D. Levy

Executive Vice President and Controller

(Principal Accounting Officer)

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EXHIBIT INDEX

 

Exhibit

Number

 

                                          Description 

 

                                      Location 

 

3(a)

Restated Certificate of Incorporation, as amended and in effect on the date hereof.

Filed herewith.

3(b)

By-Laws.

Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 28, 2011.

4(a)

See Exhibits 3(a) and 3(b).

 

4(b)

The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company.

 

10(a)

Amendment to the Wells Fargo & Company Deferred Compensation Plan, effective January 1, 2015.

Filed herewith.

10(b)

Amendment to the Wells Fargo & Company Supplemental 401(k) Plan, effective January 1, 2015.

Filed herewith.

12(a)

  

Computation of Ratios of Earnings to Fixed Charges:

  

Filed herewith.

 

  

  

  

  

Quarter

  

Six months

  

  

 

  

  

  

  

ended June 30,

  

ended June 30,

  

  

 

  

  

  

  

2014 

  

2013 

  

2014 

  

2013 

  

  

 

  

  

Including interest

  

  

  

  

  

  

  

  

  

 

  

  

  

on deposits

8.81 

  

8.15 

  

8.64 

  

7.60 

  

  

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

  

  

Excluding interest

  

  

  

  

  

  

  

  

  

 

  

  

  

on deposits

11.42 

  

11.23 

  

11.22 

  

10.41 

  

  

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

12(b)

  

Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends:

  

Filed herewith.

 

  

  

  

  

Quarter

  

Six months

  

  

 

  

  

  

  

ended June 30,

  

ended June 30,

  

  

 

  

  

  

  

2014 

  

2013 

  

2014 

  

2013 

  

  

 

  

  

Including interest

  

  

  

  

  

  

  

  

  

 

  

  

  

on deposits

6.24 

  

6.18 

  

6.23 

  

5.84 

  

  

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

  

  

Excluding interest

  

  

  

  

  

  

  

  

  

 

  

  

  

on deposits

7.37 

  

7.71 

  

7.40 

  

7.28 

  

  

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

                               

   31(a)

Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

  31(b)

Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

   32(a)

Certification of Periodic Financial Report by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.

Furnished herewith.

  32(b)

Certification of Periodic Financial Report by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.

Furnished herewith.

101

XBRL Instance Document

Filed herewith.

101

XBRL Taxonomy Extension Schema Document

Filed herewith.

101

XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith.

101

XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith.

101

XBRL Taxonomy Extension Label Linkbase Document

Filed herewith.

101

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

162

 


 

      

 



 

163

 


 
 

      

RESTATED CERTIFICATE OF INCORPORATION

 

OF

 

WELLS FARGO & COMPANY

 

___________________________________

 

Pursuant to Section 245 of the

General Corporation Law of the State of Delaware

___________________________________

 

Wells Fargo & Company, a corporation organized and existing under the General Corporation Law of the State of Delaware, hereby certifies as follows:

 

1.                   The present name of the corporation is Wells Fargo & Company. 

 

2.                   The corporation was originally incorporated under the name Northwest Bancorporation, and its original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on January 24, 1929.  On April 26, 1983 the corporation filed an amendment to its Certificate of Incorporation to change its name from Northwest Bancorporation to Norwest Corporation effective April 29, 1983, and on November 2, 1998 the corporation filed an amendment to its Certificate of Incorporation to change its name from Norwest Corporation to Wells Fargo & Company.

 

3.                   The corporation’s Board of Directors has duly adopted this Restated Certificate of Incorporation in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware.  This Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the corporation's Certificate of Incorporation, as theretofore amended or supplemented or restated, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation.

 

4.                   The text of the corporation’s Certificate of Incorporation, as heretofore amended or supplemented or restated, is hereby restated to read in its entirety as follows:

 

            FIRST:  The name of this corporation is Wells Fargo & Company.

 

            SECOND:  Its registered office in the State of Delaware is located in the City of Wilmington, County of New Castle.  The name and address of its registered agent is Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, New Castle County, Delaware 19808.

 

            THIRD:  The nature of the business, or objects or purposes to be transacted, promoted or carried on, are:

 

            To acquire by purchase, subscription or otherwise, and to own and hold, for investment purposes, the capital stock, scrip or any voting trust certificates in respect of the shares of capital stock issued or created by any moneyed, financial or investment corporation or association created and organized, or to be created and organized, under the laws of the United States of America or of any State or territory thereof; and to issue in exchange therefor shares of the capital stock of this corporation; and while the holder or owner of any such shares of capital stock, scrip or voting trust certificates, to possess and exercise in respect thereof any and all rights, powers and privileges of ownership, including the right to vote thereon;

 

            To loan money to any aforesaid corporation or association, any of whose shares of capital stock, scrip or voting trust certificates aforesaid shall be owned at the time of such loan by this corporation, and to do any and all lawful things designed to protect, preserve, improve or enhance the value of any such shares, scrip or voting trust certificates;

 

            In addition to and not in limitation of any of the aforesaid powers, to invest temporarily any of its capital or surplus funds in bonds, mortgages or evidences of indebtedness and any other securities issued or created by any individual,

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copartnership or other corporation, joint stock company or association, public or private, or of the Government of the United States of America, or of any Foreign Government, or of any State, territory, municipality or other political subdivision or of any governmental agency;

 

            To acquire, hold, sell, reissue or cancel any shares of its own capital stock; provided, however, that this corporation may not use any of its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of the capital of this corporation, and provided further that the shares of its own capital stock belonging to this corporation shall not be voted, directly or indirectly;

 

            To organize, incorporate and reorganize subsidiary corporations for all lawful purposes;

 

            To conduct all or any part of its operations and business without restriction or limit as to amount in the State of Delaware or in any or all other States, territories, districts, colonies and dependencies of the United States of America;

 

            To have and to exercise any and all powers and privileges now or hereafter conferred by the laws of the State of Delaware upon corporations formed under the Acts hereinafter referred to, or under any Act amendatory thereof or supplemental thereto or substituted therefor;

 

            The foregoing clauses shall be construed both as objects and powers; and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this corporation.

 

            FOURTH:  The total number of shares of all classes of stock which the corporation shall have authority to issue is Six Billion Twenty-Four Million (6,024,000,000), consisting of Twenty Million (20,000,000) shares of Preferred Stock without par value, Four Million (4,000,000) shares of Preference Stock without par value, and Six Billion (6,000,000,000) shares of Common Stock of the par value of $1-2/3 per share.

 

            The designations and the voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the Preferred Stock, the Preference Stock and the Common Stock which are fixed by the Certificate of Incorporation and the express grant of authority to the Board of Directors of the corporation (hereinafter referred to as the “Board of Directors”) to fix by resolution or resolutions the designations and the voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the Preferred Stock and the Preference Stock which are not fixed by the Certificate of Incorporation are as follows:

 

            1.         The Preferred Stock may be issued at any time or from time to time in any amount, provided not more than 20,000,000 shares thereof shall be outstanding at any one time, as Preferred Stock of one or more series, as hereinafter provided.  Each share of any one series of Preferred Stock shall be identical in all respects except as to the date from which dividends thereon may be cumulative, each series of Preferred Stock shall be distinctly designated by letter or descriptive words, and all series of Preferred Stock shall rank equally and be identical in all respects except as permitted by the provisions of Section 2 of this Article FOURTH.  Shares of Preferred Stock shall be issued only as fully paid and non-assessable shares.

 

The Preference Stock may be issued at any time or from time to time in any amount, provided not more than 4,000,000 shares thereof shall be outstanding at any one time, as Preference Stock of one or more series, as hereinafter provided.  Each share of any one series of Preference Stock shall be identical in all respects except as to the date from which dividends thereon may be cumulative, each series of Preference Stock shall be distinctly designated by letter or descriptive words, and all series of Preference Stock shall rank equally and be identical in all respects except as permitted by the provisions of Section 2 of this Article FOURTH.  Shares of Preference Stock shall be issued only as fully paid and non-assessable shares.

 

            2.         Authority is hereby expressly granted to and vested in the Board of Directors at any time or from time to time to issue the Preferred Stock as Preferred Stock of any series and the Preference Stock as Preference Stock of any series and, in connection with the creation of each such series, to fix by resolution or resolutions providing for the issue of shares thereof the designations and the voting powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of such series so far as not inconsistent with the provisions of this

164

 


 

      

Article FOURTH applicable to all series of Preferred Stock or Preference Stock, respectively, and to the full extent now or hereafter permitted by the laws of the State of Delaware, including the following:

 

                        (a)        The distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors;

 

                        (b)        The annual rate or rates of dividends payable on shares of such series, whether dividends shall be cumulative and, if so, the date or dates from which dividends shall be cumulative on the shares of such series, the preferences, restrictions, limitations and conditions upon the payment of dividends, and the dates on which dividends, if declared, shall be payable;

 

                        (c)        Whether shares of such series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

 

                        (d)        The rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of such series;

 

                        (e)        Whether shares of such series shall have a purchase, retirement or sinking fund for the purchase, retirement, or redemption of shares of such series and, if so, the terms and provisions thereof;

 

                        (f)        Whether shares of such series shall have conversion privileges and, if so, the terms and provisions thereof, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine;

 

                        (g)        Whether shares of such series shall have voting rights, in addition to voting rights provided by law, and, if so, the terms and provisions thereof; and

 

                        (h)        Any other preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof.

 

            3.         The holders of the Preferred Stock of each series and the holders of the Preference Stock of each series, respectively, shall be entitled to receive such dividends, when and as declared by the Board of Directors, out of funds legally available therefor, as they may be entitled to in accordance with the resolution or resolutions adopted by the Board of Directors providing for the issue of such series, payable on such dates as may be fixed in such resolution or resolutions.  So long as there shall be outstanding any shares of Preferred Stock of any series or any shares of Preference Stock of any series entitled to cumulative dividends pursuant to the resolution or resolutions providing for the issue of such series, no dividend, whether in cash or property, shall be paid or declared, nor shall any distribution be made, on the Common Stock, nor shall any shares of Common Stock be purchased, redeemed or otherwise acquired for value by the corporation, if at the time of making such payment, declaration, distribution, purchase, redemption or acquisition the corporation shall be in default with respect to any dividend payable on, or obligation to maintain a purchase, retirement or sinking fund with respect to or to redeem, shares of Preferred Stock of any series or shares of Preference Stock of any series.  The foregoing provisions of this Section 3 shall not, however, apply to a dividend payable in Common Stock or to the acquisition of shares of Common Stock in exchange for, or through application of the proceeds of the sale of, shares of Common Stock.

 

            Subject to the foregoing and to any further limitations prescribed in accordance with the provisions of Section 2 of this Article FOURTH, the Board of Directors may declare, out of any funds legally available therefor, dividends upon the then outstanding shares of Common Stock, and shares of Preferred Stock of any series and shares of Preference Stock of any series shall not be entitled to participate therein.

 

            4.         In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of the Preferred Stock of each series and the holders of the Preference Stock of each series shall be entitled to

165

 


 

 

receive, out of the assets of the corporation available for distribution to its stockholders, before any distribution of assets shall be made to the holders of the Common Stock, the amount per share fixed by the Board of Directors pursuant to Section 2 of this Article FOURTH, plus in each such case an amount equal to any cumulative dividends thereon to the date of final distribution to the holders of the Preferred Stock or to the holders of the Preference Stock, respectively; and the holders of the Common Stock shall be entitled, to the exclusion of the holders of the Preferred Stock of any and all series and the holders of the Preference Stock of any and all series, respectively, to participate ratably in all the assets of the corporation then remaining in accordance with their respective rights and preferences.  If upon any liquidation, dissolution or winding up of the corporation the assets available for distribution shall be insufficient to pay the holders of all outstanding shares of Preferred Stock or the holders of all outstanding shares of Preference Stock the full amounts to which they respectively shall be entitled, the holders of shares of Preferred Stock of all series and the holders of shares of Preference Stock of all series, respectively, shall participate ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares of Preferred Stock or shares of Preference Stock held by them upon such distribution if all amounts payable in respect of the Preferred Stock of all series or the Preference Stock of all series, respectively, were paid in full.  Neither the statutory merger nor consolidation of the corporation into or with any other corporation, nor the statutory merger or consolidation of any other corporation into or with the corporation, nor a sale, transfer or lease of all or any part of the assets of the corporation, shall be deemed to be a liquidation, dissolution or winding up of the corporation within the meaning of this Section 4.

 

            5.         The corporation, at the option of the Board of Directors, may redeem the whole or any part of the Preferred Stock of any series or of the Preference Stock of any series at the price or prices and on the terms and conditions provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series.

 

            6.         Anything herein or in any resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock or any series of Preference Stock contained to the contrary notwithstanding, the rights of the holders of all classes of stock of the corporation in respect of dividends and purchase, retirement or sinking funds, if any, shall at all times be subject to the power of the Board of Directors from time to time to set aside such reserves and to make such other provisions, if any, as the Board of Directors shall deem to be necessary or advisable for working capital, for expansion of the corporation's business (including the acquisition of real and personal property for that purpose) and for any other purpose of the corporation.

 

            7.         Except as otherwise provided by the statutes of the State of Delaware or by the Certificate of Incorporation or by the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock or any series of Preference Stock, the holders of the Preferred Stock and the holders of the Preference Stock shall have no right to vote.  The holders of the Preferred Stock and the holders of the Preference Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote or consent.  The holders of shares of Preference Stock shall not be entitled to more than one vote per share.

 

            8.         Except as otherwise provided by the statutes of the State of Delaware or by the Certificate of Incorporation or by the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock or any series of Preference Stock, the vote of the holders of all or any portion of any class of stock, as a class, shall not be required for any action whatsoever to be taken or authorized by the stockholders of the corporation, including any amendment of the Certificate of Incorporation.

 

            9.         No holder of shares of the corporation of any class or of any security or obligation convertible into, or of any warrant, option or right to subscribe for, purchase or otherwise acquire, shares of the corporation of any class, whether now or hereafter authorized, shall, as such holder, have any preemptive right whatsoever to subscribe for, purchase or otherwise acquire shares of the corporation of any class or any security or obligation convertible into, or any warrant, option or right to subscribe for, purchase or otherwise acquire, shares of the corporation of any class, whether now or hereafter authorized.

 

            10.       If it deems it desirable so to do, the Board of Directors may from time to time issue scrip for fractional shares of stock.  Such scrip shall not confer upon the holder any voting or other rights of a stockholder of the corporation, but the corporation shall from time to time, within such time as the Board of Directors may determine, issue one whole share of stock upon the surrender of scrip for fractional shares aggregating one whole share, properly endorsed if in registered form.

 

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        Pursuant to the authority conferred by this Article FOURTH, the following series of Preferred Stock have been designated, each such series consisting of such number of shares, with such voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof as are stated and expressed in the exhibit with respect to such series attached hereto as specified below and incorporated herein by reference:

 

Exhibit A

1997 ESOP Cumulative Convertible Preferred Stock

Exhibit B

1998 ESOP Cumulative Convertible Preferred Stock

Exhibit C

1999 ESOP Cumulative Convertible Preferred Stock

Exhibit D

2000 ESOP Cumulative Convertible Preferred Stock

Exhibit E

2001 ESOP Cumulative Convertible Preferred Stock

Exhibit F

2002 ESOP Cumulative Convertible Preferred Stock

Exhibit G

2003 ESOP Cumulative Convertible Preferred Stock

Exhibit H

2004 ESOP Cumulative Convertible Preferred Stock

Exhibit I

2005 ESOP Cumulative Convertible Preferred Stock

Exhibit J

2006 ESOP Cumulative Convertible Preferred Stock

 

*Wells Fargo & Company has filed Certificates Eliminating the Certificates of Designations for each of Wells Fargo's 1997, 1998, 1999, 2000, 2001, 2002, 2003, and 2004 ESOP Cumulative Convertible Preferred Stock (Exhibits A through H above)

 

            FIFTH:  The amount of capital with which this corporation will commence business is One Thousand Dollars ($1,000.00), being twenty (20) shares of the par value of Fifty Dollars ($50.00) each. 

 

            SIXTH:  The names and places of residence of the subscribers to the capital stock and the number of shares subscribed for by each are as follows:

 

                                Name                                 Residence                      No. of Shares

 

                          A. V. Lane                    Wilmington, Delaware                   18

                          C. S. Peabbles               Wilmington, Delaware                    1

                          L. E. Gray                     Wilmington, Delaware                    1

 

            SEVENTH:  This corporation is to have perpetual existence.

 

            EIGHTH:  The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever.

 

            NINTH:  The number of Directors of the corporation shall be as specified in the By-Laws, and such number may from time to time be increased or decreased in such manner as may be prescribed in the By-Laws, provided the number of Directors of the corporation shall not be less than three (3).  In case of any increase in the number of Directors, the additional Directors may be elected by the Board of Directors to hold office until the next annual meeting of the stockholders and until their successors are elected and qualified.  In case of a vacancy in the Board of Directors, a majority of the remaining members of the Board may elect Directors to fill such vacancy.

 

            Directors shall be stockholders.

 

            TENTH:  In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized:

 

            To make, alter, amend or repeal the By-Laws of the corporation, except as otherwise provided in said By-Laws;

 

            To determine from time to time whether and to what extent and at what times and places and under what conditions and regulations the accounts and books of the corporation, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account or book or document of the corporation except as conferred by the laws of the State of Delaware, unless and until authorized so to do by resolution of the Board of Directors, or of the stockholders.

 

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            To set apart out of any funds of the corporation available for dividends a reserve or reserves for working capital or for any other lawful purpose, and also to abolish any such reserve in the same manner in which it was created;

 

            If the By-Laws so provide, to designate two or more of its number to constitute an Executive Committee, which Committee shall for the time being, as provided in said resolution or in the By-Laws of this corporation, have and exercise any or all of the powers of the Board of Directors in the management of the business and affairs of this corporation and have power to authorize the seal of this corporation to be affixed to all papers which may require it.

 

            This corporation may in its By-Laws confer powers upon its Directors in addition to the foregoing and in addition to the powers and authorities expressly conferred upon them by the Statute.

 

            Both stockholders and Directors shall have power, if the By-Laws so provide, to hold their meetings and to have one or more offices within or without the State of Delaware and to keep the books of this corporation (subject to the provisions of the Statutes) outside of the State of Delaware at such places as may be from time to time designated by the Board of Directors.

 

            ELEVENTH:  In the absence of fraud, no contract or transaction between this corporation and any other association or corporation shall be affected by the fact that any of the Directors or officers of this corporation are interested in or are Directors or officers of such other association or corporation, and any Director or officer of this corporation individually may be a party to or may be interested in any such contract or transaction of this corporation; and no such contract or transaction of this corporation with any person or persons, firm, association or corporation shall be affected by the fact that any Director or officer of this corporation is a party to or interested in such contract or transaction in any way connected with such person or persons, firm, association or corporation; provided that such contract or other transaction shall be authorized or ratified by the vote of a majority of the Directors of this corporation not so interested; and each and every person who may become a Director or officer of this corporation is hereby relieved from any liability that might otherwise exist from thus contracting with this corporation for the benefit of himself or any person, firm, association or corporation in which he may be in anywise interested.

 

            TWELFTH:  This corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by Statute, and all rights conferred upon stockholders herein are granted subject to this reservation.

 

            THIRTEENTH:  The Board of Directors is expressly authorized:

 

                        (i)         to adopt, and from time to time to amend, one or more pension, profit sharing, retirement, and benefit plans benefiting any or all officers and employees and former officers and employees of this corporation and affiliated banks and companies;

 

                        (ii)        to adopt, and from time to time to amend, one or more stock option, stock purchase, stock bonus, incentive, and compensation plans benefiting any or all officers and employees of this corporation and affiliated banks and corporations; and

 

                        (iii)       to authorize affiliated banks and companies, on behalf of this corporation as a stockholder therein, to adopt, and from time to time to amend, any of said types of plans enumerated in clause (i) of this Article THIRTEENTH benefiting any or all officers and employees and former officers and employees thereof and any of said types of plans enumerated in clause (ii) of this Article THIRTEENTH benefiting any or all officers and employees thereof.

 

            No action shall be taken under this Article except by the affirmative vote of a majority of the directors in office at the time such action is taken, and such majority shall not include any director who is a salaried officer of the corporation or of any affiliated bank or company.

 

            FOURTEENTH:  (a)  Elimination of Certain Liability of Directors .  A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or

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omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.

 

            (b)(1)   Right to Indemnification .  Each person who was or is made a party or is threatened to be a made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or inaction in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in subparagraph (b)(2), the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the corporation.  The right to indemnification conferred in this paragraph (b) shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this paragraph (b) or otherwise.  The corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers.

 

            (2)  Right of Claimant to Bring Suit .  If a claim under subparagraph (b)(1) is not paid in full by the corporation within 30 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim.  It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation.  Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

 

            (3)  Non-Exclusivity of Rights .  The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this paragraph (b) shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise.

 

            (4)  Insurance .  The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.

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            IN WITNESS WHEREOF, this Restated Certificate of Incorporation is executed on behalf of the corporation by its Chairman and attested by its Secretary this  28 th  day of September, 2006.

 

 

 

                                                                                          /s/ Richard M. Kovacevich                                     

                                                                              Richard M. Kovacevich, Chairman

 

 

Attest:        /s/ Laurel A. Holschuh                        

            Laurel A. Holschuh, Secretary

 

 

[As filed with the Delaware Secretary of State on September 28, 2006.]

 

EXHIBIT I

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

___________________________________

 

2005 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Without Par Value)

___________________________________

 

 

            WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Company”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the “Board”) by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the “Preferred Stock”), and pursuant to authority conferred upon the ESOP Preferred Stock Committee I of the Board (the “ESOP Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at a meeting of the Board duly held on January 25, 2000, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on March 11, 2005, in accordance with Section 141(f) of the General Corporation Law:

 

            1.         On January 25, 2000, the Board adopted the following resolutions (the “ESOP Board Resolutions”) appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of Preferred Stock (“ESOP Preferred Stock”) to the trustee on behalf of the Company’s 401(k) Plan hereinafter referred to:

 

RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee I (the “First Committee”), which shall have and may exercise the full powers of the Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1-2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the First Committee in its discretion shall approve, and to take any and all actions as the First Committee shall deem necessary or appropriate.

 

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RESOLVED that Richard M. Kovacevich is designated to serve as the sole member of the First Committee until his successor is duly elected and qualified.

 

*  *  *  *

 

            RESOLVED that any series of ESOP Preferred Stock authorized for issuance by the First Committee . . . shall have the voting rights set forth in Appendix A to these resolutions.

 

 

APPENDIX A - VOTING RIGHTS

 

No series of the Preferred Stock, except as hereinafter set forth in this resolution or as otherwise from time to time required by law, shall have voting rights.  Whenever, at any time or times, dividends payable on any shares of a designated series of the Preferred Stock (such shares of such designated series of Preferred Stock being hereinafter referred to as the “Shares of such series”) shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding Shares of such series shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the Shares of such series, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company's next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the Shares of such series shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding Shares of such series (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such Shares of such series (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such Shares of such series shall have been paid in full, at which time such right with respect to such Shares of such series shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

            Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

            So long as any Shares of such series remain outstanding, the consent of the holders of the outstanding Shares of such series and outstanding shares of all other series of Preferred Stock ranking on a parity with such Shares of such series either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding Shares of such series and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

            (a)        the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to the Shares of such series with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

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            (b)        the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designation for the Shares of such series designating the Shares of such series and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the Shares of such series or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the Shares of such series with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

            The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Shares of such series shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            2.         On March 11, 2005, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions, the ESOP Committee adopted the following resolutions by written consent in accordance with Section 141(f) of the General Corporation Law:

 

            RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows:

 

2005 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

 

            1.   Designation and Number of Shares; Restricted Issue

 

                        (a) The designation of the series of Preferred Stock, without par value, provided for herein shall be “2005 ESOP Cumulative Convertible Preferred Stock” (hereinafter referred to as the “2005 ESOP Preferred Stock”) and the number of authorized shares constituting the 2005 ESOP Preferred Stock is 363,000, based on an offering price for the 2005 ESOP Preferred Stock of $1,067.10 per share.  Each share of 2005 ESOP Preferred Stock shall have a stated value of $1,000.00 per share.  The number of authorized shares of 2005 ESOP Preferred Stock may be reduced by further resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2005 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2005 ESOP Preferred Stock shall not be increased.  All shares of the 2005 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of 2005 ESOP Preferred Stock.

 

                        (b)  Shares of 2005 ESOP Preferred Stock shall be issued only to a trustee (the “Trustee”) acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the “Plan”).  All references to the holder of shares of 2005 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan.  In the event of any transfer of record ownership of shares of 2005 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2005 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the “Common Stock”) on the terms otherwise provided for the conversion of the shares of 2005 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2005 ESOP Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of 2005 ESOP Preferred Stock shall be so converted.  In the event of such a conversion, the transferee of the

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shares of 2005 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of 2005 ESOP Preferred Stock have been automatically converted as of the date of such transfer.  Shares of 2005 ESOP Preferred Stock may be certificated or uncertificated, at the Company’s option.  Certificates representing shares of 2005 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions.  In the case of uncertificated 2005 ESOP Preferred Stock, the transfer agent for the 2005 ESOP Preferred Stock shall note the foregoing provisions on each 2005 ESOP Preferred Stock book entry account.  The Company may require that, as a condition to transferring record ownership of any uncertificated 2005 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2005 ESOP Preferred Stock are subject to the foregoing provisions.  Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2005 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof.

            2.   Voting Rights .  No shares of 2005 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows:

 

                        (a)  Whenever, at any time or times, dividends payable on shares of 2005 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2005 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the shares of 2005 ESOP Preferred Stock, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company's next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the shares of 2005 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2005 ESOP Preferred Stock (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such shares of 2005 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such shares of 2005 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2005 ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

                        (b)  Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

                        (c)  So long as any shares of 2005 ESOP Preferred Stock remain outstanding, the consent of the holders of the outstanding shares of 2005 ESOP Preferred Stock and outstanding shares of all other series of Preferred Stock ranking on a parity with such shares of 2005 ESOP Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding shares of 2005 ESOP Preferred Stock and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

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                                    (i)  the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2005 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

                                    (ii)  the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designations designating shares of 2005 ESOP Preferred Stock and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2005 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2005 ESOP Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

                        (d)  The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2005 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            3.  Dividends .  (a)(i)  Holders of shares of 2005 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $97.50 (the “Base Dividend”) per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3.

 

                                    (ii)  The Base Dividend shall be adjusted, effective on December 1, 2006 and on each December 1 thereafter until December 1, 2014, as follows: 

 

                                                (1)  If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2005 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $102.50 per share (the “First Adjusted Dividend”). 

 

                                                (2)  If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2005 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $107.50 per share (the “Second Adjusted Dividend”).

 

                                                (3)  If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2005 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend.

 

1)                   Dividend Adjustment Table

 

2)                               Closing Price on 11/30

3)                                     First Target Price

4)                                           Second Target Price

2006

$  66.659

$74.447

2007

71.591

85.167

2008

76.889

97.431

2009

82.579

111.461

2010

88.690

127.511

2011

95.253

145.873

2012

102.302

166.879

2013

109.872

190.909

2014

118.002

218.400

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                                                (4)  As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2008, the Current Market Price of one share of Common Stock is $85.00, then the cash dividend payable for the immediately following twelve month period per share of 2005 ESOP Preferred Stock would equal $102.50, with the first quarterly payment of such $102.50 dividend to be made on March 1, 2009.  If on November 30, 2009, the Current Market Price of one share of Common Stock is $115.00, then the cash dividend payable for the immediately following twelve month period per share of 2005 ESOP Preferred Stock would equal $107.50, with the first quarterly payment of such $107.50 dividend to be made on March 1, 2010.  If on November 30, 2010, the Current Market Price of one share of Common Stock is $85.00, then the cash dividend payable for the immediately following twelve month period per share of 2005 ESOP Preferred Stock would equal $97.50, with the first quarterly payment of such $97.50 dividend to be made on March 1, 2011.

 

                                                (5)  For purposes of this Section 3, the terms “First Adjusted Dividend” and “Second Adjusted Dividend” are sometimes referred to as an “Adjusted Dividend;” the term “Current Market Price” shall have the meaning given to it in Section 4(c)(iv); and the term “Trading Day” shall have the meaning given to it in Section 4(c)(vi).

 

                                    (iii)  If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted.

 

                                    (iv)  Dividends payable on shares of the 2005 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 of each year, commencing June 1, 2005.  Dividends on shares of the 2005 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2005 ESOP Preferred Stock.  Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof.  The amount of dividends payable per share for each dividend period shall be computed by dividing by four the Base Dividend or the Adjusted Dividend, whichever is then applicable.  The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months.

 

                        (b)(i)  No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2005 ESOP Preferred Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2005 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends.  When dividends are not paid in full, as aforesaid, upon the shares of 2005 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2005 ESOP Preferred Stock, all dividends declared upon shares of 2005 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2005 ESOP Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on 2005 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2005 ESOP Preferred Stock and such other series of Preferred Stock bear to each other.  Holders of shares of 2005 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2005 ESOP Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2005 ESOP Preferred Stock which may be in arrears.

 

                                    (ii)  So long as any shares of 2005 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common

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Stock or any other stock ranking junior to 2005 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2005 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2005 ESOP Preferred Stock as to dividends or upon liquidation be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to 2005 ESOP Preferred Stock as to dividends or upon liquidation), unless, in each case, the full cumulative dividends on all outstanding shares of 2005 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods.

 

            4.   Conversion .  Shares of 2005 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2005 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows:

 

                        (a)  Each share of 2005 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the “Release Date”), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2005 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (b)  Subject to and upon compliance with the provisions of this Section 4, a holder of 2005 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2005 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2005 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (c)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

 

                                    (i)  The “Average Current Market Price” per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the “Purchase Offer” is made (as that term is defined in Section 6(d) hereof).

 

                                    (ii)  A “Business Day” means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open.

 

                                    (iii)  (A)  For purposes of a mandatory conversion of shares of 2005 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the “Conversion Price” for such shares of 2005 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date.

 

                                                (B)  For purposes of an optional conversion of shares of 2005 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the “Conversion Price” for such shares of 2005 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2005 ESOP Preferred Stock or by any agent for conversion of the 2005 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4.

 

                                                (C)  For purposes of a conversion of shares of 2005 ESOP Preferred Stock into shares of Common Stock in connection with a “Purchase Offer” (as defined in Section 6(d) hereof), the “Conversion Price” for such shares of 2005 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock.

 

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Each share of 2005 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2005 ESOP Preferred Stock will be converted. 

 

                                    (iv)  The “Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange only or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof.

                                    (v)  “Common Stock” shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designations or as such stock may be constituted from time to time.

 

                                    (vi)  “Trading Day” with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day.

                                      (d)  In connection with any conversion of 2005 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the “Conversion Notice”) shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2005 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2005 ESOP Preferred Stock by the Company or the transfer agent for the 2005 ESOP Preferred Stock, which notice shall be accompanied by (a) in the case of certificated 2005 ESOP Preferred Stock, the certificate or certificates representing the shares of 2005 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) and (b) in the case of uncertificated 2005 ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2005 ESOP Preferred Stock being converted pursuant to this Section 4.  Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2005 ESOP Preferred Stock released from the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2005 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2005 ESOP Preferred Stock, for any shares of 2005 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request.

 

                        (e)  Upon delivery to the Company or the transfer agent for the 2005 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4,  the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion.  If there

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shall have been surrendered a certificate or certificates representing shares of 2005 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2005 ESOP Preferred Stock which shall not have been converted.

                        (f)  The issuance by the Company of shares of Common Stock upon a conversion of shares of 2005 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2005 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder's designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2005 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4.  On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date.  The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2005 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares.

                        (g)  The Company shall not be obligated to deliver to holders of 2005 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2005 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law.

                        (h)  The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2005 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2005 ESOP Preferred Stock then outstanding.

                        (i)  The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2005 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

                        (j)  The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2005 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2005 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

                        5.   Redemption At the Option of the Company .  (a)  The 2005 ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2005 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2005 ESOP Preferred Stock on the date fixed for redemption.  Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5.  From and after the date fixed for redemption, dividends on shares of 2005 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price.  Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1.  If the full cumulative dividends have not been paid, or

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contemporaneously declared and set aside for payment, on all outstanding shares of 2005 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2005 ESOP Preferred Stock pursuant to this Section 5.

                        (b)  Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2005 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the 2005 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date.  Each such notice shall state:  (i) the redemption date; (ii) the total number of shares of the 2005 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2005 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable upon conversion of a share of 2005 ESOP Preferred Stock will be determined.  The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2005 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state).

                        (c)  The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2005 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2005 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2005 ESOP Preferred Stock then being redeemed.

                        (d)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

                                    (i)  ”Adjustment Period” shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined.

                                    (ii)  ”Fair Market Value” shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period.  The “Fair Market Value” of any security which is not publicly traded (other than the 2005 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof.  The “Fair Market Value” of the 2005 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2005 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section).  For purposes of determining the Fair Market Value of the 2005 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2005 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2005 ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2005 ESOP Convertible Preferred Stock Note Agreement dated on or about March 17, 2005 between the Company and the Plan (including any amendments or modifications thereto).

            6.   Consolidation, Merger, Etc.   (a)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes “qualifying employer securities” with respect to a holder of 2005 ESOP Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement

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Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2005 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2005 ESOP Preferred Stock had immediately prior to such transaction, subject to the following:

                        (1)  After such transaction each share of the 2005 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2005 ESOP Preferred Stock could have been converted immediately prior to such transaction.

                        (2)  The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2005 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid.

                        (b)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2005 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2005 ESOP Preferred Stock could have been converted at such time so that each share of 2005 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2005 ESOP Preferred Stock could have been converted immediately prior to such transaction.  However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2005 ESOP Preferred Stock, then the shares of 2005 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2005 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction.  If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares.

                        (c)  In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a “Business Combination”), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2005 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2005 ESOP Preferred Stock, a cash payment per share of 2005 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2005 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is consummated.  No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction.

 

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                        (d)  In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2005 ESOP Preferred Stock shall have the right to convert shares of 2005 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the “Purchase Offer Conversion Period”), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period.

 

                        For purposes of this paragraph (d), the following terms shall have the meanings set forth below:

 

                                    (i)  “Beneficial Ownership” shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and “person” shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.

 

                                    (ii)  A “Purchase Offer” shall have been made when any person (other than the Company or any affiliate of the Company) shall have “commenced” (as such term is defined in Rule 14d‑2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company.

 

            7.   Liquidation Rights .  (a)  Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2005 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to 2005 ESOP Preferred Stock upon liquidation, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.

 

                        (b)  Neither the sale of all or substantially all the property and assets of the Company, nor the merger or consolidation of the Company into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7.

 

                        (c)  After the payment to the holders of the shares of 2005 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2005 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company.

 

                        (d)  In the event the assets of the Company available for distribution to the holders of shares of 2005 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2005 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2005 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up.

             

(e)  Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on a parity with or prior to the shares of 2005 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2005 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2005 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2005 ESOP Preferred Stock shall not be entitled to share therein.

 

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            8.   Ranking .  For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank:

 

                        (a)  prior to the shares of 2005 ESOP Preferred Stock, either as to dividends or upon liquidation, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2005 ESOP Preferred Stock;

 

                        (b)  on a parity with shares of 2005 ESOP Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2005 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2005 ESOP Preferred Stock; and

 

                        (c)  junior to shares of 2005 ESOP Preferred Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of 2005 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes.

 

            9.   Priority of 2005 ESOP Preferred Stock .  The shares of 2005 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company's 1996 ESOP Cumulative Convertible Preferred Stock, its 1997 ESOP Cumulative Convertible Preferred Stock, its 1998 ESOP Cumulative Convertible Preferred Stock, its 1999 ESOP Cumulative Convertible Preferred Stock, its 2000 ESOP Cumulative Convertible Preferred Stock, its 2001 ESOP Cumulative Convertible Preferred Stock, its 2002 ESOP Cumulative Convertible Preferred Stock, its 2003 ESOP Cumulative Convertible Preferred Stock, and its 2004 ESOP Cumulative Convertible Preferred Stock. 

EXHIBIT J

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

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2006 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Without Par Value)

___________________________________

 

 

            WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Company”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the “Board”) by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the “Preferred Stock”), and pursuant to authority conferred upon the ESOP Preferred Stock Committee I of the Board (the “ESOP Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at a meeting of the Board duly held on January 25, 2000, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on March 17, 2006, in accordance with Section 141(f) of the General Corporation Law:

 

            1.         On January 25, 2000, the Board adopted the following resolutions (the “ESOP Board Resolutions”) appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of Preferred Stock (“ESOP Preferred Stock”) to the trustee on behalf of the Company’s 401(k) Plan hereinafter referred to:

 

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RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee I (the “First Committee”), which shall have and may exercise the full powers of the Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1-2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the First Committee in its discretion shall approve, and to take any and all actions as the First Committee shall deem necessary or appropriate.

 

RESOLVED that Richard M. Kovacevich is designated to serve as the sole member of the First Committee until his successor is duly elected and qualified.

 

*  *  *  *

 

            RESOLVED that any series of ESOP Preferred Stock authorized for issuance by the First Committee . . . shall have the voting rights set forth in Appendix A to these resolutions.

 

APPENDIX A - VOTING RIGHTS

 

No series of the Preferred Stock, except as hereinafter set forth in this resolution or as otherwise from time to time required by law, shall have voting rights.  Whenever, at any time or times, dividends payable on any shares of a designated series of the Preferred Stock (such shares of such designated series of Preferred Stock being hereinafter referred to as the “Shares of such series”) shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding Shares of such series shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the Shares of such series, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the Shares of such series shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding Shares of such series (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such Shares of such series (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such Shares of such series shall have been paid in full, at which time such right with respect to such Shares of such series shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

            Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

            So long as any Shares of such series remain outstanding, the consent of the holders of the outstanding Shares of such series and outstanding shares of all other series of Preferred Stock ranking on a parity with such Shares of such series either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting

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rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding Shares of such series and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

            (a)        the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to the Shares of such series with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

            (b)        the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designation for the Shares of such series designating the Shares of such series and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the Shares of such series or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the Shares of such series with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

            The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Shares of such series shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            2.         On March 17, 2006, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions, the ESOP Committee adopted the following resolutions by written consent in accordance with Section 141(f) of the General Corporation Law:

 

            RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows:

 

2006 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

 

            1.   Designation and Number of Shares; Restricted Issue

 

                        (a)  The designation of the series of Preferred Stock, without par value, provided for herein shall be “2006 ESOP Cumulative Convertible Preferred Stock” (hereinafter referred to as the “2006 ESOP Preferred Stock”) and the number of authorized shares constituting the 2006 ESOP Preferred Stock is 414,000, based on an offering price for the 2006 ESOP Preferred Stock of $1,070.40 per share.  Each share of 2006 ESOP Preferred Stock shall have a stated value of $1,000.00 per share.  The number of authorized shares of 2006 ESOP Preferred Stock may be reduced by further resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2006 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2006 ESOP Preferred Stock shall not be increased.  All shares of the 2006 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of 2006 ESOP Preferred Stock.

 

                        (b)  Shares of 2006 ESOP Preferred Stock shall be issued only to a trustee (the “Trustee”) acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the “Plan”).  All references to the holder of shares of 2006 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan.  In the event of any

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transfer of record ownership of shares of 2006 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2006 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the “Common Stock”) on the terms otherwise provided for the conversion of the shares of 2006 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2006 ESOP Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of 2006 ESOP Preferred Stock shall be so converted.  In the event of such a conversion, the transferee of the shares of 2006 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of 2006 ESOP Preferred Stock have been automatically converted as of the date of such transfer.  Shares of 2006 ESOP Preferred Stock may be certificated or uncertificated, at the Company’s option.  Certificates representing shares of 2006 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions.  In the case of uncertificated 2006 ESOP Preferred Stock, the transfer agent for the 2006 ESOP Preferred Stock shall note the foregoing provisions on each 2006 ESOP Preferred Stock book entry account.  The Company may require that, as a condition to transferring record ownership of any uncertificated 2006 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2006 ESOP Preferred Stock are subject to the foregoing provisions.  Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2006 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof.

            2.   Voting Rights .  No shares of 2006 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows:

 

                        (a)  Whenever, at any time or times, dividends payable on shares of 2006 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2006 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the shares of 2006 ESOP Preferred Stock, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the shares of 2006 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2006 ESOP Preferred Stock (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such shares of 2006 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such shares of 2006 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2006 ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

                        (b)  Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

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                        (c)  So long as any shares of 2006 ESOP Preferred Stock remain outstanding, the consent of the holders of the outstanding shares of 2006 ESOP Preferred Stock and outstanding shares of all other series of Preferred Stock ranking on a parity with such shares of 2006 ESOP Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding shares of 2006 ESOP Preferred Stock and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

                                    (i)  the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2006 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

                                    (ii)  the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designations designating shares of 2006 ESOP Preferred Stock and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2006 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2006 ESOP Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

                        (d)  The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2006 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            3.  Dividends .  (a)(i)  Holders of shares of 2006 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $107.50 (the “Base Dividend”) per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3.

 

                                    (ii)  The Base Dividend shall be adjusted, effective on December 1, 2007 and on each December 1 thereafter until December 1, 2015, as follows: 

 

                                                (1)  If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2006 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $112.50 per share (the “First Adjusted Dividend”). 

 

                                                (2)  If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2006 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $117.50 per share (the “Second Adjusted Dividend”).

 

                                                (3)  If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2006 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend.

 

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5)                   Dividend Adjustment Table

 

6)                               Closing Price on 11/30

7)                                     First Target Price

8)                                           Second Target Price

2007

$72.625

$81.118

2008

77.926

92.718

2009

83.615

105.976

2010

89.719

121.131

2011

96.268

138.453

2012

103.296

158.251

2013

110.837

180.881

2014

118.928

206.747

2015

127.609

236.312

 

                                                (4)  As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2009, the Current Market Price of one share of Common Stock is $85.00, then the cash dividend payable for the immediately following twelve month period per share of 2006 ESOP Preferred Stock would equal $112.50, with the first quarterly payment of such $112.50 dividend to be made on March 1, 2010.  If on November 30, 2010, the Current Market Price of one share of Common Stock is $125.00, then the cash dividend payable for the immediately following twelve month period per share of 2006 ESOP Preferred Stock would equal $117.50, with the first quarterly payment of such $117.50 dividend to be made on March 1, 2011.  If on November 30, 2011, the Current Market Price of one share of Common Stock is $85.00, then the cash dividend payable for the immediately following twelve month period per share of 2006 ESOP Preferred Stock would equal $107.50, with the first quarterly payment of such $107.50 dividend to be made on March 1, 2012.

 

                                                (5)  For purposes of this Section 3, the terms “First Adjusted Dividend” and “Second Adjusted Dividend” are sometimes referred to as an “Adjusted Dividend;” the term “Current Market Price” shall have the meaning given to it in Section 4(c)(iv); and the term “Trading Day” shall have the meaning given to it in Section 4(c)(vi).

 

                                    (iii)  If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted.

 

                                    (iv)  Dividends payable on shares of the 2006 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 of each year, commencing June 1, 2006.  Dividends on shares of the 2006 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2006 ESOP Preferred Stock.  Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof.  The amount of dividends payable per share for each dividend period shall be computed by dividing by four the Base Dividend or the Adjusted Dividend, whichever is then applicable.  The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months.

 

                        (b)(i)  No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2006 ESOP Preferred Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2006 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends.  When dividends are not paid in full, as aforesaid, upon the shares of 2006 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2006 ESOP Preferred Stock, all dividends declared upon shares of 2006 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2006 ESOP Preferred Stock shall be declared pro rata so that

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the amount of dividends declared per share on 2006 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2006 ESOP Preferred Stock and such other series of Preferred Stock bear to each other.  Holders of shares of 2006 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2006 ESOP Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2006 ESOP Preferred Stock which may be in arrears.

 

                                    (ii)  So long as any shares of 2006 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common Stock or any other stock ranking junior to 2006 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2006 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2006 ESOP Preferred Stock as to dividends or upon liquidation be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to 2006 ESOP Preferred Stock as to dividends or upon liquidation), unless, in each case, the full cumulative dividends on all outstanding shares of 2006 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods.

 

            4.   Conversion .  Shares of 2006 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2006 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows:

 

                        (a)  Each share of 2006 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the “Release Date”), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2006 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (b)  Subject to and upon compliance with the provisions of this Section 4, a holder of 2006 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2006 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2006 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (c)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

 

                                    (i)  The “Average Current Market Price” per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the “Purchase Offer” is made (as that term is defined in Section 6(d) hereof).

 

                                    (ii)  A “Business Day” means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open.

 

                                    (iii)  (A)  For purposes of a mandatory conversion of shares of 2006 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the “Conversion Price” for such shares of 2006 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date.

 

                                                (B)  For purposes of an optional conversion of shares of 2006 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the “Conversion Price” for such shares of 2006 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the

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Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2006 ESOP Preferred Stock or by any agent for conversion of the 2006 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4.

 

                                                (C)  For purposes of a conversion of shares of 2006 ESOP Preferred Stock into shares of Common Stock in connection with a “Purchase Offer” (as defined in Section 6(d) hereof), the “Conversion Price” for such shares of 2006 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock.

 

Each share of 2006 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2006 ESOP Preferred Stock will be converted. 

 

                                    (iv)  The “Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange only or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof.

                                    (v)  “Common Stock” shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designations or as such stock may be constituted from time to time.

 

                                    (vi)  “Trading Day” with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day.

                                      (d)  In connection with any conversion of 2006 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the “Conversion Notice”) shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2006 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2006 ESOP Preferred Stock by the Company or the transfer agent for the 2006 ESOP Preferred Stock, which notice shall be accompanied by (a) in the case of certificated 2006 ESOP Preferred Stock, the certificate or certificates representing the shares of 2006 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) and (b) in the case of uncertificated 2006 ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2006 ESOP Preferred Stock being converted pursuant to this Section 4.  Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2006 ESOP Preferred Stock released from the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2006 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2006 ESOP Preferred Stock, for any shares of 2006 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request.

 

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                        (e)  Upon delivery to the Company or the transfer agent for the 2006 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4,  the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder’s designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion.  If there shall have been surrendered a certificate or certificates representing shares of 2006 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder’s designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2006 ESOP Preferred Stock which shall not have been converted.

                        (f)  The issuance by the Company of shares of Common Stock upon a conversion of shares of 2006 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2006 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder’s designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2006 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4.  On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date.  The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2006 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares.

                        (g)  The Company shall not be obligated to deliver to holders of 2006 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2006 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law.

                        (h)  The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2006 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2006 ESOP Preferred Stock then outstanding.

                        (i)  The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2006 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

                        (j)  The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2006 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2006 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

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                        5.   Redemption At the Option of the Company .  (a)  The 2006 ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2006 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2006 ESOP Preferred Stock on the date fixed for redemption.  Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5.  From and after the date fixed for redemption, dividends on shares of 2006 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price.  Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1.  If the full cumulative dividends have not been paid, or contemporaneously declared and set aside for payment, on all outstanding shares of 2006 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2006 ESOP Preferred Stock pursuant to this Section 5.

                        (b)  Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2006 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the 2006 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date.  Each such notice shall state:  (i) the redemption date; (ii) the total number of shares of the 2006 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2006 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable upon conversion of a share of 2006 ESOP Preferred Stock will be determined.  The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2006 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state).

                        (c)  The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2006 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2006 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2006 ESOP Preferred Stock then being redeemed.

                        (d)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

                                    (i)  ”Adjustment Period” shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined.

                                    (ii)  ”Fair Market Value” shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period.  The “Fair Market Value” of any security which is not publicly traded (other than the 2006 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof.  The “Fair Market Value” of the 2006 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2006 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section).  For purposes of determining the Fair Market Value of the 2006 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2006 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2006

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ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2006 ESOP Convertible Preferred Stock Note Agreement dated on or about March 21, 2006 between the Company and the Plan (including any amendments or modifications thereto).

            6.   Consolidation, Merger, Etc.   (a)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes “qualifying employer securities” with respect to a holder of 2006 ESOP Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2006 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2006 ESOP Preferred Stock had immediately prior to such transaction, subject to the following:

                        (1)  After such transaction each share of the 2006 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2006 ESOP Preferred Stock could have been converted immediately prior to such transaction.

                        (2)  The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2006 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid.

                        (b)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2006 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2006 ESOP Preferred Stock could have been converted at such time so that each share of 2006 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2006 ESOP Preferred Stock could have been converted immediately prior to such transaction.  However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2006 ESOP Preferred Stock, then the shares of 2006 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2006 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction.  If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares.

                        (c)  In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a “Business Combination”), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2006 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of

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such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2006 ESOP Preferred Stock, a cash payment per share of 2006 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2006 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is consummated.  No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction.

 

                        (d)  In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2006 ESOP Preferred Stock shall have the right to convert shares of 2006 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the “Purchase Offer Conversion Period”), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period.

 

                        For purposes of this paragraph (d), the following terms shall have the meanings set forth below:

 

                                    (i)  “Beneficial Ownership” shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and “person” shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.

 

                                    (ii)  A “Purchase Offer” shall have been made when any person (other than the Company or any affiliate of the Company) shall have “commenced” (as such term is defined in Rule 14d‑2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company.

 

            7.   Liquidation Rights .  (a)  Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2006 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to 2006 ESOP Preferred Stock upon liquidation, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.

 

                        (b)  Neither the sale of all or substantially all the property and assets of the Company, nor the merger or consolidation of the Company into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7.

 

                        (c)  After the payment to the holders of the shares of 2006 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2006 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company.

 

                        (d)  In the event the assets of the Company available for distribution to the holders of shares of 2006 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2006 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2006 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up.

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(e)  Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on a parity with or prior to the shares of 2006 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2006 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2006 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2006 ESOP Preferred Stock shall not be entitled to share therein.

 

            8.   Ranking .  For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank:

 

                        (a)  prior to the shares of 2006 ESOP Preferred Stock, either as to dividends or upon liquidation, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2006 ESOP Preferred Stock;

 

                        (b)  on a parity with shares of 2006 ESOP Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2006 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2006 ESOP Preferred Stock; and

 

                        (c)  junior to shares of 2006 ESOP Preferred Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of 2006 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes.

 

            9.   Priority of 2006 ESOP Preferred Stock .  The shares of 2006 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company’s 1997 ESOP Cumulative Convertible Preferred Stock, its 1998 ESOP Cumulative Convertible Preferred Stock, its 1999 ESOP Cumulative Convertible Preferred Stock, its 2000 ESOP Cumulative Convertible Preferred Stock, its 2001 ESOP Cumulative Convertible Preferred Stock, its 2002 ESOP Cumulative Convertible Preferred Stock, its 2003 ESOP Cumulative Convertible Preferred Stock, its 2004 ESOP Cumulative Convertible Preferred Stock, and its 2005 ESOP Cumulative Convertible Preferred Stock. 

 

 

WELLS FARGO & COMPANY

___________________________________

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

___________________________________

 

2007 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Without Par Value)

___________________________________

 

 

            WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Company”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the “Board”) by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the “Preferred Stock”),

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and pursuant to authority conferred upon the ESOP Preferred Stock Committee I of the Board (the “ESOP Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at a meeting of the Board duly held on January 25, 2000, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on March 13, 2007, in accordance with Section 141(f) of the General Corporation Law:

 

            1.         On January 25, 2000, the Board adopted the following resolutions (the “ESOP Board Resolutions”) appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of Preferred Stock (“ESOP Preferred Stock”) to the trustee on behalf of the Company’s 401(k) Plan hereinafter referred to:

 

RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee I (the “First Committee”), which shall have and may exercise the full powers of the Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1 2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the First Committee in its discretion shall approve, and to take any and all actions as the First Committee shall deem necessary or appropriate.

 

RESOLVED that Richard M. Kovacevich is designated to serve as the sole member of the First Committee until his successor is duly elected and qualified.

 

*  *  *  *

 

            RESOLVED that any series of ESOP Preferred Stock authorized for issuance by the First Committee . . . shall have the voting rights set forth in Appendix A to these resolutions.

 

 

APPENDIX A - VOTING RIGHTS

 

No series of the Preferred Stock, except as hereinafter set forth in this resolution or as otherwise from time to time required by law, shall have voting rights.  Whenever, at any time or times, dividends payable on any shares of a designated series of the Preferred Stock (such shares of such designated series of Preferred Stock being hereinafter referred to as the “Shares of such series”) shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding Shares of such series shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the Shares of such series, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the Shares of such series shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding Shares of such series (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such Shares of such series (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such Shares of such series shall have been paid in full, at which time such right with respect to such Shares of such series shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

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            Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

            So long as any Shares of such series remain outstanding, the consent of the holders of the outstanding Shares of such series and outstanding shares of all other series of Preferred Stock ranking on a parity with such Shares of such series either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding Shares of such series and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

            (a)        the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to the Shares of such series with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

            (b)        the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designation for the Shares of such series designating the Shares of such series and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the Shares of such series or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the Shares of such series with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

            The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Shares of such series shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            2.         On March 13, 2007, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions, the ESOP Committee adopted the following resolutions by written consent in accordance with Section 141(f) of the General Corporation Law:

 

            RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows:

 

2007 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

 

            1.   Designation and Number of Shares; Restricted Issue

 

                        (a) The designation of the series of Preferred Stock, without par value, provided for herein shall be “2007 ESOP Cumulative Convertible Preferred Stock” (hereinafter referred to as the “2007 ESOP Preferred Stock”) and the number of authorized shares constituting the 2007 ESOP Preferred Stock is 484,000, based on an offering price for the 2007 ESOP Preferred Stock of $1,070.00 per share.  Each share of 2007 ESOP Preferred Stock shall have a stated value of $1,000.00 per share.  The number of authorized shares of 2007 ESOP Preferred Stock may be reduced by further

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resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2007 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2007 ESOP Preferred Stock shall not be increased.  All shares of the 2007 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of 2007 ESOP Preferred Stock.

 

                        (b)  Shares of 2007 ESOP Preferred Stock shall be issued only to a trustee (the “Trustee”) acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the “Plan”).  All references to the holder of shares of 2007 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan.  In the event of any transfer of record ownership of shares of 2007 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2007 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the “Common Stock”) on the terms otherwise provided for the conversion of the shares of 2007 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2007 ESOP Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of 2007 ESOP Preferred Stock shall be so converted.  In the event of such a conversion, the transferee of the shares of 2007 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of 2007 ESOP Preferred Stock have been automatically converted as of the date of such transfer.  Shares of 2007 ESOP Preferred Stock may be certificated or uncertificated, at the Company’s option.  Certificates representing shares of 2007 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions.  In the case of uncertificated 2007 ESOP Preferred Stock, the transfer agent for the 2007 ESOP Preferred Stock shall note the foregoing provisions on each 2007 ESOP Preferred Stock book entry account.  The Company may require that, as a condition to transferring record ownership of any uncertificated 2007 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2007 ESOP Preferred Stock are subject to the foregoing provisions.  Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2007 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof.

            2.   Voting Rights .  No shares of 2007 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows:

 

                        (a)  Whenever, at any time or times, dividends payable on shares of 2007 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2007 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the shares of 2007 ESOP Preferred Stock, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the shares of 2007 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2007 ESOP Preferred Stock (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such shares of 2007 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such shares of 2007 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2007

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ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

                        (b)  Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

                        (c)  So long as any shares of 2007 ESOP Preferred Stock remain outstanding, the consent of the holders of the outstanding shares of 2007 ESOP Preferred Stock and outstanding shares of all other series of Preferred Stock ranking on a parity with such shares of 2007 ESOP Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding shares of 2007 ESOP Preferred Stock and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

                                    (i)  the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2007 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

                                    (ii)  the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designations designating shares of 2007 ESOP Preferred Stock and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2007 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2007 ESOP Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

                        (d)  The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2007 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            3.         Dividends .  (a)(i)  Holders of shares of 2007 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $107.50 (the “Base Dividend”) per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3.

 

                                    (ii)  The Base Dividend shall be adjusted, effective on December 1, 2008 and on each December 1 thereafter until December 1, 2016, as follows: 

 

                                                (1)  If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2007 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $112.50 per share (the “First Adjusted Dividend”). 

 

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                                                (2)  If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2007 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $117.50 per share (the “Second Adjusted Dividend”).

 

                                                (3)  If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2007 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend.

 

9)                   Dividend Adjustment Table

 

10)                           Closing Price on 11/30

11)                                 First Target Price

12)                                       Second Target Price

2008

$38.649

$43.120

2009

41.316

49.071

2010

44.167

55.843

2011

47.215

63.549

2012

50.472

72.319

2013

53.955

82.299

2014

57.678

93.656

2015

61.658

106.580

2016

65.912

121.288

 

                                                (4)  As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2010, the Current Market Price of one share of Common Stock is $50, then the cash dividend payable for the immediately following twelve month period per share of 2007 ESOP Preferred Stock would equal $112.50, with the first quarterly payment of such $112.50 dividend to be made on March 1, 2011.  If on November 30, 2011, the Current Market Price of one share of Common Stock is $65, then the cash dividend payable for the immediately following twelve month period per share of 2007 ESOP Preferred Stock would equal $117.50, with the first quarterly payment of such $117.50 dividend to be made on March 1, 2012.  If on November 30, 2012, the Current Market Price of one share of Common Stock is $45, then the cash dividend payable for the immediately following twelve month period per share of 2007 ESOP Preferred Stock would equal $107.50, with the first quarterly payment of such $107.50 dividend to be made on March 1, 2013.

 

                                                (5)  For purposes of this Section 3, the terms “First Adjusted Dividend” and “Second Adjusted Dividend” are sometimes referred to as an “Adjusted Dividend;” the term “Current Market Price” shall have the meaning given to it in Section 4(c)(iv); and the term “Trading Day” shall have the meaning given to it in Section 4(c)(vi).

 

                                    (iii)  If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted.

 

                                    (iv)  Dividends payable on shares of the 2007 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 of each year, commencing June 1, 2007.  Dividends on shares of the 2007 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2007 ESOP Preferred Stock.  Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof.  The amount of dividends payable per share for each dividend period shall be computed by dividing by

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four the Base Dividend or the Adjusted Dividend, whichever is then applicable.  The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months.

 

                        (b)(i)  No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2007 ESOP Preferred Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2007 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends.  When dividends are not paid in full, as aforesaid, upon the shares of 2007 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2007 ESOP Preferred Stock, all dividends declared upon shares of 2007 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2007 ESOP Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on 2007 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2007 ESOP Preferred Stock and such other series of Preferred Stock bear to each other.  Holders of shares of 2007 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2007 ESOP Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2007 ESOP Preferred Stock which may be in arrears.

 

                                    (ii)  So long as any shares of 2007 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common Stock or any other stock ranking junior to 2007 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2007 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2007 ESOP Preferred Stock as to dividends or upon liquidation be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to 2007 ESOP Preferred Stock as to dividends or upon liquidation), unless, in each case, the full cumulative dividends on all outstanding shares of 2007 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods.

 

            4.   Conversion .  Shares of 2007 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2007 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows:

 

                        (a)  Each share of 2007 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the “Release Date”), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2007 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (b)  Subject to and upon compliance with the provisions of this Section 4, a holder of 2007 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2007 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2007 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (c)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

 

                                    (i)  The “Average Current Market Price” per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the “Purchase Offer” is made (as that term is defined in Section 6(d) hereof).

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                                    (ii)  A “Business Day” means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open.

 

                                    (iii)  (A)  For purposes of a mandatory conversion of shares of 2007 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the “Conversion Price” for such shares of 2007 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date.

 

                                                (B)  For purposes of an optional conversion of shares of 2007 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the “Conversion Price” for such shares of 2007 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2007 ESOP Preferred Stock or by any agent for conversion of the 2007 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4.

 

                                                (C)  For purposes of a conversion of shares of 2007 ESOP Preferred Stock into shares of Common Stock in connection with a “Purchase Offer” (as defined in Section 6(d) hereof), the “Conversion Price” for such shares of 2007 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock.

 

Each share of 2007 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2007 ESOP Preferred Stock will be converted. 

 

                                    (iv)  The “Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange only or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof.

                                    (v)  “Common Stock” shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designations or as such stock may be constituted from time to time.

 

                                    (vi)  “Trading Day” with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day.

                                      (d)  In connection with any conversion of 2007 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the “Conversion Notice”) shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2007 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2007 ESOP Preferred Stock by the Company or the transfer agent for the 2007 ESOP Preferred Stock, which notice shall be accompanied by (a) in the case of certificated 2007 ESOP Preferred Stock, the certificate or certificates representing the shares of 2007 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) and (b) in the case of uncertificated 2007

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ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2007 ESOP Preferred Stock being converted pursuant to this Section 4.  Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2007 ESOP Preferred Stock released from the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2007 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2007 ESOP Preferred Stock, for any shares of 2007 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request.

 

                        (e)  Upon delivery to the Company or the transfer agent for the 2007 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4,  the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder’s designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion.  If there shall have been surrendered a certificate or certificates representing shares of 2007 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder’s designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2007 ESOP Preferred Stock which shall not have been converted.

                        (f)  The issuance by the Company of shares of Common Stock upon a conversion of shares of 2007 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2007 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder’s designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2007 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4.  On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date.  The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2007 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares.

                        (g)  The Company shall not be obligated to deliver to holders of 2007 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2007 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law.

                        (h)  The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2007 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2007 ESOP Preferred Stock then outstanding.

                        (i)  The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2007 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

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                        (j)  The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2007 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2007 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

                        5.   Redemption At the Option of the Company .  (a)  The 2007 ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2007 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2007 ESOP Preferred Stock on the date fixed for redemption.  Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5.  From and after the date fixed for redemption, dividends on shares of 2007 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price.  Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1.  If the full cumulative dividends have not been paid, or contemporaneously declared and set aside for payment, on all outstanding shares of 2007 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2007 ESOP Preferred Stock pursuant to this Section 5.

                        (b)  Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2007 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the 2007 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date.  Each such notice shall state:  (i) the redemption date; (ii) the total number of shares of the 2007 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2007 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable upon conversion of a share of 2007 ESOP Preferred Stock will be determined.  The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2007 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state).

                        (c)  The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2007 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2007 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2007 ESOP Preferred Stock then being redeemed.

                        (d)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

                                    (i)  “Adjustment Period” shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined.

                                    (ii)  “Fair Market Value” shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period.  The “Fair Market Value” of any security which is not publicly traded (other than the 2007 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent

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investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof.  The “Fair Market Value” of the 2007 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2007 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section).  For purposes of determining the Fair Market Value of the 2007 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2007 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2007 ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2007 ESOP Convertible Preferred Stock Note Agreement dated on or about March 20, 2007 between the Company and the Plan (including any amendments or modifications thereto).

            6.   Consolidation, Merger, etc.   (a)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes “qualifying employer securities” with respect to a holder of 2007 ESOP Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2007 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2007 ESOP Preferred Stock had immediately prior to such transaction, subject to the following:

                        (1)  After such transaction each share of the 2007 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2007 ESOP Preferred Stock could have been converted immediately prior to such transaction.

                        (2)  The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2007 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid.

                        (b)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2007 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2007 ESOP Preferred Stock could have been converted at such time so that each share of 2007 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2007 ESOP Preferred Stock could have been converted immediately prior to such transaction.  However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2007 ESOP Preferred Stock, then the shares of 2007 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2007 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction.  If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then

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the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares.

                        (c)  In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a “Business Combination”), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2007 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2007 ESOP Preferred Stock, a cash payment per share of 2007 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2007 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is consummated.  No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction.

 

                        (d)  In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2007 ESOP Preferred Stock shall have the right to convert shares of 2007 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the “Purchase Offer Conversion Period”), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period.

 

                        For purposes of this paragraph (d), the following terms shall have the meanings set forth below:

 

                                    (i)  “Beneficial Ownership” shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and “person” shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.

 

                                    (ii)  A “Purchase Offer” shall have been made when any person (other than the Company or any affiliate of the Company) shall have “commenced” (as such term is defined in Rule 14d-2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company.

 

            7.   Liquidation Rights .  (a)  Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2007 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to 2007 ESOP Preferred Stock upon liquidation, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.

 

                        (b)  Neither the sale of all or substantially all the property and assets of the Company, nor the merger or consolidation of the Company into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7.

 

                        (c)  After the payment to the holders of the shares of 2007 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2007 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company.

 

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                        (d)  In the event the assets of the Company available for distribution to the holders of shares of 2007 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2007 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2007 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up.

 

                        (e)  Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on a parity with or prior to the shares of 2007 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2007 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2007 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2007 ESOP Preferred Stock shall not be entitled to share therein.

 

            8.   Ranking .  For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank:

 

                        (a)  prior to the shares of 2007 ESOP Preferred Stock, either as to dividends or upon liquidation, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2007 ESOP Preferred Stock;

 

                        (b)  on a parity with shares of 2007 ESOP Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2007 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2007 ESOP Preferred Stock; and

 

                        (c)  junior to shares of 2007 ESOP Preferred Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of 2007 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes.

 

            9.   Priority of 2007 ESOP Preferred Stock .  The shares of 2007 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company’s 1998 ESOP Cumulative Convertible Preferred Stock, its 1999 ESOP Cumulative Convertible Preferred Stock, its 2000 ESOP Cumulative Convertible Preferred Stock, its 2001 ESOP Cumulative Convertible Preferred Stock, its 2002 ESOP Cumulative Convertible Preferred Stock, its 2003 ESOP Cumulative Convertible Preferred Stock, its 2004 ESOP Cumulative Convertible Preferred Stock, its 2005 ESOP Cumulative Convertible Preferred Stock and its 2006 ESOP Cumulative Convertible Preferred Stock. 

 

IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by Richard M. Kovacevich, its Chairman and Chief Executive Officer, and attested by Rachelle M. Graham, its Assistant Secretary, whereby such Chairman and Chief Executive Officer affirms, under penalties of perjury, that this Certificate of Designations is the act and deed of the Company and that the facts stated herein are true, this 13 th day of March, 2007.

 

WELLS FARGO & COMPANY

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By         /s/ Richard M. Kovacevich              

Richard M. Kovacevich

i)                             Chairman and

ii)                           Chief Executive Officer

 

 

Attest:

 

     /s/ Rachelle M. Graham     

Rachelle M. Graham

Assistant Secretary

 

 

[As filed with the Delaware Secretary of State on March 15, 2007.]

 

WELLS FARGO & COMPANY

___________________________________

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

___________________________________

 

2008 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Without Par Value)

___________________________________

 

 

            WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Company”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the “Board”) by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the “Preferred Stock”), and pursuant to authority conferred upon the ESOP Preferred Stock Committee II of the Board (the “ESOP Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at meetings of the Board duly held on January 25, 2000 and February 27, 2007, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on March 11, 2008, in accordance with Section 141(f) of the General Corporation Law:

 

            1.         On January 25, 2000, the Board adopted the following resolutions (the “ESOP Board Resolutions”) appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of Preferred Stock (“ESOP Preferred Stock”) to the trustee on behalf of the Company’s 401(k) Plan hereinafter referred to:

 

RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee II (the “Second Committee”), which shall have and may exercise the full powers of the Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1 2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the Second Committee in its discretion shall approve, and to take any and all actions as the Second Committee shall deem necessary or appropriate.

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*  *  *  *

 

            RESOLVED that any series of ESOP Preferred Stock authorized for issuance by the . . . Second Committee shall have the voting rights set forth in Appendix A to these resolutions.

 

APPENDIX A - VOTING RIGHTS

 

No series of the Preferred Stock, except as hereinafter set forth in this resolution or as otherwise from time to time required by law, shall have voting rights.  Whenever, at any time or times, dividends payable on any shares of a designated series of the Preferred Stock (such shares of such designated series of Preferred Stock being hereinafter referred to as the “Shares of such series”) shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding Shares of such series shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the Shares of such series, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the Shares of such series shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding Shares of such series (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such Shares of such series (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such Shares of such series shall have been paid in full, at which time such right with respect to such Shares of such series shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

            Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

            So long as any Shares of such series remain outstanding, the consent of the holders of the outstanding Shares of such series and outstanding shares of all other series of Preferred Stock ranking on a parity with such Shares of such series either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding Shares of such series and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

            (a)        the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to the Shares of such series with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

            (b)        the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designation for the Shares of such series designating the Shares of such series and the preferences and relative,

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participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the Shares of such series or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the Shares of such series with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

            The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Shares of such series shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            2.         Pursuant to resolutions adopted on February 27, 2007, the Board designated John G. Stumpf as the sole member of the ESOP Committee, effective April 25, 2007.

 

3.         On March 11, 2008, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions, the ESOP Committee adopted the following resolutions by written consent in accordance with Section 141(f) of the General Corporation Law:

 

            RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows:

 

2008 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

 

            1.   Designation and Number of Shares; Restricted Issue

 

                        (a) The designation of the series of Preferred Stock, without par value, provided for herein shall be “2008 ESOP Cumulative Convertible Preferred Stock” (hereinafter referred to as the “2008 ESOP Preferred Stock”) and the number of authorized shares constituting the 2008 ESOP Preferred Stock is 520,500, based on an offering price for the 2008 ESOP Preferred Stock of $1,058.00 per share.  Each share of 2008 ESOP Preferred Stock shall have a stated value of $1,000.00 per share.  The number of authorized shares of 2008 ESOP Preferred Stock may be reduced by further resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2008 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2008 ESOP Preferred Stock shall not be increased.  All shares of the 2008 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of 2008 ESOP Preferred Stock.

 

                        (b)  Shares of 2008 ESOP Preferred Stock shall be issued only to a trustee (the “Trustee”) acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the “Plan”).  All references to the holder of shares of 2008 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan.  In the event of any transfer of record ownership of shares of 2008 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2008 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the “Common Stock”) on the terms otherwise provided for the conversion of the shares of 2008 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2008 ESOP Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of 2008 ESOP Preferred Stock shall be so converted.  In the event of such a conversion, the transferee of the shares of 2008 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock

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into which such shares of 2008 ESOP Preferred Stock have been automatically converted as of the date of such transfer.  Shares of 2008 ESOP Preferred Stock may be certificated or uncertificated, at the Company’s option.  Certificates representing shares of 2008 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions.  In the case of uncertificated 2008 ESOP Preferred Stock, the transfer agent for the 2008 ESOP Preferred Stock shall note the foregoing provisions on each 2008 ESOP Preferred Stock book entry account.  The Company may require that, as a condition to transferring record ownership of any uncertificated 2008 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2008 ESOP Preferred Stock are subject to the foregoing provisions.  Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2008 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof.

            2.   Voting Rights .  No shares of 2008 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows:

 

                        (a)  Whenever, at any time or times, dividends payable on shares of 2008 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2008 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the shares of 2008 ESOP Preferred Stock, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the shares of 2008 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2008 ESOP Preferred Stock (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such shares of 2008 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such shares of 2008 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2008 ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

                        (b)  Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

                        (c)  So long as any shares of 2008 ESOP Preferred Stock remain outstanding, the consent of the holders of the outstanding shares of 2008 ESOP Preferred Stock and outstanding shares of all other series of Preferred Stock ranking on a parity with such shares of 2008 ESOP Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding shares of 2008 ESOP Preferred Stock and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

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                                    (i)  the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2008 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

                                    (ii)  the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designations designating shares of 2008 ESOP Preferred Stock and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2008 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2008 ESOP Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

                        (d)  The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2008 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            3.         Dividends .  (a)(i)  Holders of shares of 2008 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $105.00 (the “Base Dividend”) per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3.

 

                                    (ii)  The Base Dividend shall be adjusted, effective on December 1, 2009 and on each December 1 thereafter until December 1, 2017, as follows: 

 

                                                (1)  If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2008 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $110.00 per share (the “First Adjusted Dividend”). 

 

                                                (2)  If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2008 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $115.00 per share (the “Second Adjusted Dividend”).

 

                                                (3)  If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2008 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend.

13)                 

14)               Dividend Adjustment Table

 

15)                           Closing Price on 11/30

16)                                 First Target Price

17)                                       Second Target Price

2009

33.444

37.899

2010

36.120

43.963

2011

39.009

50.997

2012

42.130

59.157

2013

45.500

68.622

2014

49.140

79.601

2015

53.072

92.338

2016

57.317

107.112

2017

61.903

124.249

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                                                (4)  As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2011, the Current Market Price of one share of Common Stock is $50.00, then the cash dividend payable for the immediately following twelve month period per share of 2008 ESOP Preferred Stock would equal $110.00, with the first quarterly payment of such $110.00 dividend to be made on March 1, 2012.  If on November 30, 2012, the Current Market Price of one share of Common Stock is $60.00, then the cash dividend payable for the immediately following twelve month period per share of 2008 ESOP Preferred Stock would equal $115.00, with the first quarterly payment of such $115.00 dividend to be made on March 1, 2013.  If on November 30, 2013, the Current Market Price of one share of Common Stock is $40.00, then the cash dividend payable for the immediately following twelve month period per share of 2008 ESOP Preferred Stock would equal $105.00, with the first quarterly payment of such $105.00 dividend to be made on March 1, 2014.

 

                                                (5)  For purposes of this Section 3, the terms “First Adjusted Dividend” and “Second Adjusted Dividend” are sometimes referred to as an “Adjusted Dividend;” the term “Current Market Price” shall have the meaning given to it in Section 4(c)(iv); and the term “Trading Day” shall have the meaning given to it in Section 4(c)(vi).

 

                                    (iii)  If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted.

 

                                    (iv)  Dividends payable on shares of the 2008 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 of each year, commencing June 1, 2008.  Dividends on shares of the 2008 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2008 ESOP Preferred Stock.  Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof.  The amount of dividends payable per share for each dividend period shall be computed by dividing by four the Base Dividend or the Adjusted Dividend, whichever is then applicable.  The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months.

 

                        (b)(i)  No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2008 ESOP Preferred Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2008 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends.  When dividends are not paid in full, as aforesaid, upon the shares of 2008 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2008 ESOP Preferred Stock, all dividends declared upon shares of 2008 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2008 ESOP Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on 2008 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2008 ESOP Preferred Stock and such other series of Preferred Stock bear to each other.  Holders of shares of 2008 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2008 ESOP Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2008 ESOP Preferred Stock which may be in arrears.

 

                                    (ii)  So long as any shares of 2008 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common

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Stock or any other stock ranking junior to 2008 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2008 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2008 ESOP Preferred Stock as to dividends or upon liquidation be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to 2008 ESOP Preferred Stock as to dividends or upon liquidation), unless, in each case, the full cumulative dividends on all outstanding shares of 2008 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods.

 

            4.   Conversion .  Shares of 2008 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2008 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows:

 

                        (a)  Each share of 2008 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the “Release Date”), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2008 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (b)  Subject to and upon compliance with the provisions of this Section 4, a holder of 2008 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2008 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2008 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (c)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

 

                                    (i)  The “Average Current Market Price” per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the “Purchase Offer” is made (as that term is defined in Section 6(d) hereof).

 

                                    (ii)  A “Business Day” means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open.

 

                                    (iii)  (A)  For purposes of a mandatory conversion of shares of 2008 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the “Conversion Price” for such shares of 2008 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date.

 

                                                (B)  For purposes of an optional conversion of shares of 2008 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the “Conversion Price” for such shares of 2008 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2008 ESOP Preferred Stock or by any agent for conversion of the 2008 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4.

 

                                                (C)  For purposes of a conversion of shares of 2008 ESOP Preferred Stock into shares of Common Stock in connection with a “Purchase Offer” (as defined in Section 6(d) hereof), the “Conversion Price” for such shares of 2008 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock.

 

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Each share of 2008 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2008 ESOP Preferred Stock will be converted.  

 

                                    (iv)  The “Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange only or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof.

                                    (v)  “Common Stock” shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designations or as such stock may be constituted from time to time.

 

                                    (vi)  “Trading Day” with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day.

                                      (d)  In connection with any conversion of 2008 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the “Conversion Notice”) shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2008 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2008 ESOP Preferred Stock by the Company or the transfer agent for the 2008 ESOP Preferred Stock, which notice shall be accompanied by (a) in the case of certificated 2008 ESOP Preferred Stock, the certificate or certificates representing the shares of 2008 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) and (b) in the case of uncertificated 2008 ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2008 ESOP Preferred Stock being converted pursuant to this Section 4.  Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2008 ESOP Preferred Stock released from the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2008 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2008 ESOP Preferred Stock, for any shares of 2008 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request.

 

                        (e)  Upon delivery to the Company or the transfer agent for the 2008 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4,  the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder’s designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion.  If there

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shall have been surrendered a certificate or certificates representing shares of 2008 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder’s designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2008 ESOP Preferred Stock which shall not have been converted.

                        (f)  The issuance by the Company of shares of Common Stock upon a conversion of shares of 2008 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2008 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder’s designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2008 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4.  On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date.  The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2008 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares.

                        (g)  The Company shall not be obligated to deliver to holders of 2008 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2008 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law.

                        (h)  The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2008 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2008 ESOP Preferred Stock then outstanding.

                        (i)  The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2008 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

                        (j)  The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2008 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2008 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

                        5.   Redemption At the Option of the Company .  (a)  The 2008 ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2008 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2008 ESOP Preferred Stock on the date fixed for redemption.  Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5.  From and after the date fixed for redemption, dividends on shares of 2008 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price.  Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1.  If the full cumulative dividends have not been paid, or

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contemporaneously declared and set aside for payment, on all outstanding shares of 2008 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2008 ESOP Preferred Stock pursuant to this Section 5.

                        (b)  Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2008 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the 2008 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date.  Each such notice shall state:  (i) the redemption date; (ii) the total number of shares of the 2008 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2008 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable upon conversion of a share of 2008 ESOP Preferred Stock will be determined.  The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2008 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state).

                        (c)  The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2008 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2008 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2008 ESOP Preferred Stock then being redeemed.

                        (d)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

                                    (i)  “Adjustment Period” shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined.

                                    (ii)  “Fair Market Value” shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period.  The “Fair Market Value” of any security which is not publicly traded (other than the 2008 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof.  The “Fair Market Value” of the 2008 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2008 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section).  For purposes of determining the Fair Market Value of the 2008 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2008 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2008 ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2008 ESOP Convertible Preferred Stock Note Agreement dated on or about March 13, 2008 between the Company and the Plan (including any amendments or modifications thereto).

            6.   Consolidation, Merger, etc.   (a)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes “qualifying employer securities” with respect to a holder of 2008 ESOP Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement

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Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2008 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2008 ESOP Preferred Stock had immediately prior to such transaction, subject to the following:

                        (1)  After such transaction each share of the 2008 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2008 ESOP Preferred Stock could have been converted immediately prior to such transaction.

                        (2)  The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2008 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid.

                        (b)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2008 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2008 ESOP Preferred Stock could have been converted at such time so that each share of 2008 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2008 ESOP Preferred Stock could have been converted immediately prior to such transaction.  However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2008 ESOP Preferred Stock, then the shares of 2008 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2008 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction.  If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares.

                        (c)  In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a “Business Combination”), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2008 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2008 ESOP Preferred Stock, a cash payment per share of 2008 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2008 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is consummated.  No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction.

 

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                        (d)  In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2008 ESOP Preferred Stock shall have the right to convert shares of 2008 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the “Purchase Offer Conversion Period”), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period.

 

                        For purposes of this paragraph (d), the following terms shall have the meanings set forth below:

 

                                    (i)  “Beneficial Ownership” shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and “person” shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.

 

                                    (ii)  A “Purchase Offer” shall have been made when any person (other than the Company or any affiliate of the Company) shall have “commenced” (as such term is defined in Rule 14d-2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company.

 

            7.   Liquidation Rights .  (a)  Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2008 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to 2008 ESOP Preferred Stock upon liquidation, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.

 

                        (b)  Neither the sale of all or substantially all the property and assets of the Company, nor the merger or consolidation of the Company into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7.

 

                        (c)  After the payment to the holders of the shares of 2008 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2008 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company.

 

                        (d)  In the event the assets of the Company available for distribution to the holders of shares of 2008 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2008 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2008 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up.

             

(e)  Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on a parity with or prior to the shares of 2008 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2008 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2008 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2008 ESOP Preferred Stock shall not be entitled to share therein.

 

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            8.   Ranking .  For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank:

 

                        (a)  prior to the shares of 2008 ESOP Preferred Stock, either as to dividends or upon liquidation, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2008 ESOP Preferred Stock;

 

                        (b)  on a parity with shares of 2008 ESOP Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2008 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2008 ESOP Preferred Stock; and

 

                        (c)  junior to shares of 2008 ESOP Preferred Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of 2008 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes.

 

            9.   Priority of 2008 ESOP Preferred Stock .  The shares of 2008 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company’s 1999 ESOP Cumulative Convertible Preferred Stock, its 2000 ESOP Cumulative Convertible Preferred Stock, its 2001 ESOP Cumulative Convertible Preferred Stock, its 2002 ESOP Cumulative Convertible Preferred Stock, its 2003 ESOP Cumulative Convertible Preferred Stock, its 2004 ESOP Cumulative Convertible Preferred Stock, its 2005 ESOP Cumulative Convertible Preferred Stock, its 2006 ESOP Cumulative Convertible Preferred Stock and its 2007 ESOP Cumulative Convertible Preferred Stock. 

 

IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by John G. Stumpf, its President and Chief Executive Officer, and attested by Jeannine E. Zahn, its Assistant Secretary, whereby such President and Chief Executive Officer affirms, under penalties of perjury, that this Certificate of Designations is the act and deed of the Company and that the facts stated herein are true, this 12th day of March, 2008.

 

 

WELLS FARGO & COMPANY

 

 

 

By /s/ John G. Stumpf                                   

John G. Stumpf

i)                             President and

ii)                           Chief Executive Officer

 

 

Attest:

 

/s/ Jeannine E. Zahn                                        

Jeannine E. Zahn

Assistant Secretary

 

 

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[As filed with the Delaware Secretary of State on March 12, 2008.]

 

WELLS FARGO & COMPANY

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware

 

DIVIDEND EQUALIZATION PREFERRED SHARES
(Without Par Value)

 

WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “Board of Directors”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”), the following resolutions were duly adopted by the Committee pursuant to the written consent of the Committee duly adopted on November 20, 2008, in accordance with Section 141(f) of the General Corporation Law:

RESOLVED, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated October 2, 2008, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

18)               1.         Designation. 

                        (a)        The shares of such series of Preferred Stock shall be designated Dividend Equalization Preferred Shares (“DEPs”), and the number of shares constituting such series shall be 97,000.

                        (b)        DEPs redeemed, purchased or otherwise acquired by the Corporation or any of its subsidiaries (other than in a bona fide fiduciary capacity) shall be cancelled and may not be reissued.  DEPs may be issued in fractional shares which are whole number multiples of one one-millionth of a share, which fractional shares shall entitle the holder, in proportion to such holder’s fractional share, to all rights of a holder of a whole share of DEPs.

                        (c)        DEPs shall, with respect to distributions upon the liquidation, winding-up and dissolution of the Corporation, rank (x) senior to the Common Stock for the Liquidation Preference stated and defined in Section 3(a) below and (y) junior to each class or series of preferred stock issued in exchange for preferred stock of Wachovia Corporation established by the board of directors of Wachovia Corporation after September 1, 2001 and each class or series of preferred stock established by the Board of Directors after the date hereof.

19)                             2.         Dividends.  DEPs shall not entitle the holders thereof to any dividends, whether payable in cash, property, stock or otherwise.

20)                             3.         Liquidation. 

                        (a)        In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of full and fractional DEPs shall be entitled, before any

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distribution or payment is made on any date to the holders of the Common Stock or any other stock of the Corporation ranking junior to the DEPs upon liquidation, to be paid in full an amount per whole share of DEPs equal to $10.00 (the “Liquidation Preference”), together with accrued dividends to such distribution or payment date, whether or not earned or declared.  If such payment shall have been made in full to all holders of DEPs, the holders of DEPs as such shall have no right or claim to any of the remaining assets of the Corporation. 

                        (b)        In the event the assets of the Corporation available for distribution to the holders of DEPs upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 3(a), no such distribution shall be made on account of any shares of any other class or series of Preferred Stock ranking on a parity with the DEPs upon such liquidation, dissolution or winding up unless proportionate distributive amounts shall be paid on account of the DEPs, ratably in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such liquidation, dissolution or winding up. 

                        (c)        Upon the liquidation, dissolution or winding up of the Corporation, the holders of DEPs then outstanding shall be entitled to be paid out of assets of the Corporation available for distribution to its shareholders all amounts to which such holders are entitled pursuant to the first paragraph of this Section 3 before any payment shall be made to the holders of Common Stock or any other stock of the Corporation ranking junior upon liquidation to the DEPs. 

                        (d)        For the purposes of this Section 3, the consolidation or merger of, or binding statutory share exchange by, the Corporation with any other corporation shall not be deemed to constitute a liquidation, dissolution or winding up of the Corporation. 

21)               4.         Redemption, Conversion, Exchange.

                        (a)        The DEPs shall not be convertible or exchangeable.  Other than as described in the next sentence, the DEPs shall not be redeemable.  The DEPs shall be redeemable by the Corporation, at the Corporation’s option and in its sole discretion, for an amount in cash equal to the Liquidation Preference per share of DEPs, after December 31, 2021.

                        (b)        In case of redemption of less than all of the DEPs at the time outstanding, the shares to be redeemed shall be selected pro rata or by lot as determined by the Corporation in its sole discretion, provided that the Corporation may redeem all shares held by holders of fewer than 0.100 DEPs (or by holders that would hold fewer than 0.100 DEPs following such redemption) prior to its redemption of other DEPs. 

                        (c)        Notice of any redemption shall be sent by or on behalf of the Corporation no less than 30 nor more than 60 days prior to the date specified for redemption in such notice (the “Redemption Date”), by first class mail, postage prepaid, to all holders of record of the DEPs at their last addresses as they appear on the books of the Corporation; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any DEPs except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective.  In addition to any information required by applicable law or regulation or the rules of any exchange upon which the DEPs may be listed or admitted to trading, such notice shall state (1) that such redemption is being made pursuant to the redemption provisions of this Section 5, (2) the Redemption Date, (3) the redemption price, (4) the total number of DEPs to be redeemed and, if less than all shares held by such holder are to be redeemed, the number of such shares to be redeemed, and (5) the place or places where certificates for such shares are to be surrendered for payment of the redemption price, including any procedures applicable to redemption to be accomplished through book-entry transfers.  Upon the mailing of any such notice of redemption, the Corporation shall become obligated to redeem, on the Redemption Date, all shares called for redemption. 

22)               5.         Voting Rights .  Except as otherwise required by applicable law or regulation or the rules of a securities exchange upon which the DEPs may be listed or quoted, holders of the DEPs shall have no voting rights.

IN WITNESS WHEREOF, WELLS FARGO & COMPANY has caused this Certificate of Designations to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Laurel A. Holschuh, its Secretary, this  30 th  day of December, 2008.

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WELLS FARGO & COMPANY


By:    
/s/ Barbara S. Brett        
Barbara S. Brett, Senior Vice President
and Assistant Treasurer

                                      /s/ Laurel A. Holschuh         
Laurel A. Holschuh, Secretary

 

 

 [As filed with the Delaware Secretary of State on December 30, 2008.]

WELLS FARGO & COMPANY

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware

 

CLASS A PREFERRED STOCK, SERIES G
(Without Par Value)

 

WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “Board of Directors”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”), the following resolutions were duly adopted by the Committee pursuant to the written consent of the Committee duly adopted on November 20, 2008, in accordance with Section 141(f) of the General Corporation Law:

RESOLVED, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated October 2, 2008, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

1.         Designation .  The shares of such series of Preferred Stock shall be designated Class A Preferred Stock, Series G, with no par value and with a liquidation preference of $15,000.00 per share (hereinafter referred to as the “Series G Preferred Stock”), and the number of shares constituting such series shall be 50,000, which number may be increased or decreased (but not below the number of shares then outstanding) from time to time by the Board of Directors of the Corporation.  The Series G Preferred Stock shall rank prior to the common stock of the Corporation, $1-2/3 par value per share (the “Common Stock”), and on a parity with each series of the Corporation’s Parity Stock with respect to the payment of dividends and the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation as expressly provided for herein.

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2.         Defined Terms .  As used in this Certificate of Designations, the following terms have the meanings specified below:

“Affiliate” of any specified Person shall mean (i) any other Person which, directly or indirectly, is in Control of, is controlled by or is under common Control with such specified Person, or (ii) any other Person who is a director or executive officer (A) of such specified Person, (B) of any subsidiary of such specified Person, or (C) of any Person described in clause (i) above.

“Business Day” means any day other than a Saturday, a Sunday or a day on which banks located in the City of New York, New York or Charlotte, North Carolina generally are authorized or required by law or regulation to close.

“Common Stock” shall have the meaning set forth in Section 1.

“Conditional Exchange” shall mean the exchange of one Depositary Share for each share of WPFC Series A Preferred Securities following the occurrence of a Supervisory Event.

“Control” means the power, direct or indirect, to direct or cause the direction of the management and policies of any Person whether by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Corporation” means Wells Fargo & Company, a Delaware corporation, together with its successors and assigns.

“Depositary Company” shall have the meaning set forth in Section 5(c).

“Depositary Share” means a depositary share representing a one-six hundredth interest in one share of Series G Preferred Stock.

“Dividend Payment” shall have the meaning set forth in Section 3(a).

“Dividend Payment Date” shall have the meaning set forth in Section 3(a).

“Dividend Period” shall have the meaning set forth in Section 3(a).

“Dividend Record Date” shall have the meaning set forth in Section 3(a).

“Federal Reserve Board” means the United States Board of Governors of the Federal Reserve System.

“Initial Dividend Period” shall have the meaning set forth in Section 3(a).

“Junior Stock” means the Common Stock and all other classes and series of securities of the Corporation that rank below the Series G Preferred Stock as to dividend rights and rights upon liquidation, winding up, or dissolution.

“OCC” means the United States Office of the Comptroller of the Currency.

“Parity Stock” means any outstanding class or series of Preferred Stock of the Corporation ranking, in accordance to its terms, as to dividends and upon voluntary or involuntary liquidation, dissolution or winding-up of affairs of the Corporation on parity with the Series G Preferred Stock.

“Person” means an individual, corporation, partnership, estate, trust (or portion thereof), association, private foundation, joint stock company or other entity or any government or agency or political subdivision thereof and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.

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“Preferred Stock” means the Corporation’s preferred stock, no par value, of which 20,000,000 shares are authorized as of the date hereof.

“Redemption Date” shall have the meaning set forth in Section 5(c).

“Redemption Price” shall have the meaning set forth in Section 5(b).

“Regulatory Capital Event” means a determination by the Corporation, based on the receipt by the Corporation of an opinion or letter of counsel, rendered by a law firm experienced in such matters, in form and substance satisfactory to the Corporation, which states that there is a significant risk that the Series G Preferred Stock will no longer constitute Tier 1 capital of the Corporation for purposes of the capital adequacy regulations or guidelines or policies of the Federal Reserve Board, or its successor, as the Corporation’s primary Federal banking regulator, as a result of (i) any amendment to, clarification of, or change in applicable laws or related regulations, guidelines, policies or official interpretations thereof, or (ii) any official administrative pronouncement or judicial decision interpreting or applying such laws or related regulations, guidelines, policies or official interpretations thereof.

“Series G Preferred Stock” shall have the meaning set forth in Section 1.

“Supervisory Event” means the occurrence of one of the following:  (i) Wachovia Bank becomes “undercapitalized” under the OCC’s prompt corrective action regulations, (ii) Wachovia Bank is placed into conservatorship or receivership, or (iii) the OCC, in its sole discretion, anticipates Wachovia Bank becoming “undercapitalized” in the near term or takes supervisory action that limits the payment of dividends by WPFC and in connection therewith the OCC directs an exchange of the WPFC Series A Preferred Securities for the Series G Preferred Stock.

“Wachovia Bank” means Wachovia Bank, National Association, a national banking association, or its successors and assigns.

“WPFC” means Wachovia Preferred Funding Corp., a Delaware corporation.

“WPFC Series A Preferred Securities” means the 7.25% Non-cumulative Series A Preferred Securities, par value $0.01, liquidation preference $25.00 per share, of WPFC.

3.         Dividends .  (a)  The dividend rate for the Series G Preferred Stock shall be 7.25% per share per annum of the initial liquidation preference of $15,000.00 per share, accruing from the effective date of the Conditional Exchange to and including the last day of March, the last day of June, the last day of September or the last day of December, whichever occurs first, after issuance of the Series G Preferred Stock following the Conditional Exchange (such period being the “Initial Dividend Period”) and then for each quarterly period thereafter, commencing on April 1, July 1, October 1 or January 1, as the case may be, of each year and ending on and including the day next preceding the first day of the next such quarterly period (each such period, including the Initial Dividend Period, being a “Dividend Period”), payable to holders of record of the Series G Preferred Stock on the respective record dates fixed for such purpose by the Board of Directors in advance of payment of such dividend, which shall be the 15th calendar day of the last calendar month of the applicable Dividend Period (each such date, a “Dividend Record Date”).  If such Dividend Record Date is not a Business Day, then the Dividend Record Date for the applicable Dividend Period shall be the first Business Day immediately following the 15th calendar day of the last calendar month of the applicable Dividend Period, except if such Business Day falls in the calendar month following the last calendar month of the applicable Dividend Period, the Dividend Record Date shall be the last Business Date immediately preceding the 15th calendar day of the last calendar month of the applicable Dividend Period.  Until no longer outstanding, the holders of the Series G Preferred Stock shall be entitled to receive such cash dividends, and the Corporation shall be bound to pay the same, but only as, if and when declared by the Board of Directors, out of funds legally available for the payment thereof (each such payment, a “Dividend Payment”), on March 31, June 30, September 30 and December 31 of each year (each a “Dividend Payment Date”) for the respective Dividend Period ending on such date; provided , however , that the Dividend Payment for the Initial Dividend Period shall include any unpaid dividends accrued from the payment date of the last dividend paid prior to such date on the WPFC Series A Preferred Securities.  If a Dividend Payment Date is not a Business Day, the Dividend Payment due on such Dividend Payment Date shall be paid on the first Business Day immediately following such Dividend Payment Date, except if such

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Business Day falls in a different calendar year than such Dividend Payment Date, such Dividend Payment shall be paid on the last Business Date immediately preceding such Dividend Payment Date.  The amount of dividends payable for the Initial Dividend Period or any period shorter than a full Dividend Period shall be computed on the basis of a 360-day year having 30-day months and the actual number of days elapsed in the period.

(b)        Dividends shall be non-cumulative .  If the Board of Directors fails to or chooses not to declare a dividend on the Series G Preferred Stock for a Dividend Period, then holders of the Series G Preferred Stock shall have no right to receive a dividend for that Dividend Period, and the Corporation shall have no obligation to pay a dividend for that Dividend Period, whether or not dividends are declared and paid for any future Dividend Period, with respect to either the Series G Preferred Stock, other series of preferred stock of the Corporation, or the Common Stock.

(c)        Holders of Series G Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full dividends for each Dividend Period, as herein provided, on the Series G Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any Dividend Payment or Dividend Payments or failure to make any Dividend Payment or Dividend Payments.

(d)        Unless full dividend payments on the Series G Preferred Stock have been declared and paid or declared and a sum sufficient for such payment has been set apart for payment for the immediately preceding Dividend Period, no dividends shall be declared or paid or set aside for payment and no other distribution shall be declared or made or set aside for payment upon any shares of Junior Stock, nor shall shares of Junior Stock be redeemed, purchased, or otherwise acquired for any consideration, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation, except by conversion into or exchange for other Junior Stock.

4.         Liquidation Preference .  (a)  The amount payable on the Series G Preferred Stock in the event of any voluntary or involuntary liquidation, dissolution, or winding-up of affairs of the Corporation shall be $15,000.00 per share, plus authorized, declared but unpaid dividends up to the date of such liquidation, dissolution, or winding-up of affairs of the Corporation, and no more before any distribution shall be made to the holders of any shares of Junior Stock.  The holders of Series G Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution, or winding-up of affairs of the Corporation other than what is expressly provided for in this Section 4(a).

(b)        If the amounts available for distribution in respect of the Series G Preferred Stock and any Parity Stock are not sufficient to satisfy the full liquidation rights of all of the outstanding Series G Preferred Stock and any Parity Stock, then the holders of the Series G Preferred Stock and any Parity Stock shall share ratably in any such distribution of assets in proportion to the full respective liquidation preference to which they are entitled.

(c)        The sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a dissolution, liquidation or winding up of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or Person or the merger, consolidation or any other business combination transaction of any other corporation or Person into or with the Corporation be deemed to be a dissolution, liquidation or winding up of the Corporation.

5.         Redemption .  (a)  The Series G Preferred Stock shall not be redeemable by the Corporation prior to December 31, 2022, except upon the occurrence of a Regulatory Capital Event.

(b)        Prior to December 31, 2022, upon the occurrence of a Regulatory Capital Event and with the prior approval of the OCC, the Corporation, at the option of the Board of Directors, may redeem the outstanding Series G Preferred Stock, in whole, but not in part, at a price equal to $15,000.00 per share of Series G Preferred Stock, plus authorized, declared but unpaid dividends to the Redemption Date, without interest, on shares redeemed (collectively, the “Redemption Price”) from funds legally available for such purpose.  On or after December 31, 2022, the Corporation may redeem the Series G Preferred Stock for cash, with the prior approval of the OCC, in whole or in part, at any time and from time to time for the Redemption Price from funds legally available for such purpose.  In the event the Corporation redeems fewer than all the outstanding Series A

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Preferred Securities, the shares to be redeemed shall be determined by lot, pro rata , or by such other method as the Board of Directors in its sole discretion determines.

(c)        Not more than 60 days and not less than 30 days prior to the date established for such redemption by the Board of Directors (the “Redemption Date”), notice of the proposed redemption shall be mailed to the holders of record of the Series G Preferred Stock to be redeemed, such notice to be addressed to each such stockholder at his last known address shown on the records of the Corporation, and the time of mailing such notice shall be deemed to be the time of the giving thereof.  On or after the Redemption Date, the Series G Preferred Stock called for redemption shall automatically, and without further action on the part of the holder thereof, be deemed to have been redeemed and the former holder thereof shall thereupon only be entitled to receive payment of the Redemption Price.  If such notice of redemption shall have been given as aforesaid, and if on or before the Redemption Date the funds necessary for the redemption shall have been set aside so as to be available therefore, then the dividends thereon shall cease to accrue after the Redemption Date and all rights with respect to the Series G Preferred Stock so called for redemption shall forthwith after such Redemption Date cease, except the right of the holders to receive the Redemption Price, without interest.  If such notice of redemption of all or any part of the Series G Preferred Stock shall have been mailed as aforesaid and the Corporation shall thereafter deposit money for the payment of the Redemption Price pursuant thereto with any bank or trust company (the “Depositary Company”), including any Affiliate of the Corporation, selected by the Board of Directors for that purpose, to be applied to such redemption, then from and after the making of such deposit, such Series G Preferred Stock shall not be deemed to be outstanding for any purpose, and the rights of the holders thereof shall be limited to the rights to receive payment of the Redemption Price, without interest but including any declared, authorized, but unpaid, dividends to the Redemption Date, from the Depositary Company, if applicable, upon endorsement, if required, and surrender of the certificates therefore.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company, the interest, if any, allowed on such moneys deposited with it, and the holders of any Series G Preferred Stock so redeemed shall have no claim to any such interest.  Any moneys so deposited and remaining unclaimed at the end of three years from the Redemption Date shall, if thereafter requested by resolution of the Board of Directors, be repaid to the Corporation, and in the event of such repayment to the Corporation, such holders of record of the Series G Preferred Stock so redeemed which shall not have made claim against such moneys prior to such repayment to the Corporation shall be deemed to be unsecured creditors of the Corporation for an amount equivalent to the amount deposited as stated above for the redemption of the Series G Preferred Stock and so repaid to the Corporation, but shall in no event be entitled to any interest.

(d)        Subject to the provisions herein, the Board of Directors shall have authority to prescribe from time to time the manner in which the Series G Preferred Stock shall be redeemed.

(e)        Nothing contained herein shall limit any legal right of the Corporation to purchase any shares of the Series G Preferred Stock.

6.         Conversion .  The holders of the Series G Preferred Stock shall not have any rights to convert such Series G Preferred Stock into shares of any other class of capital stock of the Corporation.

7.         Rank .  Notwithstanding anything set forth in the Restated Certificate of Incorporation of the Corporation or this Certificate of Designations to the contrary, the Board of Directors, without the vote of the holders of the Series G Preferred Stock, may authorize and issue additional shares of Junior Stock, Parity Stock or any class or series of stock ranking senior to Series G Preferred Stock as to dividends and upon voluntary or involuntary liquidation, dissolution or winding-up of affairs of the Corporation.

8.         Repurchase .  Subject to the limitations imposed herein, the Corporation may purchase and sell Series G Preferred Stock from time to time to such extent, in such manner, and upon such terms as the Board of Directors may determine; provided , however , that the Corporation shall not use any of its funds for any such purchase when there are reasonable grounds to believe that the Corporation is, or by such purchase would be, rendered insolvent.

9.         Voting Rights .  The holders of Series G Preferred Stock will have no voting rights except as expressly provided by applicable law.

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10.       Unissued or Reacquired Shares .  Shares of Series G Preferred Stock not issued or which have been issued and converted, redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

11.       No Sinking Fund .  Shares of Series G Preferred Stock are not subject to the operation of a sinking fund.

IN WITNESS WHEREOF, WELLS FARGO & COMPANY has caused this Certificate of Designations to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Laurel A. Holschuh, its Secretary, this  30 th  day of December, 2008.

WELLS FARGO & COMPANY


By:      
            /s/ Barbara S. Brett                              
            Barbara S. Brett, Senior Vice President
            and Assistant Treasurer

            /s/ Laurel A. Holschuh
Laurel A. Holschuh, Secretary

 

 

[As filed with the Delaware Secretary of State on December 30, 2008.]

WELLS FARGO & COMPANY

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware

 

CLASS A PREFERRED STOCK, SERIES H
(Without Par Value)

 

WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “Board of Directors”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”), the following resolutions were duly adopted by the Committee pursuant to the written consent of the Committee duly adopted on November 20, 2008, in accordance with Section 141(f) of the General Corporation Law:

RESOLVED, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated October 2, 2008, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

1.                   Designation .  The shares of such series of Preferred Stock shall be designated Class A Preferred Stock, Series H, with no par value and with a liquidation preference of $20,000.00 per share (hereinafter referred to as the

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“Series H Preferred Stock”), and the number of shares constituting such series shall be 50,000, which number may be increased or decreased (but not below the number of shares then outstanding) from time to time by the Board of Directors of the Corporation.  The Series H Preferred Stock shall rank prior to the common stock of the Corporation, $1-2/3 par value per share (the “Common Stock”), and on a parity with each series of the Corporation’s Parity Stock with respect to the payment of dividends and the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation as expressly provided for herein.

2.                   Defined Terms .  As used in this Certificate of Designations, the following terms have the meanings specified below:

“Affiliate” of any specified Person shall mean (i) any other Person which, directly or indirectly, is in Control of, is controlled by or is under common Control with such specified Person, or (ii) any other Person who is a director or executive officer (A) of such specified Person, (B) of any subsidiary of such specified Person, or (C) of any Person described in clause (i) above.

 “Applicable Rate” means, with respect to distributions on each Dividend Period, (i) a rate per annum equal to Three-Month LIBOR plus 1.83%, or (ii) upon the occurrence of an initial Fixed Rate Event and thereafter, a fixed rate equal to the Assigned Fixed Rate.

“Assigned Fixed Rate” means the fixed rate equal to the Applicable Rate on the date of the occurrence of the initial Fixed Rate Event.

“Business Day” means any day other than a Saturday, a Sunday or a day on which banks located in the City of New York, New York or Charlotte, North Carolina generally are authorized or required by law or regulation to close.

“Common Stock” shall have the meaning set forth in Section 1.

“Conditional Exchange” shall mean the exchange of one Depositary Share for each share of WPFC Series B Preferred Securities following the occurrence of a Supervisory Event.

“Control” means the power, direct or indirect, to direct or cause the direction of the management and policies of any Person whether by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Corporation” means Wells Fargo & Company, a Delaware corporation, together with its successors and assigns.

“Depositary Company” shall have the meaning set forth in Section 5(c).

“Depositary Share” means a depositary share representing a one-eight hundredth interest in one share of Series H Preferred Stock.

“Dividend Payment” shall have the meaning set forth in Section 3(a).

“Dividend Payment Date” shall have the meaning set forth in Section 3(a).

“Dividend Period” shall have the meaning set forth in Section 3(a).

“Dividend Record Date” shall have the meaning set forth in Section 3(a).

“Federal Reserve Board” means the United States Board of Governors of the Federal Reserve System.

“Fixed Rate Event” means any Transfer with respect to all or a portion of the WPFC Series B Preferred Securities, subsequent to the initial issuance of the WPFC Series B Preferred Securities, through an initial public offering, private placement or otherwise, to any Person who is not an Affiliate of the Corporation.

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“Initial Dividend Period” shall have the meaning set forth in Section 3(a).

“Junior Stock” means the Common Stock and all other classes and series of securities of the Corporation that rank below the Series H Preferred Stock as to dividend rights and rights upon liquidation, winding up, or dissolution.

“LIBOR Business Day” means any day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealings in foreign exchange and foreign currency deposits) in London and New York.

“LIBOR Determination Date” means, as to each Dividend Period, commencing with the Initial Dividend Period, the date that is two LIBOR Business Days prior to the first day of such Dividend Period.

“OCC” means the United States Office of the Comptroller of the Currency.

“Parity Stock” means any outstanding class or series of Preferred Stock of the Corporation ranking, in accordance to its terms, as to dividends and upon voluntary or involuntary liquidation, dissolution or winding-up of affairs of the Corporation on parity with the Series H Preferred Stock.

“Person” means an individual, corporation, partnership, estate, trust (or portion thereof), association, private foundation, joint stock company or other entity or any government or agency or political subdivision thereof and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.

“Preferred Stock” means the Corporation’s preferred stock, no par value, of which 20,000,000 shares are authorized as of the date hereof.

“Redemption Date” shall have the meaning set forth in Section 5(c).

“Redemption Price” shall have the meaning set forth in Section 5(a).

“Regulatory Capital Event” means a determination by the Corporation, based on the receipt by the Corporation of an opinion or letter of counsel, rendered by a law firm experienced in such matters, in form and substance satisfactory to the Corporation, which states that there is a significant risk that the Series H Preferred Stock will no longer constitute Tier 1 capital of the Corporation for purposes of the capital adequacy regulations or guidelines or policies of the Federal Reserve Board, or its successor, as the Corporation’s primary Federal banking regulator, as a result of (i) any amendment to, clarification of, or change in applicable laws or related regulations, guidelines, policies or official interpretations thereof, or (ii) any official administrative pronouncement or judicial decision interpreting or applying such laws or related regulations, guidelines, policies or official interpretations thereof.

“Series H Preferred Stock” shall have the meaning set forth in Section 1.

“Supervisory Event” means the occurrence of one of the following:  (i) Wachovia Bank becomes “undercapitalized” under the OCC’s prompt corrective action regulations, (ii) Wachovia Bank is placed into conservatorship or receivership, or (iii) the OCC, in its sole discretion, anticipates Wachovia Bank becoming “undercapitalized” in the near term or takes supervisory action that limits the payment of dividends by WPFC and in connection therewith the OCC directs an exchange of the WPFC Series B Preferred Securities for the Series H Preferred Stock.

“Three-Month LIBOR” means, with respect to any LIBOR Determination Date, a rate determined on the basis of the offered rates for three-month U.S. dollar deposits of not less than a principal amount equal to that which is representative for a single transaction in such market at such time, commencing on the second LIBOR Business Day immediately following such LIBOR Determination Date, which appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date.

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If on any LIBOR Determination Date no rate appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, the Corporation shall on such LIBOR Determination Date require four major reference banks in the London interbank market selected by the Corporation to provide the Corporation with a quotation of the rate at which three-month deposits in U.S. dollars, commencing on the second LIBOR Business Day immediately following such LIBOR Determination Date, are offered by them to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time.  If at least two such quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations as calculated by the Corporation.  If fewer than two quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., London time, on such LIBOR Determination Date by three major banks in the London inter-bank market selected by the Corporation for loans in U.S. dollars to leading European banks, having a three-month maturity commencing on the second LIBOR Business Day immediately following such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time; provided, however, that, if the banks selected as aforesaid by the Corporation are not quoting as mentioned in this sentence, Three-Month LIBOR for such LIBOR Determination Date will be the Three-Month LIBOR determined with respect to the immediately preceding Dividend Period.

“Transfer” means any sale, transfer, gift, assignment, devise or other disposition of the WPFC Series B Preferred Securities, including, but not limited to, (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of such securities, or (ii) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for WPFC Series B Preferred Securities, whether voluntary or involuntary, whether of record or beneficially and whether by operation of law or otherwise.

“Wachovia Bank” means Wachovia Bank, National Association, a national banking association, or its successors and assigns.

“WPFC” means Wachovia Preferred Funding Corp., a Delaware corporation.

“WPFC Series B Preferred Securities” means the Floating Rate Non-cumulative Series B Preferred Securities, par value $0.01, liquidation preference $25.00 per share, of WPFC.

3.                   Dividends .  (a) The dividend rate for the Series H Preferred Stock shall be the Applicable Rate per share per annum of the initial liquidation preference of $20,000.00 per share, accruing from the effective date of the Conditional Exchange to and including the last day of March, the last day of June, the last day of September or the last day of December, whichever occurs first, after issuance of the Series H Preferred Stock following the Conditional Exchange (such period being the “Initial Dividend Period”) and then for each quarterly period thereafter, commencing on April 1, July 1, October 1 or January 1, as the case may be, of each year and ending on and including the day next preceding the first day of the next such quarterly period (each such period, including the Initial Dividend Period, being a “Dividend Period”), payable to holders of record of the Series H Preferred Stock on the respective record dates fixed for such purpose by the Board of Directors in advance of payment of such dividend, which shall be the 15th calendar day of the last calendar month of the applicable Dividend Period (each such date, a “Dividend Record Date”).  If such Dividend Record Date is not a Business Day, then the Dividend Record Date for the applicable Dividend Period shall be the first Business Day immediately following the 15th calendar day of the last calendar month of the applicable Dividend Period, except if such Business Day falls in the calendar month following the last calendar month of the applicable Dividend Period, the Dividend Record Date shall be the last Business Date immediately preceding the 15th calendar day of the last calendar month of the applicable Dividend Period.  Until no longer outstanding, the holders of the Series H Preferred Stock shall be entitled to receive such cash dividends, and the Corporation shall be bound to pay the same, but only as, if and when declared by the Board of Directors, out of funds legally available for the payment thereof (each such payment, a “Dividend Payment”), on March 31, June 30, September 30 and December 31 of each year (each a “Dividend Payment Date”) for the respective Dividend Period ending on such date; provided, however, that the Dividend Payment for the Initial Dividend Period shall include any unpaid dividends accrued from the payment date of the last dividend paid prior to such date on the WPFC Series B Preferred Securities.  If a Dividend Payment Date is not a Business Day, the Dividend Payment due on such Dividend Payment Date shall be paid on the first Business Day immediately following such Dividend Payment Date, except if such Business Day falls in a different calendar year than such Dividend Payment Date, such Dividend Payment shall be paid on the last Business Date immediately preceding such Dividend Payment Date.  The

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amount of dividends payable for the Initial Dividend Period or any period shorter than a full Dividend Period shall be computed on the basis of a 360-day year having 30-day months and the actual number of days elapsed in the period.

(b)  Dividends shall be non-cumulative.  If the Board of Directors fails to or chooses not to declare a dividend on the Series H Preferred Stock for a Dividend Period, then holders of the Series H Preferred Stock shall have no right to receive a dividend for that Dividend Period, and the Corporation shall have no obligation to pay a dividend for that Dividend Period, whether or not dividends are declared and paid for any future Dividend Period, with respect to either the Series H Preferred Stock, other series of preferred stock of the Corporation, or the Common Stock.

(c)  Holders of Series H Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full dividends for each Dividend Period, as herein provided, on the Series H Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any Dividend Payment or Dividend Payments or failure to make any Dividend Payment or Dividend Payments.

(d)  Unless full dividend payments on the Series H Preferred Stock have been declared and paid or declared and a sum sufficient for such payment has been set apart for payment for the immediately preceding Dividend Period, no dividends shall be declared or paid or set aside for payment and no other distribution shall be declared or made or set aside for payment upon any shares of Junior Stock, nor shall shares of Junior Stock be redeemed, purchased, or otherwise acquired for any consideration, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation, except by conversion into or exchange for other Junior Stock.

4.                   Liquidation Preference .  (a) The amount payable on the Series H Preferred Stock in the event of any voluntary or involuntary liquidation, dissolution, or winding-up of affairs of the Corporation shall be $20,000.00 per share, plus authorized, declared but unpaid dividends up to the date of such liquidation, dissolution, or winding-up of affairs of the Corporation, and no more before any distribution shall be made to the holders of any shares of Junior Stock.  The holders of Series H Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution, or winding-up of affairs of the Corporation other than what is expressly provided for in this Section 4(a).

(b)  If the amounts available for distribution in respect of the Series H Preferred Stock and any Parity Stock are not sufficient to satisfy the full liquidation rights of all of the outstanding Series H Preferred Stock and any Parity Stock, then the holders of the Series H Preferred Stock and any Parity Stock shall share ratably in any such distribution of assets in proportion to the full respective liquidation preference to which they are entitled.

(c)  The sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a dissolution, liquidation or winding up of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or Person or the merger, consolidation or any other business combination transaction of any other corporation or Person into or with the Corporation be deemed to be a dissolution, liquidation or winding up of the Corporation.

5.                   Redemption .  (a) The Series H Preferred Stock shall not be redeemable by the Corporation prior to the fifth anniversary of the initial issuance of the WPFC Series B Preferred Securities, except upon the occurrence of a Regulatory Capital Event.  On or after the fifth anniversary of the initial issuance of the WPFC Series B Preferred Securities, the Corporation may, with the prior approval of the OCC, redeem the Series H Preferred Stock for cash, in whole or in part, at a price equal to $20,000.00 per share of Series H Preferred Stock, plus authorized, declared, but unpaid dividends to the Redemption Date, without interest, on shares redeemed (collectively, the “Redemption Price”) from funds legally available for such purpose.

(b)  On or after the fifth anniversary of the initial issuance of the WPFC Series B Preferred Securities, the Corporation, at the option of the Board of Directors, may at any time redeem fewer than all the outstanding Series H Preferred Stock.  In that event, the shares to be redeemed shall be determined by lot, pro rata, or by such other method as the Board of Directors in its sole discretion determines to be equitable.

(c)  Prior to the fifth anniversary of the initial issuance of the WPFC Series B Preferred Securities, but only upon or after the occurrence of a Regulatory Capital Event, the Corporation, at the option of the Board of Directors,

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may redeem the outstanding Series H Preferred Stock, in whole, but not in part, for the Redemption Price from funds legally available for such purpose.

(d)  Not more than 60 days and not less than 30 days prior to the date established for such redemption by the Board of Directors (the “Redemption Date”), notice of the proposed redemption shall be mailed to the holders of record of the Series H Preferred Stock to be redeemed, such notice to be addressed to each such stockholder at his last known address shown on the records of the Corporation, and the time of mailing such notice shall be deemed to be the time of the giving thereof.  On or after the Redemption Date, the Series H Preferred Stock called for redemption shall automatically, and without further action on the part of the holder thereof, be deemed to have been redeemed and the former holder thereof shall thereupon only be entitled to receive payment of the Redemption Price.  If such notice of redemption shall have been given as aforesaid, and if on or before the Redemption Date the funds necessary for the redemption shall have been set aside so as to be available therefore, then the dividends thereon shall cease to accrue after the Redemption Date and all rights with respect to the Series H Preferred Stock so called for redemption shall forthwith after such Redemption Date cease, except the right of the holders to receive the Redemption Price, without interest.  If such notice of redemption of all or any part of the Series H Preferred Stock shall have been mailed as aforesaid and the Corporation shall thereafter deposit money for the payment of the Redemption Price pursuant thereto with any bank or trust company (the “Depositary Company”), including any Affiliate of the Corporation, selected by the Board of Directors for that purpose, to be applied to such redemption, then from and after the making of such deposit, such Series H Preferred Stock shall not be deemed to be outstanding for any purpose, and the rights of the holders thereof shall be limited to the rights to receive payment of the Redemption Price, without interest but including any declared, authorized, but unpaid, dividends to the Redemption Date, from the Depositary Company, if applicable, upon endorsement, if required, and surrender of the certificates therefore.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company, the interest, if any, allowed on such moneys deposited with it, and the holders of any Series H Preferred Stock so redeemed shall have no claim to any such interest.  Any moneys so deposited and remaining unclaimed at the end of three years from the Redemption Date shall, if thereafter requested by resolution of the Board of Directors, be repaid to the Corporation, and in the event of such repayment to the Corporation, such holders of record of the Series H Preferred Stock so redeemed which shall not have made claim against such moneys prior to such repayment to the Corporation shall be deemed to be unsecured creditors of the Corporation for an amount equivalent to the amount deposited as stated above for the redemption of the Series H Preferred Stock and so repaid to the Corporation, but shall in no event be entitled to any interest.

(e)  Subject to the provisions herein, the Board of Directors shall have authority to prescribe from time to time the manner in which the Series H Preferred Stock shall be redeemed.

(f)  Nothing contained herein shall limit any legal right of the Corporation to purchase any shares of the Series H Preferred Stock.

6.                   Conversion .  The holders of the Series H Preferred Stock shall not have any rights to convert such Series H Preferred Stock into shares of any other class of capital stock of the Corporation.

7.                   Rank .  Notwithstanding anything set forth in the Restated Certificate of Incorporation of the Corporation or this Certificate of Designations to the contrary, the Board of Directors, without the vote of the holders of the Series H Preferred Stock, may authorize and issue additional shares of Junior Stock, Parity Stock or any class or series of stock ranking senior to Series H Preferred Stock as to dividends and upon voluntary or involuntary liquidation, dissolution or winding-up of affairs of the Corporation.

8.                   Repurchase .  Subject to the limitations imposed herein, the Corporation may purchase and sell Series H Preferred Stock from time to time to such extent, in such manner, and upon such terms as the Board of Directors may determine; provided, however, that the Corporation shall not use any of its funds for any such purchase when there are reasonable grounds to believe that the Corporation is, or by such purchase would be, rendered insolvent.

9.                   Voting Rights .  The holders of Series H Preferred Stock will have no voting rights except as expressly provided by applicable law.

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10.               Unissued or Reacquired Shares .  Shares of Series H Preferred Stock not issued or which have been issued and converted, redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

11.               No Sinking Fund .  Shares of Series H Preferred Stock are not subject to the operation of a sinking fund.

IN WITNESS WHEREOF, WELLS FARGO & COMPANY has caused this Certificate of Designations to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Laurel A. Holschuh, its Secretary, this  30 th  day of December, 2008.

 

WELLS FARGO & COMPANY


By:    
/s/ Barbara S. Brett                         
Barbara S. Brett, Senior Vice President
and Assistant Treasurer

            /s/ Laurel A. Holschuh            
Laurel A. Holschuh, Secretary

 

 

 

 [As filed with the Delaware Secretary of State on December 30, 2008.]

WELLS FARGO & COMPANY

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware

 

CLASS A PREFERRED STOCK, SERIES I
(Without Par Value)

 

WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “Board of Directors”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”), the following resolutions were duly adopted by the Committee pursuant to the written consent of the Committee duly adopted on November 20, 2008, in accordance with Section 141(f) of the General Corporation Law:

RESOLVED, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated October 2, 2008, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

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Section 1.         Designation .  The shares of such series of Preferred Stock shall be designated Class A Preferred Stock, Series I, with no par value and a liquidation preference of $100,000 per share (hereinafter referred to as the “Series I Preferred Stock”).  Each share of Series I Preferred Stock shall be identical in all respects to every other share of Series I Preferred Stock.  Series I Preferred Stock will rank equally with Parity Stock, if any, and will rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Section 2.         Number of Shares .  The number of shares of Series I Preferred Stock shall be 25,010.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of preferred stock) or decreased (but not below the number of shares of Series I Preferred Stock then outstanding) by the board of directors.  Shares of Series I Preferred Stock that are redeemed, purchased or otherwise acquired by the Corporation shall be cancelled and shall revert to authorized but unissued shares of preferred stock undesignated as to series.  The Corporation shall have the authority to issue fractional shares of Series I Preferred Stock.

Section 3.         Definitions .  As used herein with respect to Series I Preferred Stock:

“Business Day” means each Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in Charlotte, North Carolina or New York, New York are not authorized or obligated by law, regulation or executive order to close.

“Depositary Company” shall have the meaning set forth in Section 6(d).

“Dividend Payment Date” shall have the meaning set forth in Section 4(a).

“Dividend Period” shall have the meaning set forth in Section 4(a).

“DTC” means The Depositary Trust Company, together with its successors and assigns.

“Junior Stock” means the Corporation’s common stock and any other class or series of stock of the Corporation hereafter authorized over which Series I Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Corporation.

“London Banking Day” means any day on which commercial banks are open for general business (including dealings in deposits in U.S. dollars) in London.

“Parity Stock” means any other class or series of stock of the Corporation that ranks on a par with Series I Preferred Stock in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Corporation.

“Series I Preferred Stock” shall have the meaning set forth in Section 1.

“Telerate Page 3750” means the display page so designated on the Moneyline/Telerate Service (or such other page as may replace that page on that service, or such other service as may be nominated as the information vendor, for the purpose of displaying rates or prices comparable to London Interbank Offered Rate for U.S. dollar deposits).

“Three-Month LIBOR” means, with respect to any Dividend Period, the rate (expressed as a percentage per annum ) for deposits in U.S. dollars for a three-month period commencing on the first day of that Dividend Period that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the second London Banking Day preceding the first day of that Dividend Period.  If such rate does not appear on Telerate Page 3750, Three-Month LIBOR will be determined on the basis of the rates at which deposits in U.S. dollars for a three-month period commencing on the first day of that Dividend Period and in a principal amount of not less than $1,000,000 are offered to prime banks in the London interbank market by four major banks in the London interbank market selected by the Corporation, at approximately 11:00 a.m., London time on the second London Banking Day preceding the first day of that Dividend Period.  Wachovia Bank, National Association, as calculation agent for the Preferred Stock, will request the principal London office of each of such banks to provide a quotation of its rate.  If at least two such quotations are provided, Three-Month LIBOR with respect to that Dividend Period will be the arithmetic mean (rounded upward if necessary to the nearest .00001 of 1%) of such

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quotations.  If fewer than two quotations are provided, Three-Month LIBOR with respect to that Dividend Period will be the arithmetic mean (rounded upward if necessary to the nearest .00001 of 1%) of the rates quoted by three major banks in New York City selected by the calculation agent, at approximately 11:00 a.m., New York City time, on the first day of that Dividend Period for loans in U.S. dollars to leading European banks for a three-month period commencing on the first day of that Dividend Period and in a principal amount of not less than $1,000,000.  However, if the banks selected by the calculation agent to provide quotations are not quoting as described above, Three-Month LIBOR for that Dividend Period will be the same as Three-Month LIBOR as determined for the previous Dividend Period, or in the case of the first Dividend Period, the most recent rate that could have been determined in accordance with the first sentence of this paragraph had Series I Preferred Stock been outstanding.  The calculation agent’s establishment of Three-Month LIBOR and calculation of the amount of dividends for each Dividend Period will be on file at the principal offices of the Corporation, will be made available to any holder of Series I Preferred Stock upon request and will be final and binding in the absence of manifest error.

Section 4.         Dividends

(a)        Rate .  Holders of Series I Preferred Stock shall be entitled to receive, when, as and if declared by the board of directors, but only out of funds legally available therefor, non-cumulative cash dividends on the liquidation preference of $100,000 per share of Series I Preferred Stock, and no more, payable:  (1) if the Series I Preferred Stock is issued prior to March 15, 2011, semi-annually in arrears on each March 15 and September 15 through March 15, 2011 and (2) from and including the later of March 15, 2011 and the date of issuance, quarterly in arrears on each March 15, June 15, September 15 and December 15.  If any date prior to March 15, 2011 specified pursuant to the preceding sentence is not a Business Day, then dividends will be payable on the first Business Day following such date, without accrual to the actual payment date; if any date on or after March 15, 2011 specified pursuant the preceding sentence is not a Business Day, then dividends will be payable on the first Business Day following such date and dividends shall accrue to the actual payment date.  The term “Dividend Payment Date” means each of the following dates occurring after the date of issuance of the Series I Preferred Stock:  (i) each March 15 and September 15 through September 15, 2010 and (ii) each March 15, June 15, September 15 and December 15, or if any such day in the case of this clause (ii) is not a Business Day, the next Business Day.  The term “Dividend Period” means each period from and including a Dividend Payment Date (or the date of issuance of the Series I Preferred Stock for the first Dividend Payment Date) to but excluding the next Dividend Payment Date.  For any Dividend Period ending prior to the Dividend Payment Date in March 2011 dividends will accrue at a rate per annum equal to 5.80%, and for any Dividend Period ending after the Dividend Payment Date in March 2011, dividends will accrue at a rate per annum equal to the greater of (x) Three-Month LIBOR for the related Dividend Period plus 0.93% and (y) 5.56975%.  The amount of dividends payable for any Dividend Period (1) ending prior to the Dividend Payment Date in March 2011 shall be computed on the basis of a 360-day year consisting of twelve 30-day months and (2) beginning on or after the Dividend Payment Date in March 2011 shall be computed on the basis of a 360-day year and the actual number of days elapsed.

(b)        Non-Cumulative Dividends .  Dividends on shares of Series I Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series I Preferred Stock on any Dividend Payment Date are not declared and paid, in full or otherwise, on such Dividend Payment Date, then such unpaid dividends shall not cumulate and shall cease to accrue and be payable and the Corporation shall have no obligation to pay, and the holders of Series I Preferred Stock shall have no right to receive, dividends accrued for the Dividend Period ending immediately prior to such Dividend Payment Date after such Dividend Payment Date or to pay interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Series I Preferred Stock, Parity Stock, Junior Stock or any other class or series of authorized preferred stock of the Corporation.  Holders of Series I Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full dividends for each Dividend Period on the Series I Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any Dividend Payment or Dividend Payments or failure to make any Dividend Payment or Dividend Payments.

(c)        Priority of Dividends .  So long as any share of Series I Preferred Stock remains outstanding, (i) no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on any Junior Stock, other than a dividend payable solely in Junior Stock, (ii) no shares of Junior Stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or

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indirectly (other than as a result of a reclassification of Junior Stock for or into Junior Stock, or the exchange or conversion of one share of Junior Stock for or into another share of Junior Stock, and other than through the use of the proceeds of a substantially contemporaneous sale of other shares of Junior Stock), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation, and (iii) no shares of Parity Stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series I Preferred Stock and such Parity Stock except by conversion into or exchange for Junior Stock, unless full dividends on all outstanding shares of Series I Preferred Stock for the then-current Dividend Period have been paid in full or declared and set aside for payment.  The foregoing shall not restrict the ability of the Corporation, or any affiliate of the Corporation, to engage in any market-making transactions in the Junior Stock or Parity Stock in the ordinary course of business.  When dividends are not paid in full upon the shares of Series I Preferred Stock and any Parity Stock, all dividends declared upon shares of Series I Preferred Stock and any Parity Stock shall be declared on a proportional basis so that the amount of dividends declared per share will bear to each other the same ratio that accrued dividends for the then-current Dividend Period per share on Series I Preferred Stock, and accrued dividends, including any accumulations on Parity Stock, bear to each other.  No interest will be payable in respect of any dividend payment on such offered stock that may be in arrears.  If the board of directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Corporation will provide written notice to the holders of the Series I Preferred Stock prior to such date.  Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the board of directors may be declared and paid on any Junior Stock from time to time out of any funds legally available therefor, and the shares of Series I Preferred Stock shall not be entitled to participate in any such dividend.

Section 5.         Liquidation Rights

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series I Preferred Stock shall be entitled, before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of any Junior Stock and subject to the rights of the holders of any class or series of securities ranking senior to or on parity with Series I Preferred Stock upon liquidation and the rights of the Corporation’s depositors and other creditors, to receive in full a liquidation preference in an amount equal to $100,000 per share, plus an amount equal to all accrued and unpaid dividends for the then-current Dividend Period to the date of liquidation.  The holder of Series I Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b)        Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the liquidation preference to all holders of Series I Preferred Stock and the liquidation preferences of any Parity Stock to all holders of such Parity Stock, the amounts paid to the holders of Series I Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preferences of Series I Preferred Stock and all such Parity Stock.

(c)        Residual Distributions .  If the liquidation preference has been paid in full to all holders of Series I Preferred Stock and all holders of any Parity Stock, the holders of Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)        Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.         Redemption

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(a)        Optional Redemption .  So long as full dividends for all outstanding shares of Series I Preferred Stock for the then-current Dividend Period have been paid or declared and a sum sufficient for the payment thereof set aside, the Corporation, at the option of the board of directors, may redeem in whole or in part the shares of Series I Preferred Stock at the time outstanding, at any time on or after the later of March 15, 2011 and the date of original issuance of the Series I Preferred Stock, upon notice given as provided in Subsection (b) below, at the redemption price in effect at the redemption date as provided in this Section 6.  The redemption price for shares of Series I Preferred Stock shall be $100,000 per share plus dividends that have been declared but not paid plus accrued and unpaid dividends for the then-current Dividend Period to the redemption date.

(b)        Notice of Redemption .  Notice of every redemption of shares of Series I Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Corporation.  Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption.  Notwithstanding the foregoing, if the Series I Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC.  Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series I Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series I Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series I Preferred Stock to be redeemed; (iii) the redemption price; (iv) the place or places where the Series I Preferred Stock are to be redeemed; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date.

(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series I Preferred Stock at the time outstanding, the shares of Series I Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series I Preferred Stock in proportion to the number of Series I Preferred Stock held by such holders or by lot or in such other manner as the board of directors may determine to be fair and equitable.  Subject to the provisions hereof, the board of directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series I Preferred Stock shall be redeemed from time to time.

(d)        Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the board of directors (the “Depositary Company”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company at any time after the redemption date the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any such interest.  Any funds so deposited and unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, and in the event of such repayment to the Corporation, the holders of record of the shares so called for redemption shall be deemed to be unsecured creditors of the Corporation for an amount equivalent to the amount deposited as stated above for the redemption of such shares and so repaid to the Corporation, but shall in no event be entitled to any interest.

Section 7.         Voting Rights .  The holders of Series I Preferred Stock will have no voting rights and will not be entitled to elect any directors, except as expressly provided by law.

Section 8.         Conversion .  The holders of Series I Preferred Stock shall not have any rights to convert such Series I Preferred Stock into shares of any other class of capital stock of the Corporation.

Section 9.         Rank .  Notwithstanding anything set forth in the Restated Certificate  of Incorporation of the Corporation or this Certificate of Designations to the contrary, the board of directors, without the vote of the holders of

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the Series I Preferred Stock, may authorize and issue additional shares of Junior Stock, Parity Stock or any class of securities ranking senior to the Series I Preferred Stock as to dividends and upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Section 10.       Repurchase .  Subject to the limitations imposed herein, the Corporation may purchase and sell Series I Preferred Stock from time to time to such extent, in such manner, and upon such terms as the board of directors may determine; provided, however, that the Corporation shall not use any of its funds for any such purchase when there are reasonable grounds to believe that the Corporation is, or by such purchase would be, rendered insolvent.

Section 11.       Unissued or Reacquired Shares .  Shares of Series I Preferred Stock not issued or which have been issued and converted, redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 12.       No Sinking Fund .  Shares of Series I Preferred Stock are not subject to the operation of a sinking fund.

IN WITNESS WHEREOF, WELLS FARGO & COMPANY has caused this Certificate of Designations to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Laurel A. Holschuh, its Secretary, this  30 th  day of December, 2008.

WELLS FARGO & COMPANY


By:      
            /s/ Barbara S. Brett                              
            Barbara S. Brett, Senior Vice President
            and Assistant Treasurer

            /s/ Laurel A. Holschuh            
Laurel A. Holschuh, Secretary

 

 

[As filed with the Delaware Secretary of State on December 30, 2008.]

WELLS FARGO & COMPANY

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware

 

8.00% NON-CUMULATIVE PERPETUAL CLASS A PREFERRED STOCK, SERIES J
(Without Par Value)

 

WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “Board of Directors”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”), the

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following resolutions were duly adopted by the Committee pursuant to the written consent of the Committee duly adopted on November 20, 2008, in accordance with Section 141(f) of the General Corporation Law:

RESOLVED, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated October 2, 2008, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

Section 1.         Designation .  The shares of such series of Preferred Stock shall be designated 8.00% Non-Cumulative Perpetual Class A Preferred Stock, Series J, with no par value and a liquidation preference of $1,000 per share (hereinafter referred to as the “ Series J Preferred Stock ”).  Each share of Series J Preferred Stock shall be identical in all respects to every other share of Series J Preferred Stock.  Series J Preferred Stock will rank equally with Parity Stock, if any, and will rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Section 2.         Number of Shares .  The number of shares of Series J Preferred Stock shall be 2,300,000.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series J Preferred Stock then outstanding) by the board of directors.  Shares of Series J Preferred Stock that are redeemed, purchased or otherwise acquired by the Corporation shall be cancelled and shall revert to authorized but unissued shares of Preferred Stock undesignated as to series.  The Corporation shall have the authority to issue fractional shares of Series J Preferred Stock.

Section 3.         Definitions .  As used herein with respect to Series J Preferred Stock:

Business Day ” means each Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in Charlotte, North Carolina or New York, New York are not authorized or obligated by law, regulation or executive order to close.

Depositary Company ” shall have the meaning set forth in Section 6(d).

Dividend Payment Date ” shall have the meaning set forth in Section 4(a).

Dividend Period ” shall have the meaning set forth in Section 4(a).

DTC ” means The Depositary Trust Company, together with its successors and assigns.

Junior Stock ” means the Corporation’s common stock and any other class or series of stock of the Corporation hereafter authorized over which Series J Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Parity Stock ” means any other class or series of stock of the Corporation that ranks on a par with Series J Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Series J Preferred Stock ” shall have the meaning set forth in Section 1.

Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series J Preferred Stock.

Section 4.         Dividends. 

(a)        Rate .  Holders of Series J Preferred Stock shall be entitled to receive, when, as and if declared by the board of directors, but only out of funds legally available therefor, non-cumulative cash dividends on the liquidation

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preference of $1,000 per share of Series J Preferred Stock, and no more, payable quarterly in arrears on each March 15, June 15, September 15 and December 15.  If any date specified pursuant the preceding sentence is not a Business Day, then dividends will be payable on the first Business Day following such date and dividends shall accrue to the actual payment date.  The term “ Dividend Payment Date ” means March 15, June 15, September 15 and December 15, or if any such day in the case of this clause is not a Business Day, the next Business Day.  The term “ Dividend Period ” means each period from and including a Dividend Payment Date (or the date of issuance of the Series J Preferred Stock for the first Dividend Payment Date) to but excluding the next Dividend Payment Date; provided that the first Dividend Period shall be deemed to have commenced on December 15, 2008.  Dividends will accrue at a rate per annum equal to 8.00%.  The amount of dividends payable for any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months.

(b)        Non-Cumulative Dividends .  Dividends on shares of Series J Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series J Preferred Stock on any Dividend Payment Date are not declared and paid, in full or otherwise, on such Dividend Payment Date, then such unpaid dividends shall not cumulate and shall cease to accrue and be payable and the Corporation shall have no obligation to pay, and the holders of Series J Preferred Stock shall have no right to receive, dividends accrued for the Dividend Period ending immediately prior to such Dividend Payment Date after such Dividend Payment Date, whether or not dividends are declared for any subsequent Dividend Period with respect to Series J Preferred Stock, Parity Stock, Junior Stock or any other class or series of authorized preferred stock of the Corporation.  Holders of Series J Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full dividends for each Dividend Period on the Series J Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any Dividend Payment or Dividend Payments or failure to make any Dividend Payment or Dividend Payments.

(c)        Priority of Dividends .  So long as any share of Series J Preferred Stock remains outstanding, unless full dividends on all outstanding shares of Series J Preferred Stock for the then-current Dividend Period have been paid in full or declared and set aside for payment, (i) no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on any Junior Stock, other than a dividend payable solely in Junior Stock, (ii) no shares of Junior Stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than as a result of a reclassification of Junior Stock for or into Junior Stock, or the exchange or conversion of one share of Junior Stock for or into another share of Junior Stock, and other than through the use of the proceeds of a substantially contemporaneous sale of other shares of Junior Stock), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation, and (iii) no shares of Parity Stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than as a result of a reclassification of Parity Stock for or into Parity Stock or Junior Stock, or the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or for or into Junior Stock, and other than through the use of the proceeds of a substantially contemporaneous sale of other shares of Parity Stock or Junior Stock), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation, otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series J Preferred Stock and such Parity Stock.  The foregoing shall not restrict the ability of the Corporation, or any affiliate of the Corporation, to engage in any market-making transactions in the Junior Stock or Parity Stock in the ordinary course of business.  When dividends are not paid in full upon the shares of Series J Preferred Stock and any Parity Stock, all dividends declared upon shares of Series J Preferred Stock and any Parity Stock shall be declared on a proportional basis so that the amount of dividends declared per share will bear to each other the same ratio that accrued dividends for the then-current Dividend Period per share on Series J Preferred Stock, and accrued dividends, including any accumulations, on Parity Stock, bear to each other.  No interest will be payable in respect of any dividend payment on such Parity Stock that may be in arrears.  If the board of directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Corporation will provide written notice to the holders of the Series J Preferred Stock prior to such date.  Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the board of directors may be declared and paid on any Junior Stock from time to time out of any funds legally available therefor, and the shares of Series J Preferred Stock shall not be entitled to participate in any such dividend.

Section 5.         Liquidation Rights.

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series J Preferred Stock shall be entitled, before any distribution or payment

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out of the assets of the Corporation may be made to or set aside for the holders of any Junior Stock and subject to the rights of the holders of any class or series of securities ranking senior to or on parity with Series J Preferred Stock upon liquidation and the rights of the Corporation’s depositors and other creditors, to receive in full a liquidation preference in an amount equal to $1,000 per share, plus an amount equal to all declared and unpaid dividends for the then-current Dividend Period to the date of liquidation.  The holder of Series J Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b)        Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the liquidation preference to all holders of Series J Preferred Stock and the liquidation preferences of any Parity Stock to all holders of such Parity Stock, the amounts paid to the holders of Series J Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preferences of Series J Preferred Stock and all such Parity Stock.

(c)        Residual Distributions .  If the liquidation preference has been paid in full to all holders of Series J Preferred Stock and all holders of any Parity Stock, the holders of Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)        Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.         Redemption. 

(a)        Optional Redemption .  So long as full dividends for all outstanding shares of Series J Preferred Stock for the then-current Dividend Period have been paid or declared and a sum sufficient for the payment thereof set aside, and subject to applicable regulatory approvals, the Corporation, at the option of the board of directors, may redeem in whole or in part the shares of Series J Preferred Stock at the time outstanding, on any Dividend Payment Date on or after December 15, 2017 upon notice given as provided in Subsection (b) below, at the redemption price in effect at the redemption date as provided in this Section 6.  The redemption price for shares of Series J Preferred Stock shall be $1,000 per share plus declared and unpaid dividends for the then-current Dividend Period, without interest.

(b)        Notice of Redemption .  Notice of every redemption of shares of Series J Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Corporation.  Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption.  Notwithstanding the foregoing, if the Series J Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC.  Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series J Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series J Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series J Preferred Stock to be redeemed; (iii) the redemption price; and (iv) the place or places where the Series J Preferred Stock are to be redeemed.

(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series J Preferred Stock at the time outstanding, the shares of Series J Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series J Preferred Stock in proportion to the number of Series J Preferred Stock held by such holders or by lot or in such other manner as the board of directors may determine to be fair and equitable.  Subject to the provisions hereof, the board of directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series J Preferred Stock shall be redeemed from time to time.

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(d)        Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the board of directors (the “ Depositary Company ”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company at any time after the redemption date the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any such interest.  Any funds so deposited and unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, and in the event of such repayment to the Corporation, the holders of record of the shares so called for redemption shall be deemed to be unsecured creditors of the Corporation for an amount equivalent to the amount deposited as stated above for the redemption of such shares and so repaid to the Corporation, but shall in no event be entitled to any interest.

Section 7.         Voting Rights .  The holders of Series J Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by applicable law.

(a)        Right To Elect Two Directors Upon Nonpayment Events .  If and whenever the dividends on the Series J Preferred Stock or any class or series of Voting Parity Stock have not been declared and paid in an aggregate amount equal to full dividends for at least six Dividend Periods or their equivalent (whether or not consecutive) (a “ Nonpayment Event ”), the number of directors then constituting the board of directors shall automatically be increased by two and the holders of Series J Preferred Stock, voting together as a single and separate class with the holders of any outstanding shares of Voting Parity Stock, shall be entitled to elect the two additional directors (the “ Preferred Stock Directors ”) by a plurality of the votes cast, provided that it shall be a qualification for election for any such Preferred Stock Director that the election of such director shall not cause the Corporation to violate the corporate governance requirement of the New York Stock Exchange (or any other securities exchange or other trading facility on which securities of the Corporation may then be listed or traded) that listed or traded companies must have a majority of independent directors, and provided further that the board of directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).

In the event that the holders of Series J Preferred Stock and such other holders of Voting Parity Stock shall be entitled to vote for the election of the Preferred Stock Directors following a Nonpayment Event, such directors shall be initially elected following such Nonpayment Event at the Corporation’s next annual meeting of shareholders, and, except as provided below, at each subsequent annual meeting of shareholders of the Corporation.

When dividends have been paid in full on the Series J Preferred Stock and any and all Voting Parity Stock for at least four consecutive Dividend Periods or their equivalent after a Nonpayment Event, then the right of the holders of Series J Preferred Stock to elect the Preferred Stock Directors shall cease (but subject always to revesting of such voting rights in the case of any future Nonpayment Event), and, if and when all rights of holders of Series J Preferred Stock and Voting Parity Stock to elect the Preferred Stock Directors shall have ceased, the terms of office of all the Preferred Stock Directors shall forthwith terminate and the number of directors constituting the board of directors shall automatically be reduced accordingly.

Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series J Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a single and separate class).  In case any vacancy shall occur among the Preferred Stock Directors, a successor shall be elected by a plurality of the votes cast by the holders of Series J Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a single and separate class.  The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the board of directors for a vote.

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(b)        Other Voting Rights .  So long as any shares of Series J Preferred Stock are outstanding, in addition to any other vote or consent of shareholders required by law or by the certificate of incorporation, the vote or consent of the holders of at least 66 2/3% of the shares of Series J Preferred Stock at the time outstanding and entitled to vote thereon, voting separately as a single class with all other series of preferred stock ranking equally with the Series J Preferred Stock and entitled to vote thereon, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating any of the following actions, whether or not such approval is required by Delaware law:

(i)               Issuance of Senior Stock .  The issuance of any class or series of preferred stock of the Corporation ranking senior to the Series J Preferred Stock with respect to either the payment of dividends or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation;

(ii)              Amendment Affecting Series J Preferred Stock .  Any amendment, alteration or repeal of any provision of the certificate of incorporation or bylaws so as to adversely affect the rights, preferences, privileges or voting powers of the Series J Preferred Stock;

(iii) Authorization of Senior Stock .  Any amendment or alteration of any provision of the certificate of incorporation or bylaws to authorize, create or increase the authorized amount of, any shares of, or any securities convertible into shares of, any class or series of capital stock of the Corporation ranking senior to the Series J Preferred Stock with respect to either the payment of dividends or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; or

(iv)             Share Exchanges, Reclassifications, Mergers and Consolidations .  Any consummation of a binding share exchange or reclassification involving the Series J Preferred Stock, or of a merger or consolidation of the Corporation with another corporation or other entity, unless in each case (x) the shares of Series J Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting corporation, are converted into or exchanged for preference securities of the surviving or resulting corporation or a corporation controlling such corporation, and (y) such Series J Preferred Stock shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series J Preferred Stock, taken as a whole;

provided however , that any amendment of the certificate of incorporation to authorize or create or to increase the authorized amount of any Junior Stock or any class or series or any securities convertible into shares of any class or series of Parity Stock or Junior Stock will not be deemed to adversely affect the rights, preferences, privileges or voting powers of the Series J Preferred Stock, and the Series J Preferred Stock shall have no right to vote thereon.

If any amendment, alteration, repeal, share exchange, reclassification, merger or consolidation specified in this Section 7(b) would adversely affect one or more but not all series of voting preferred stock (including the Series J Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a single class (in lieu of all other series of preferred stock).

(c)        Changes for Clarification .  Without the consent of the holders of Series J Preferred Stock, so long as such action does not adversely affect the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of the Series J Preferred Stock, the Corporation may amend, alter, supplement or repeal any terms of the Series J Preferred Stock:

(i)               to cure any ambiguity, or to cure, correct or supplement any provision contained in this Certificate of Designations that may be defective or inconsistent; or

(ii)              to make any provision with respect to matters or questions arising with respect to the Series J Preferred Stock that is not inconsistent with the provisions of this Certificate of Designations.

(d)        Changes after Provision for Redemption .  No vote or consent of the holders of Series J Preferred Stock shall be required pursuant to this Section 7 if, at or prior to the time when any such vote or consent would otherwise

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be required pursuant to such Section, all outstanding shares of Series J Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been set aside for such redemption, in each case pursuant to Section 6.

(e)        Procedures for Voting and Consents .  The rules and procedures for calling and conducting any meeting of the holders of Series J Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the board of directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the certificate of incorporation, the bylaws, applicable law and any national securities exchange or other trading facility in which the Series J Preferred Stock is listed or traded at the time.  Whether the vote or consent of the holders of a plurality, majority or other portion of the shares of Series J Preferred Stock and any Voting Parity Stock has been cast or given on any matter on which the holders of shares of Series J Preferred Stock are entitled to vote shall be determined by the Corporation by reference to the specified liquidation amounts of the shares voted or covered by the consent.

For purposes of determining the voting rights of the holders of Series J Preferred Stock under this Section 7, each holder will be entitled to one vote for each $1,000 of liquidation preference to which his or her shares are entitled.  Holders of shares of Series J Preferred Stock will be entitled to one vote for each such share of Series J Preferred Stock held by them.

Section 8.         Conversion.    The holders of Series J Preferred Stock shall not have any rights to convert such Series J Preferred Stock into shares of any other class of capital stock of the Corporation.

Section 9.         Rank .  Notwithstanding anything set forth in the certificate of incorporation or this Certificate of Designations to the contrary, the board of directors, without the vote of the holders of the Series J Preferred Stock, may authorize and issue additional shares of Junior Stock or Parity Stock.

Section 10.       Repurchase .  Subject to the limitations imposed herein, the Corporation may purchase and sell Series J Preferred Stock from time to time to such extent, in such manner, and upon such terms as the board of directors may determine; provided however , that the Corporation shall not use any of its funds for any such purchase when there are reasonable grounds to believe that the Corporation is, or by such purchase would be, rendered insolvent.

Section 11.       Unissued or Reacquired Shares .  Shares of Series J Preferred Stock not issued or which have been issued and redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 12.       No Sinking Fund .  Shares of Series J Preferred Stock are not subject to the operation of a sinking fund.

IN WITNESS WHEREOF, WELLS FARGO & COMPANY has caused this Certificate of Designations to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Laurel A. Holschuh, its Secretary, this  30 th  day of December, 2008.

WELLS FARGO & COMPANY


By:      
            /s/ Barbara S. Brett                              
            Barbara S. Brett, Senior Vice President
            and Assistant Treasurer

            /s/ Laurel A. Holschuh            
Laurel A. Holschuh, Secretary

 

 

[As filed with the Delaware Secretary of State on December 30, 2008.]

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WELLS FARGO & COMPANY

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware

 

FIXED-TO-FLOATING RATE NON-CUMULATIVE PERPETUAL CLASS A PREFERRED STOCK, SERIES K
(Without Par Value)

 

WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “Board of Directors”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”), the following resolutions were duly adopted by the Committee pursuant to the written consent of the Committee duly adopted on November 20, 2008, in accordance with Section 141(f) of the General Corporation Law:

RESOLVED, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated October 2, 2008, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

Section 1.         Designation .  The shares of such series of Preferred Stock shall be designated Fixed-to-Floating Rate non Cumulative Perpetual Class A Preferred Stock, Series K, with no par value and a liquidation preference of $1,000 per share (hereinafter referred to as the “ Series K Preferred Stock ”).  Each share of Series K Preferred Stock shall be identical in all respects to every other share of Series K Preferred Stock.  Series K Preferred Stock will rank equally with Parity Stock, if any, and will rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Section 2.         Number of Shares .  The number of shares of Series K Preferred Stock shall be 3,500,000.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series K Preferred Stock then outstanding) by the board of directors.  Shares of Series K Preferred Stock that are redeemed, purchased or otherwise acquired by the Corporation shall be cancelled and shall revert to authorized but unissued shares of Preferred Stock undesignated as to series.  The Corporation shall have the authority to issue fractional shares of Series K Preferred Stock.

Section 3.         Definitions .  As used herein with respect to Series K Preferred Stock:

Business Day ” means each Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in Charlotte, North Carolina or New York, New York are not authorized or obligated by law, regulation or executive order to close.

Depositary Company ” shall have the meaning set forth in Section 6(d).

Dividend Payment Date ” shall have the meaning set forth in Section 4(a).

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Dividend Period ” shall have the meaning set forth in Section 4(a).

DTC ” means The Depositary Trust Company, together with its successors and assigns.

Fixed Rate Period ” shall have the meaning set forth in Section 4(a).

Floating Rate Period ” shall have the meaning set forth in Section 4(a).

Junior Stock ” means the Corporation’s common stock and any other class or series of stock of the Corporation hereafter authorized over which Series K Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

London Banking Day ” means any day on which commercial banks are open for general business (including dealings in deposits in U.S. dollars) in London.

Nonpayment Event ” shall have the meaning set forth in Section 7(a).

Parity Stock ” means any other class or series of stock of the Corporation that ranks on a par with Series K Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Preferred Stock Directors ” shall have the meaning set forth in Section 7(a).

Reuters Screen LIBOR01 page ” means the display page so designated on Reuters (or such other page as may replace that page on that service, or such other service as may be nominated as the information vendor, for the purpose of displaying rates or prices comparable to London Interbank Offered Rate for U.S. dollar deposits).

Series K Preferred Stock ” shall have the meaning set forth in Section 1.

Three-Month LIBOR ” means, with respect to any Dividend Period beginning on or after March 15, 2018, the rate for deposits in U.S. dollars for a three-month period that appears on Reuters Screen LIBOR01 page as of 11:00 a.m.  (London time) on the second London Banking Day preceding the first day of that Dividend Period.  If the rate described above does not appear on Reuters Screen LIBOR01 page, Three-Month LIBOR will be determined on the basis of the rates at which deposits in U.S. dollars for a three-month period and in a principal amount of not less than $1,000,000 are offered to prime banks in the London interbank market by four major banks in the London interbank market selected by us, at approximately 11:00 a.m., London time on the second London Banking Day preceding the first day of that Dividend Period.  Wachovia Bank, National Association, as calculation agent for the Preferred Stock, will request the principal London office of each of such banks to provide a quotation of its rate.  If at least two such quotations are provided, Three-Month LIBOR with respect to that Dividend Period will be the arithmetic mean (rounded upward if necessary to the nearest .00001 of 1%) of such quotations.  If fewer than two quotations are provided, Three-Month LIBOR with respect to that Dividend Period will be the arithmetic mean (rounded upward if necessary to the nearest .00001 of 1%) of the rates quoted by three major banks in New York, New York, selected by the calculation agent, at approximately 11:00 a.m., New York City time, on the first day of that Dividend Period for loans in U.S. dollars to leading European banks for a three-month period and in a principal amount of not less than $1,000,000.  However, if the banks selected by the calculation agent to provide quotations are not quoting as described above, Three-Month LIBOR for that Dividend Period will be the same as Three-Month LIBOR as determined for the previous Dividend Period, or in the case of the first Dividend Period, the most recent rate that could have been determined in accordance with the first sentence of this paragraph had the Preferred Stock been outstanding.  The calculation agent’s establishment of Three-Month LIBOR and calculation of the amount of dividends for each Dividend Period will be on file at our principal offices, will be made available to any holder of Preferred Stock upon request and will be final and binding in the absence of manifest error.

Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series K Preferred Stock.

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Section 4.         Dividends

(a)        Rate .  Holders of Series K Preferred Stock shall be entitled to receive, when, as and if declared by the board of directors, but only out of funds legally available therefor, non-cumulative cash dividends on the liquidation preference of $1,000 per share of Series K Preferred Stock, and no more, from the date of issuance to, but excluding March 15, 2018 at a rate of 7.98% per annum (the “ Fixed Rate Period ”) payable semi-annually in arrears on each March 15 and September 15, beginning on September 15, 2008.  Thereafter, declared dividends will be at a floating rate equal to Three-Month LIBOR plus 3.77% per annum, payable quarterly in arrears, on March 15, June 15, September 15 and December 15 of each year, beginning on June 15, 2018 (the “ Floating Rate Period ”).  If any date specified pursuant to the preceding sentence is not a Business Day, then dividends will be payable on the first Business Day following such date and dividends shall accrue to the actual payment date.  The term “ Dividend Payment Date ” means, with respect to the Fixed Rate Period, March 15 and September 15, and with respect to the Floating Rate Period, March 15, June 15, September 15 and December 15, or if any such day in the case of this clause is not a Business Day, the next Business Day.  The term “ Dividend Period ” means each period from and including a Dividend Payment Date (or the date of issuance of the Series K Preferred Stock for the first Dividend Payment Date) to but excluding the next Dividend Payment Date; provided that the first Dividend Period shall be deemed to have commenced on December 15, 2008.  The amount of dividends payable for any Dividend Period during the Fixed Rate Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months.  The amount of dividends payable for any Dividend Period during the Floating Rate Period shall be computed on the basis of actual number of days in a Dividend Period and a 360-day year.

(b)        Non-Cumulative Dividends .  Dividends on shares of Series K Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series K Preferred Stock on any Dividend Payment Date are not declared and paid, in full or otherwise, on such Dividend Payment Date, then such unpaid dividends shall not cumulate and shall cease to accrue and be payable and the Corporation shall have no obligation to pay, and the holders of Series K Preferred Stock shall have no right to receive, dividends accrued for the Dividend Period ending immediately prior to such Dividend Payment Date after such Dividend Payment Date, whether or not dividends are declared for any subsequent Dividend Period with respect to Series K Preferred Stock, Parity Stock, Junior Stock or any other class or series of authorized preferred stock of the Corporation.  Holders of Series K Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full dividends for each Dividend Period on the Series K Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any Dividend Payment or Dividend Payments or failure to make any Dividend Payment or Dividend Payments.

(c)        Priority of Dividends .  So long as any share of Series K Preferred Stock remains outstanding, unless full dividends on all outstanding shares of Series K Preferred Stock for the then-current Dividend Period have been paid in full or declared and set aside for payment, (i) no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on any Junior Stock, other than a dividend payable solely in Junior Stock, (ii) no shares of Junior Stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than as a result of a reclassification of Junior Stock for or into Junior Stock, or the exchange or conversion of one share of Junior Stock for or into another share of Junior Stock, and other than through the use of the proceeds of a substantially contemporaneous sale of other shares of Junior Stock), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation, and (iii) no shares of Parity Stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than as a result of a reclassification of Parity Stock for or into Parity Stock or Junior Stock, or the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or for or into Junior Stock, and other than through the use of the proceeds of a substantially contemporaneous sale of other shares of Parity Stock or Junior Stock), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation, otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series K Preferred Stock and such Parity Stock.  The foregoing shall not restrict the ability of the Corporation, or any affiliate of the Corporation, to engage in any market-making transactions in the Junior Stock or Parity Stock in the ordinary course of business.  When dividends are not paid in full upon the shares of Series K Preferred Stock and any Parity Stock, all dividends declared upon shares of Series K Preferred Stock and any Parity Stock shall be declared on a proportional basis so that the amount of dividends declared per share will bear to each other the same ratio that accrued dividends for the then-current Dividend Period per share on Series K Preferred Stock, and accrued dividends, including any accumulations, on Parity Stock, bear to each other.  No interest will be payable in respect of any dividend payment on such Parity Stock that may be in arrears.  If the board of directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Corporation will provide written notice to the holders of the Series K Preferred Stock prior

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to such date.  Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the board of directors may be declared and paid on any Junior Stock from time to time out of any funds legally available therefor, and the shares of Series K Preferred Stock shall not be entitled to participate in any such dividend.

Section 5.         Liquidation Rights

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series K Preferred Stock shall be entitled, before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of any Junior Stock and subject to the rights of the holders of any class or series of securities ranking senior to or on parity with Series K Preferred Stock upon liquidation and the rights of the Corporation’s depositors and other creditors, to receive in full a liquidation preference in an amount equal to $1,000 per share, plus an amount equal to all declared and unpaid dividends for the then-current Dividend Period to the date of liquidation.  The holder of Series K Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b)        Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the liquidation preference to all holders of Series K Preferred Stock and the liquidation preferences of any Parity Stock to all holders of such Parity Stock, the amounts paid to the holders of Series K Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preferences of Series K Preferred Stock and all such Parity Stock.

(c)        Residual Distributions .  If the liquidation preference has been paid in full to all holders of Series K Preferred Stock and all holders of any Parity Stock, the holders of Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)        Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.         Redemption

(a)        Optional Redemption .  So long as full dividends for all outstanding shares of Series K Preferred Stock and Parity Stock for the then-current Dividend Period have been paid or declared and a sum sufficient for the payment thereof set aside, and subject to applicable regulatory approvals, the Corporation, at the option of the board of directors, may redeem in whole or in part the shares of Series K Preferred Stock at the time outstanding, on any Dividend Payment Date on or after March 15, 2018 upon notice given as provided in Subsection (b) below, at the redemption price in effect at the redemption date as provided in this Section 6.  The redemption price for shares of Series K Preferred Stock shall be $1,000 per share plus declared and unpaid dividends for the then-current Dividend Period, without interest.

(b)        Notice of Redemption .  Notice of every redemption of shares of Series K Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Corporation.  Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption.  Notwithstanding the foregoing, if the Series K Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC.  Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series K Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series K Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series K Preferred Stock to be redeemed; (iii) the redemption price; and (iv) the place or places where the Series K Preferred Stock are to be redeemed.

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(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series K Preferred Stock at the time outstanding, the shares of Series K Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series K Preferred Stock in proportion to the number of Series K Preferred Stock held by such holders or by lot or in such other manner as the board of directors may determine to be fair and equitable.  Subject to the provisions hereof, the board of directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series K Preferred Stock shall be redeemed from time to time.

(d)        Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been set aside by the Corporation, separate and apart from its other funds, in trust for the   pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the board of directors (the “ Depositary Company ”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company at any time after the redemption date the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any such interest.  Any funds so deposited and unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, and in the event of such repayment to the Corporation, the holders of record of the shares so called for redemption shall be deemed to be unsecured creditors of the Corporation for an amount equivalent to the amount deposited as stated above for the redemption of such shares and so repaid to the Corporation, but shall in no event be entitled to any interest.

Section 7.         Voting Rights .  The holders of Series K Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by applicable law.

(a)        Right To Elect Two Directors Upon Nonpayment Events .  If and whenever the dividends on the Series K Preferred Stock or any class or series of Voting Parity Stock have not been declared and paid in an aggregate amount equal to full dividends for at least six Dividend Periods or their equivalent (whether or not consecutive) (a “ Nonpayment Event ”), the number of directors then constituting the board of directors shall automatically be increased by two and the holders of Series K Preferred Stock, voting together as a single and separate class with the holders of any outstanding shares of Voting Parity Stock, shall be entitled to elect the two additional directors (the “ Preferred Stock Directors ”) by a plurality of the votes cast, provided that it shall be a qualification for election for any such Preferred Stock Director that the election of such director shall not cause the Corporation to violate the corporate governance requirement of the New York Stock Exchange (or any other securities exchange or other trading facility on which securities of the Corporation may then be listed or traded) that listed or traded companies must have a majority of independent directors, and provided further that the board of directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).

In the event that the holders of Series K Preferred Stock and such other holders of Voting Parity Stock shall be entitled to vote for the election of the Preferred Stock Directors following a Nonpayment Event, such directors shall be initially elected following such Nonpayment Event at the Corporation’s next annual meeting of shareholders, and, except as provided below, at each subsequent annual meeting of shareholders of the Corporation.

When dividends have been paid in full on the Series K Preferred Stock and any and all Voting Parity Stock for at least four consecutive Dividend Periods or their equivalent after a Nonpayment Event, then the right of the holders of Series K Preferred Stock to elect the Preferred Stock Directors shall cease (but subject always to revesting of such voting rights in the case of any future Nonpayment Event), and, if and when all rights of holders of Series K Preferred Stock and Voting Parity Stock to elect the Preferred Stock Directors shall have ceased, the terms of office of all the Preferred Stock Directors shall forthwith terminate and the number of directors constituting the board of directors shall automatically be reduced accordingly.

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Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series K Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a single and separate class).  In case any vacancy shall occur among the Preferred Stock Directors, a successor shall be elected by a plurality of the votes cast by the holders of Series K Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a single and separate class.  The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the board of directors for a vote.

(b)        Other Voting Rights .  So long as any shares of Series K Preferred Stock are outstanding, in addition to any other vote or consent of shareholders required by law or by the certificate of incorporation, the vote or consent of the holders of at least 66 2/3% of the shares of Series K Preferred Stock at the time outstanding and entitled to vote thereon, voting separately as a single class with all other series of preferred stock ranking equally with the Series K Preferred Stock and entitled to vote thereon, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating any of the following actions, whether or not such approval is required by Delaware law:

(i)         Issuance of Senior Stock .  The issuance of any class or series of preferred stock of the Corporation ranking senior to the Series K Preferred Stock with respect to either the payment of dividends or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation;

(ii)        Amendment Affecting Series K Preferred Stock .  Any amendment, alteration or repeal of any provision of the certificate of incorporation or bylaws so as to adversely affect the rights, preferences, privileges or voting powers of the Series K Preferred Stock;

(iii)       Authorization of Senior Stock .  Any amendment or alteration of any provision of the certificate of incorporation or bylaws to authorize, create or increase the authorized amount of, any shares of, or any securities convertible into shares of, any class or series of capital stock of the Corporation ranking senior to the Series K Preferred Stock with respect to either the payment of dividends or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; or

(iv)       Share Exchanges, Reclassifications, Mergers and Consolidations .  Any consummation of a binding share exchange or reclassification involving the Series K Preferred Stock, or of a merger or consolidation of the Corporation with another corporation or other entity, unless in each case (x) the shares of Series K Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting corporation, are converted into or exchanged for preference securities of the surviving or resulting corporation or a corporation controlling such corporation, and (y) such Series K Preferred Stock shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series K Preferred Stock, taken as a whole;

provided however , that any amendment of the certificate of incorporation to authorize or create or to increase the authorized amount of any Junior Stock or any class or series or any securities convertible into shares of any class or series of Parity Stock or Junior Stock will not be deemed to adversely affect the rights, preferences, privileges or voting powers of the Series K Preferred Stock, and the Series K Preferred Stock shall have no right to vote thereon.

If any amendment, alteration, repeal, share exchange, reclassification, merger or consolidation specified in this Section 7(b) would adversely affect one or more but not all series of voting preferred stock (including the Series K Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a single class (in lieu of all other series of preferred stock).

(c)        Changes for Clarification .  Without the consent of the holders of Series K Preferred Stock, so long as such action does not adversely affect the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of the Series K Preferred Stock, the Corporation may amend, alter, supplement or repeal any terms of the Series K Preferred Stock:

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(i)         to cure any ambiguity, or to cure, correct or supplement any provision contained in this Certificate of Designations that may be defective or inconsistent; or

(ii)        to make any provision with respect to matters or questions arising with respect to the Series K Preferred Stock that is not inconsistent with the provisions of this Certificate of Designations.

(d)        Changes after Provision for Redemption .  No vote or consent of the holders of Series K Preferred Stock shall be required pursuant to this Section 7 if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding shares of Series K Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been set aside for such redemption, in each case pursuant to Section 6.

(e)        Procedures for Voting and Consents .  The rules and procedures for calling and conducting any meeting of the holders of Series K Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the board of directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the certificate of incorporation, the bylaws, applicable law and any national securities exchange or other trading facility in which the Series K Preferred Stock is listed or traded at the time.  Whether the vote or consent of the holders of a plurality, majority or other portion of the shares of Series K Preferred Stock and any Voting Parity Stock has been cast or given on any matter on which the holders of shares of Series K Preferred Stock are entitled to vote shall be determined by the Corporation by reference to the specified liquidation amounts of the shares voted or covered by the consent.

For purposes of determining the voting rights of the holders of Series K Preferred Stock under this Section 7, each holder will be entitled to one vote for each $1,000 of liquidation preference to which his or her shares are entitled.  Holders of shares of Series K Preferred Stock will be entitled to one vote for each such share of Series K Preferred Stock held by them.

Section 8.         Conversion .  The holders of Series K Preferred Stock shall not have any rights to convert such Series K Preferred Stock into shares of any other class of capital stock of the Corporation.

Section 9.         Rank .  Notwithstanding anything set forth in the certificate of incorporation or this Certificate of Designations to the contrary, the board of directors, without the vote of the holders of the Series K Preferred Stock, may authorize and issue additional shares of Junior Stock or Parity Stock.

Section 10.       Repurchase .  Subject to the limitations imposed herein, the Corporation may purchase and sell Series K Preferred Stock from time to time to such extent, in such manner, and upon such terms as the board of directors may determine; provided however , that the Corporation shall not use any of its funds for any such purchase when there are reasonable grounds to believe that the Corporation is, or by such purchase would be, rendered insolvent.

Section 11.       Unissued or Reacquired Shares .  Shares of Series K Preferred Stock not issued or which have been issued and redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 12.       No Sinking Fund .  Shares of Series K Preferred Stock are not subject to the operation of a sinking fund.

IN WITNESS WHEREOF, WELLS FARGO & COMPANY has caused this Certificate of Designations to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Laurel A. Holschuh, its Secretary, this  30 th  day of December, 2008.

WELLS FARGO & COMPANY


By:      
            /s/ Barbara S. Brett                              

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            Barbara S. Brett, Senior Vice President
            and Assistant Treasurer

            /s/ Laurel A. Holschuh            
Laurel A. Holschuh, Secretary

 

 

 [As filed with the Delaware Secretary of State on December 30, 2008.]

WELLS FARGO & COMPANY

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware

 

7.50% NON-CUMULATIVE PERPETUAL CONVERTIBLE

CLASS A PREFERRED STOCK, SERIES L
(Without Par Value)

 

WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “Board of Directors”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”), the following resolutions were duly adopted by the Committee pursuant to the written consent of the Committee duly adopted on November 20, 2008, in accordance with Section 141(f) of the General Corporation Law:

RESOLVED, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated October 2, 2008, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

Section 1.     Designation .  The shares of such series of Preferred Stock shall be designated 7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L, with no par value and a liquidation preference of $1,000 per share (hereinafter referred to as the “ Series L Preferred Stock ”). Each share of Series L Preferred Stock shall be identical in all respects to every other share of Series L Preferred Stock. Series L Preferred Stock will rank equally with Parity Stock, if any, and will rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any voluntary or involuntary dissolution, winding-up and liquidation of the Corporation.

Section 2.     Number of Shares .  The authorized number of shares of Series L Preferred Stock shall be 4,025,000. Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series L Preferred Stock then outstanding) by the board of directors. Shares of Series L Preferred Stock that are converted in accordance with the terms hereof, purchased or otherwise acquired by the Corporation shall be cancelled and shall revert to authorized but unissued shares of Preferred Stock undesignated as to series. The Corporation shall have the authority to issue fractional shares of Series L Preferred Stock.

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Section 3.     Definitions .  As used herein with respect to Series L Preferred Stock:

Applicable Conversion Price ” at any given time means, for each share of Series L Preferred Stock, the price equal to $1,000 divided by the Applicable Conversion Rate in effect at such time.

Applicable Conversion Rate ” means the Conversion Rate in effect at any given time.

Base Price ” has the meaning set forth in Section 13(d)(i).

Business Day ” means each Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in Charlotte, North Carolina or New York, New York are not authorized or obligated by law, regulation or executive order to close.

Capital Stock ” of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any preferred stock, excluding any debt securities convertible into such equity.

Closing Price ” of the Common Stock on any date of determination means the closing sale price or, if no closing sale price is reported, the last reported sale price of the shares of the Common Stock on the New York Stock Exchange on that date. If the Common Stock is not traded on the New York Stock Exchange on any date of determination, the Closing Price of the Common Stock on such date of determination means the closing sale price as reported in the composite transactions for the principal U.S. national or regional securities exchange or securities exchange in the European Economic Area on which the Common Stock is so listed or quoted, or, if no closing sale price is reported, the last reported sale price on the principal U.S. national or regional securities exchange or securities exchange in the European Economic Area on which the Common Stock is so listed or quoted, or if the Common Stock is not so listed or quoted on a U.S. national or regional securities exchange or securities exchange in the European Economic Area, the last quoted bid price for the Common Stock in the over-the-counter market as reported by Pink Sheets LLC or a similar organization, or, if that bid price is not available, the market price of the Common Stock on that date as determined by a nationally recognized independent investment banking firm (unaffiliated with the Corporation) retained by the Corporation for this purpose. The “Closing Price” for any other share of Capital Stock shall be determined on a comparable basis, mutatis mutandis

For purposes of this Certificate of Designations, all references herein to the “Closing Price” and “last reported sale price” of the Common Stock on the New York Stock Exchange shall be such closing sale price and last reported sale price as reflected on the website of the New York Stock Exchange (http://www.nyse.com) and as reported by Bloomberg Professional Service; provided that in the event that there is a discrepancy between the closing sale price or last reported sale price as reflected on the website of the New York Stock Exchange and as reported by Bloomberg Professional Service, the closing sale price and last reported sale price on the website of the New York Stock Exchange will govern.

For purposes of calculating the Closing Price, if a Reorganization Event has occurred and (1) the Exchange Property consists only of shares of common securities, the Closing Price shall be based on the Closing Price of such common securities; (2) the Exchange Property consists only of cash, the Closing Price shall be the cash amount paid per share; and (3) the Exchange Property consists of securities, cash and/or other property, the Closing Price shall be based on the sum, as applicable, of (x) the Closing Price of such common securities, (y) the cash amount paid per share of Common Stock and (z) the value (as determined by the board of directors from time-to-time) of any other securities or property paid to holders of Common Stock in connection with the Reorganization Event.

Common Stock ” means the common stock, $1-2/3 par value per share, of the Corporation.

Conversion Agent ” means American Stock Transfer & Trust Company acting in its capacity as conversion agent for the Series L Preferred Stock, and its successors and assigns or any other conversion agent appointed by the Corporation.

Conversion Date ” has the meaning set forth in Section 13(a)(iv)(B).

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Conversion Rate ” means for each share of Series L Preferred Stock, 6.3814 shares of Common Stock, plus cash in lieu of fractional shares, subject to adjustment as set forth herein.

Current Market Price ” per share of Common Stock on any date of determination means the average of the VWAP per share of Common Stock on each of the 10 consecutive VWAP Trading Days ending on the earlier of the day in question and the day before the Ex-Date or other specified date with respect to the issuance or distribution requiring such computation, appropriately adjusted to take into account the occurrence during such period of any event described in Section 14(a)(i) through (v).

Depositary ” means DTC or its nominee or any successor depositary appointed by the Corporation.

Dividend Payment Date ” has the meaning set forth in Section 4(a).

Dividend Period ” has the meaning set forth in Section 4(a).

Dividend Threshold Amount ” has the meaning set forth in Section 14(a)(iv).

DTC ” means The Depository Trust Company, together with its successors and assigns.

Exchange Act ” means the Securities Exchange Act of 1934, as amended.

Exchange Property ” has the meaning set forth in Section 15(a).

Ex-Date ” when used with respect to any issuance or distribution, means the first date on which such shares of Common Stock or other securities trade without the right to receive an issuance or distribution with respect thereto.

Expiration Time ” has the meaning set forth in Section 12(a)(v).

Expiration Date ” has the meaning set forth in Section 14(a)(v).

Fiscal Quarter ” means, with respect to the Corporation, the fiscal quarter publicly disclosed by the Corporation.

Fundamental Change ” has the meaning set forth in Section 13(d)(i).

Holder ” means the Person in whose name the shares of Series L Preferred Stock are registered, which may be treated by the Corporation, Transfer Agent, Registrar, paying agent and Conversion Agent as the absolute owner of the shares of Series L Preferred Stock for the purpose of making payment and settling conversions and for all other purposes.

Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation hereafter authorized over which Series L Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets in the event of any voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Corporation.

Make-Whole Acquisition ” means the occurrence, prior to any Conversion Date, of one of the following:

(a)        “ person ” or “ group ” within the meaning of Section 13(d) of the Exchange Act files a Schedule TO or any schedule, form or report under the Exchange Act disclosing that such person or group has become the direct or indirect ultimate “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of common equity of the Corporation representing more than 50% of the voting power of the Common Stock; or

(b)        consummation of any consolidation or merger of the Corporation or similar transaction or any sale, lease or other transfer in one transaction or a series of related transactions of all or substantially all of the consolidated assets of the Corporation and its subsidiaries, taken as a whole, to any Person other than one of the

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Corporation’s subsidiaries, in each case, pursuant to which the Common Stock will be converted into cash, securities, or other property, other than pursuant to a transaction in which the Persons that “beneficially owned” (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, Voting Shares immediately prior to such transaction beneficially own, directly or indirectly, Voting Shares representing a majority of the total voting power of all outstanding classes of Voting Shares of the continuing or surviving Person immediately after the transaction;

provided however that a Make-Whole Acquisition will not be deemed to have occurred if at least 90% of the consideration received by holders of the Common Stock in the transaction or transactions (as determined by the board of directors) consists of shares of common securities of a Person or American Depositary Receipts in respect of such common securities that are traded on a U.S. national securities exchange or a securities exchange in the European Economic Area or that will be traded on a U.S. national securities exchange or a securities exchange in the European Economic Area when issued or exchanged in connection with a Make-Whole Acquisition.

Make-Whole Acquisition Conversion ” has the meaning set forth in Section 13(c)(i).

Make-Whole Acquisition Conversion Period ” has the meaning set forth in Section 13(c)(i).

Make-Whole Acquisition Effective Date ” has the meaning set forth in Section 13(c)(i).

Make-Whole Acquisition Stock Price ” means the price paid per share of Common Stock in the event of a Make-Whole Acquisition. If the holders of shares of Common Stock receive only cash in the Make-Whole Acquisition in a single per-share amount, other than with respect to appraisal and similar rights, the Make-Whole Acquisition Stock Price shall be the cash amount paid per share of Common Stock. For purposes of the preceding sentence as applied to a Make-Whole Acquisition of the type set forth in clause (a) of the definition Make-Whole Acquisition, a single price per share of Common Stock shall be deemed to have been paid only if the transaction or transactions that caused the Make-Whole Acquisition to occur was a tender offer for more than 50% of the then-outstanding Common Stock. Otherwise, the Make-Whole Acquisition Stock Price shall be the average of the Closing Price per share of Common Stock on the ten Trading Days up to, but not including, the Make-Whole Acquisition Effective Date.

Make-Whole Shares ” has the meaning set forth in Section 13(c)(i).

Mandatory Conversion Date ” has the meaning set forth in Section 13(b)(iii).

Market Disruption Event ” means any of the following events that has occurred:

(a)        change or quotation system on which the VWAP is determined pursuant to the definition of the VWAP Trading Day (a “ Relevant Exchange ”) during the one-hour period prior to the close of trading for the regular trading session on the Relevant Exchange (or for purposes of determining the VWAP per share of Common Stock any period or periods aggregating one half-hour or longer during the regular trading session on the relevant day) and whether by reason of movements in price exceeding limits permitted by the Relevant Exchange, or otherwise relating to Common Stock or in futures or options contracts relating to the Common Stock on the Relevant Exchange;

(b)        any event (other than an event described in clause (c)) that disrupts or impairs (as determined by the Corporation in its reasonable discretion) the ability of market participants during the one-hour period prior to the close of trading for the regular trading session on the Relevant Exchange (or for purposes of determining the VWAP per share of Common Stock any period or periods aggregating one half-hour or longer during the regular trading session on the relevant day) in general to effect transactions in, or obtain market values for, the Common Stock on the Relevant Exchange or to effect transactions in, or obtain market values for, futures or options contracts relating to the Common Stock on the Relevant Exchange; or

(c)        the failure to open of the Relevant Exchange on which futures or options contracts relating to the Common Stock, are traded or the closure of such Relevant Exchange prior to its respective scheduled closing time for the regular trading session on such day (without regard to after hours or any other trading outside of the regular trading session hours) unless such earlier closing time is announced by such Relevant Exchange at least one hour prior to the earlier of the actual closing time for the regular trading session on such day and the submission deadline for orders to be entered into such Relevant Exchange for execution at the actual closing time on such day.

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Nonpayment Event ” has the meaning set forth in Section 7(a).

Notice of Mandatory Conversion ” has the meaning set forth in Section 13(b)(iii).

Parity Stock ” means any other class or series of stock of the Corporation that ranks on a par with Series L Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary dissolution, winding-up and liquidation of the Corporation.

Person ” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company or trust.

Preferred Stock Directors ” has the meaning set forth in Section 7(a).

Purchased Shares ” has the meaning set forth in Section 12(a)(v).

Record Date ” has the meaning set forth in Section 12(d), except for purposes of Section 14.

Reference Price ” means the applicable Make-Whole Acquisition Stock Price.

Registrar ” means American Stock Transfer & Trust Company acting in its capacity as registrar for the Series L Preferred Stock, and its successors and assigns or any other registrar appointed by the Corporation.

Relevant Exchange ” has the meaning set forth above in the definition of Market Disruption Event.

Reorganization Event ” has the meaning set forth in Section 15(a).

Series L Preferred Stock ” has the meaning set forth in Section 1.

Trading Day ” means a day on which the shares of Common Stock:

(a)        are not suspended from trading on any national or regional securities exchange or association or over-the-counter market at the close of business; and

(b)        have traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of the Common Stock.

Transfer Agent ” shall mean American Stock Transfer & Trust Company acting in its capacity as transfer agent for the Series L Preferred Stock, and its successors and assigns or any other transfer agent appointed by the Corporation.

Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series L Preferred Stock.

Voting Shares ” of a Person means shares of all classes of Capital Stock of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of the board of directors of such Person.

VWAP ” per share of the Common Stock on any VWAP Trading Day means the per share volume-weighted average price as displayed under the heading Bloomberg VWAP on Bloomberg page WFC<equity>AQR (or its equivalent successor if such page is not available) in respect of the period from the open of trading on the relevant VWAP Trading Day until the close of trading on the relevant VWAP Trading Day (or if such volume-weighted average price is unavailable, the market price of one share of Common Stock on such VWAP Trading Days determined, using a volume-weighted average method, by a nationally recognized investment banking firm (unaffiliated with the Corporation) retained for this purpose by the Corporation). The VWAP for any other share of Capital Stock shall be determined on a comparable basis, mutatis mutandis.

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VWAP Trading Day ” means, for purposes of determining a VWAP per share of Common Stock, a Business Day on which the Relevant Exchange (as defined in the definition of Market Disruption Event) is scheduled to be open for business and on which there has not occurred or does not exist a Market Disruption Event.

Section 4.     Dividends

(a)        Rate .  Holders of Series L Preferred Stock shall be entitled to receive, if, as and when declared by the board of directors, but only out of funds legally available therefor, non-cumulative cash dividends on the liquidation preference of $1,000 per share of Series L Preferred Stock, and no more, from the date of issuance at a rate per annum equal to 7.50%, payable quarterly in arrears on each March 15, June 15, September 15 and December 15, commencing June 15, 2008. The term “Dividend Payment Date” means March 15, June 15, September 15 and December 15. If any date specified pursuant the preceding sentence is not a Business Day, then dividends will be payable on the first Business Day following such date and dividends shall be payable to the actual payment date and no interest or other payment shall be paid with respect of such delay. The term “Dividend Period” means each period from and including a Dividend Payment Date (or the date of issuance of the Series L Preferred Stock for the first Dividend Payment Date) to but excluding the next Dividend Payment Date; provided that the first Dividend Period shall be deemed to have commenced on December 15, 2008. The amount of dividends payable for any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months.

(b)        Non-Cumulative Dividends .  Dividends on shares of Series L Preferred Stock shall be non-cumulative. To the extent that any dividends payable on the shares of Series L Preferred Stock on any Dividend Payment Date are not declared and paid, in full or otherwise, on such Dividend Payment Date, then such unpaid dividends shall not cumulate and shall cease to be payable and the Corporation shall have no obligation to pay, and the holders of Series L Preferred Stock shall have no right to receive, dividends payable in respect of the Dividend Period ending immediately prior to such Dividend Payment Date after such Dividend Payment Date, whether or not dividends are declared for any subsequent Dividend Period with respect to the Series L Preferred Stock, any Parity Stock, any Junior Stock or any other class or series of authorized preferred stock of the Corporation. Holders of Series L Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full dividends for each Dividend Period on the Series L Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any Dividend Payment or Dividend Payments or failure to make any Dividend Payment or Dividend Payments.

(c)        Priority of Dividends .  So long as any share of Series L Preferred Stock remains outstanding and, as to any Junior Stock or Parity Stock then outstanding, unless full dividends on all outstanding shares of Series L Preferred Stock for the Dividend Period ending on or immediately prior to the dividend payment date or other payment date for such Junior Stock or Parity Stock have been paid in full or declared and set aside for payment, (i) no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on such Junior Stock (other than a dividend payable solely in Junior Stock) or on such Parity Stock, subject to the immediately following paragraph in the case of Parity Stock, (ii) no shares of Junior Stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than (1) as a result of a reclassification of Junior Stock for or into Junior Stock, (2) the exchange or conversion of one share of Junior Stock for or into another share of Junior Stock, (3) through the use of the proceeds of a substantially contemporaneous sale of other shares of Junior Stock or (4) in connection with the satisfaction of the Corporation’s obligations pursuant to any contract entered into in the ordinary course prior to the beginning of such Dividend Period), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation, and (iii) no shares of Parity Stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than (1) as a result of a reclassification of Parity Stock for or into Parity Stock or Junior Stock, (2) the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or for or into Junior Stock, (3) through the use of the proceeds of a substantially contemporaneous sale of other shares of Parity Stock or Junior Stock or (4) in connection with the satisfaction of the Corporation’s obligations pursuant to any contract entered into in the ordinary course prior to the beginning of such Dividend Period), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation (other than through the use of the proceeds of a substantially contemporaneous sale described in clause (ii)(3) or (iii)(3) above), otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series L Preferred Stock and such Parity Stock.

When dividends are not paid in full upon the Series L Preferred Stock and any Parity Stock, dividends upon shares of the Series L Preferred Stock and such Parity Stock will be declared on a proportional basis, based upon the

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ratio of the amount of dividends declared on the Series L Preferred Stock and such Parity Stock to the amount that, if declared, would be full dividends (including accrued and unpaid dividends as to any Parity Stock that bears dividends on a cumulative basis) on the Series L Preferred Stock and such Parity Stock through the next succeeding applicable dividend payment date. If the board of directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Corporation will provide written notice to the holders of the Series L Preferred Stock prior to such date. Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the board of directors may be declared and paid on any Junior Stock from time to time out of any funds legally available therefor, and the shares of Series L Preferred Stock shall not be entitled to participate in any such dividend.

Section 5.     Liquidation Rights

(a)        Liquidation .  In the event of any voluntary or involuntary dissolution, winding-up and liquidation of the Corporation, holders of Series L Preferred Stock shall be entitled, before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of any Junior Stock and subject to the rights of the holders of any Parity Stock or class or series of securities ranking senior to or on parity with the Series L Preferred Stock upon liquidation and the rights of the Corporation’s creditors, to receive in full a liquidation preference in an amount equal to $1,000 per share, plus an amount equal to all declared and unpaid dividends for the then-current Dividend Period to the date of liquidation. The holder of Series L Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary dissolution, winding-up and liquidation of the Corporation other than what is expressly provided for in this Section 5.

(b)        Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the liquidation preference to all holders of Series L Preferred Stock and the liquidation preferences of any Parity Stock to all holders of such Parity Stock, the amounts paid to the holders of Series L Preferred Stock and to the holders of all Parity Stock shall be   pro rata   in accordance with the respective aggregate liquidation preferences of Series L Preferred Stock and all such Parity Stock.

(c)        Residual Distributions .  If the applicable liquidation preference has been paid in full to all holders of Series L Preferred Stock and all holders of any Parity Stock, the holders of Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)        Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Corporation.

Section 6.     Redemption .  The shares of Series L Preferred Stock shall not be redeemable.

Section 7.     Voting Rights .  The holders of Series L Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by applicable law.

(a)        Right To Elect Two Directors Upon Nonpayment Events .  If after the issuance of the Series L Preferred Stock the Corporation fails to pay, or declare and set aside for payment, full dividends on the Series L Preferred Stock or any class or series of Voting Parity Stock for six Dividend Periods or their equivalent (whether or not consecutive) (a “ Nonpayment Event ”), the number of directors then constituting the board of directors shall automatically be increased by two and the holders of Series L Preferred Stock, voting together as a single and separate class with the holders of all outstanding shares of Voting Parity Stock, shall be entitled to elect the two additional directors (the “ Preferred Stock Directors ”) by a plurality of the votes cast; provided that it shall be a qualification for election for any such Preferred Stock Director that the election of such director shall not cause the Corporation to violate the corporate governance requirement of the New York Stock Exchange (or any other securities exchange or other trading facility on which securities of the Corporation may then be listed or traded) that listed or traded companies must have a majority of independent directors; and provided further that the board of directors shall at no time include more than two Preferred

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Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).

In the event that the holders of Series L Preferred Stock and such other holders of Voting Parity Stock shall be entitled to vote for the election of the Preferred Stock Directors following a Nonpayment Event, such directors shall be initially elected following such Nonpayment Event at the Corporation’s next annual meeting of shareholders, and, except as provided below, at each subsequent annual meeting of shareholders of the Corporation.

When dividends have been paid in full on the Series L Preferred Stock and any and all Voting Parity Stock for at least four consecutive Dividend Periods or their equivalent after a Nonpayment Event, then the right of the holders of Series L Preferred Stock to elect the Preferred Stock Directors shall cease (but subject always to revesting of such rights in the case of any future Nonpayment Event), and, if and when all rights of holders of Series L Preferred Stock and Voting Parity Stock to elect the Preferred Stock Directors shall have ceased, the terms of office of all the Preferred Stock Directors shall forthwith terminate and the number of directors constituting the board of directors shall automatically be reduced accordingly.

Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series L Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a single and separate class). In case any vacancy shall occur among the Preferred Stock Directors, a successor shall be elected by a plurality of the votes cast by the holders of Series L Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a single and separate class. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the board of directors for a vote.

(b)        Other Voting Rights .  So long as any shares of Series L Preferred Stock are outstanding, the vote or consent of the holders of at least 66   2/3 % of the shares of Series L Preferred Stock at the time outstanding and entitled to vote thereon, voting separately as a single class with all other classes or series of preferred stock ranking equally with the Series L Preferred Stock and entitled to vote thereon, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating any of the following actions, whether or not such approval is required by Delaware law:

(i)         Amendment Affecting Series L Preferred Stock .  Any amendment, alteration or repeal of any provision of the certificate of incorporation or bylaws so as to adversely affect the rights, preferences, privileges or voting powers of the Series L Preferred Stock.

(ii)        Authorization or Issuance of Senior Stock .  Any amendment or alteration of any provision of the certificate of incorporation or bylaws to authorize, create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into shares of, any class or series of Capital Stock of the Corporation ranking senior to the Series L Preferred Stock with respect to either the payment of dividends or the distribution of assets in the event of any voluntary or involuntary dissolution, winding-up and liquidation of the affairs of the Corporation; or

(iii)       Share Exchanges, Reclassifications, Mergers and Consolidations .  Any consummation of a binding share exchange or reclassification involving the Series L Preferred Stock, or of a merger or consolidation of the Corporation with another Person, unless in each case (x) the shares of Series L Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting Person, are converted into or exchanged for preference securities of the surviving or resulting Person or a Person controlling such Person, and (y) such Series L Preferred Stock shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series L Preferred Stock, taken as a whole;

provided however , that any authorization, creation or increase in the authorized amount of or issuance of Series L Preferred Stock or any class or series of Parity Stock or Junior Stock or any securities convertible into any class or series of Parity Stock (whether dividends payable in respect of such Parity Stock are cumulative or non-cumulative) or Junior

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Stock will be deemed not to adversely affect the rights, preferences, privileges or voting powers of the Series L Preferred Stock, and holders of the Series L Preferred Stock shall have no right to vote thereon.

If any amendment, alteration, repeal, share exchange, reclassification, merger or consolidation specified in this Section 7(b) would adversely affect one or more but not all series of voting preferred stock (including the Series L Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a single class (in lieu of all other series of preferred stock).

(c)        Changes for Clarification .  Without the consent of the holders of Series L Preferred Stock, so long as such action does not adversely affect the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of the Series L Preferred Stock, the Corporation may amend, alter, supplement or repeal any terms of the Series L Preferred Stock:

(i)         to cure any ambiguity, or to cure, correct or supplement any provision contained in this Certificate of Designations that may be defective or inconsistent; or

(ii)        to make any provision with respect to matters or questions arising with respect to the Series L Preferred Stock that is not inconsistent with the provisions of this Certificate of Designations.

(d)        Procedures for Voting and Consents .  The rules and procedures for calling and conducting any meeting of the holders of Series L Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the board of directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the certificate of incorporation, the bylaws, applicable law and any national securities exchange or other trading facility in which the Series L Preferred Stock is listed or traded at the time. Whether the vote or consent of the holders of a plurality, majority or other portion of the shares of Series L Preferred Stock and any Voting Parity Stock has been cast or given on any matter on which the holders of shares of Series L Preferred Stock are entitled to vote shall be determined by the Corporation by reference to the specified liquidation amounts of the shares voted or covered by the consent.

For purposes of determining the voting rights of the holders of Series L Preferred Stock under this Section 7, each holder will be entitled to one vote for each $1,000 of liquidation preference to which his or her shares are entitled. Holders of shares of Series L Preferred Stock will be entitled to one vote for each such share of Series L Preferred Stock held by them.

Section 8.     Rank .  Notwithstanding anything set forth in the certificate of incorporation or this Certificate of Designations to the contrary, the board of directors, without the vote of the holders of the Series L Preferred Stock, may authorize and issue additional shares of Junior Stock or Parity Stock.

Section 9.     Repurchase .  Subject to the limitations imposed herein, the Corporation may purchase and sell Series L Preferred Stock from time to time to such extent, in such manner, and upon such terms as the board of directors may determine; provided however , that the Corporation shall not use any of its funds for any such purchase when there are reasonable grounds to believe that the Corporation is, or by such purchase would be, rendered insolvent.

Section 10.   Unissued or Reacquired Shares .  Shares of Series L Preferred Stock not issued or which have been issued and converted in accordance with the terms hereof or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Ssection 11.  No Sinking Fund .  Shares of Series L Preferred Stock are not subject to the operation of a sinking fund.

Section 12.   Right to Convert .  Each Holder shall have the right, at such Holder’s option, at any time, to convert all or any portion of such Holder’s Series L Preferred Stock into shares of Common Stock at the Applicable Conversion Rate (subject to the conversion procedures set forth in Section 13 herein) plus cash in lieu of fractional shares.

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Section 13.   Conversion

(a)        Conversion Procedures

(i)         Effective immediately prior to the close of business on the Mandatory Conversion Date or any applicable Conversion Date, dividends shall no longer be declared on any converted shares of Series L Preferred Stock and such shares of Series L Preferred Stock shall cease to be outstanding, in each case, subject to the right of Holders to receive any declared and unpaid dividends on such shares and any other payments to which they are otherwise entitled pursuant to Section 12, Section 13(b), Section 13(c), Section 13(d), Section 15 or Section 16, as applicable.

(ii)        Prior to the close of business on the Mandatory Conversion Date or any applicable Conversion Date, shares of Common Stock issuable upon conversion of, or other securities issuable upon conversion of, any shares of Series L Preferred Stock shall not be deemed outstanding for any purpose, and Holders shall have no rights with respect to the Common Stock or other securities issuable upon conversion (including voting rights, rights to respond to tender offers for the Common Stock and rights to receive any dividends or other distributions on the Common Stock and/or other securities issuable upon conversion), by virtue of holding shares of Series L Preferred Stock.

(iii)       The Person or Persons entitled to receive the Common Stock and/or other securities issuable upon conversion of Series L Preferred Stock shall be treated for all purposes as the record holder(s) of such shares of Common Stock and/or such other securities as of the close of business on the Mandatory Conversion Date or any applicable Conversion Date except to the extent that all or a portion of such Common Stock is subject to the limitations set forth in Section 18. In the event that a Holder shall not by written notice designate the name in which shares of Common Stock and/or cash, other securities or other property (including payments of cash in lieu of fractional shares) to be issued or paid upon conversion of shares of Series L Preferred Stock should be registered or paid or the manner in which such shares should be delivered, the Corporation shall be entitled to register and deliver such shares, and make such payment, in the name of the Holder and in the manner shown on the records of the Corporation through book-entry transfer through the Depositary.

(iv)       Conversion into shares of Common Stock will occur on the Mandatory Conversion Date or any applicable Conversion Date as follows:

(A)       On the Mandatory Conversion Date or applicable Conversion Date, certificates or evidence of shares in book-entry form representing shares of Common Stock shall be issued and delivered to Holders or their designee upon presentation and surrender of the certificate evidencing the Series L Preferred Stock to the Conversion Agent if shares of the Series L Preferred Stock are held in certificated form, and, if required, the furnishing of appropriate endorsements and transfer documents and the payment of all transfer and similar taxes. If a Holder’s interest is a beneficial interest in a global certificate representing Series L Preferred Stock, a book-entry transfer through the Depositary will be made by the Conversion Agent upon compliance with the Depositary’s procedures for converting a beneficial interest in a global security.

(B)       On the date of any conversion at the option of Holders pursuant to Section 12, Section 13(c) or Section 13(d), if a Holder’s interest is in certificated form, a Holder must do each of the following in order to convert:

(1)        complete and manually sign the conversion notice provided by the Conversion Agent, or a facsimile of the conversion notice, and deliver this irrevocable notice to the Conversion Agent;

(2)        surrender the shares of Series L Preferred Stock to the Conversion Agent;

(3)        if required, furnish appropriate endorsements and transfer documents;

(4)        if required, pay all transfer or similar taxes; and

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(5)        if required, pay funds equal to any declared and unpaid dividend payable on the next Dividend Payment Date.

If a Holder’s interest is a beneficial interest in a global certificate representing Series L Preferred Stock, in order to convert a Holder must comply with clauses (3) through (5) listed above and comply with the Depositary’s procedures for converting a beneficial interest in a global security.

The date on which a Holder complies with the procedures in this clause (v) is the “Conversion Date.”

(C)       Conversion Agent shall, on a Holder’s behalf, convert the Series L Preferred Stock into shares of Common Stock and/or cash, other securities or other property (involving payments of cash in lieu of fractional shares), in accordance with the terms of the notice delivered by such Holder described in clause (B) above. If a Conversion Date on which a Holder elects to convert Series L Preferred Stock is prior to the Record Date relating to any declared dividend for the Dividend Period, such Holder will not have the right to receive any declared dividends for that Dividend Period. If a Conversion Date on which a Holder elects to convert Series L Preferred Stock or the Mandatory Conversion Date is after the Record Date for any declared dividend and prior to the Dividend Payment Date, such Holder shall receive that dividend on the relevant Dividend Payment Date if such Holder was the Holder of record on the Record Date for that dividend. Notwithstanding the preceding sentence, if the Conversion Date is after the Record Date and prior to the Dividend Payment Date, whether or not such Holder was the Holder of record on the Record Date, the Holder must pay to the Conversion Agent upon conversion of the shares of Series L Preferred Stock an amount in cash equal to the full dividend actually paid on the Dividend Payment Date for the then-current Dividend Period on the shares of Series L Preferred Stock being converted, unless the Holder’s shares of Series L Preferred Stock are being converted pursuant to Section 13(b), Section 13(c) or Section 13(d).

(b)        Mandatory Conversion at the Corporation’s Option

(i)         On or after March 15, 2013, the Corporation may, at its option, at any time or from time to time, cause some or all of the Series L Preferred Stock to be converted into shares of Common Stock at the Applicable Conversion Rate if, for 20 Trading Days during any period of 30 consecutive Trading Days, including the last Trading Day of such period, the Closing Price of the Common Stock exceeds 130% of the Applicable Conversion Price of the Series L Preferred Stock. The Corporation will provide Notice of Mandatory Conversion as set forth in Section 13(b)(iii) within three Trading Days after the end of the 30 consecutive Trading Day period.

(ii)        If the Corporation elects to cause less than all of the Series L Preferred Stock to be converted under clause (i) above, the Conversion Agent will select the Series L Preferred Stock to be converted by lot, or on a pro rata basis or by another method the Conversion Agent considers fair and appropriate, including any method required by the Depositary (so long as such method is not prohibited by the rules of any stock exchange or quotation association on which the Series L Preferred Stock is then traded or quoted). If the Conversion Agent selects a portion of a Holder’s Series L Preferred Stock for partial conversion at the Corporation’s option and such Holder converts a portion of its shares of Series L Preferred Stock at the same time, the portion converted at such Holder’s option will reduce the portion selected for conversion at the Corporation’s option under this Section 13(b).

(iii)       If the Corporation exercises the optional conversion right described in this Section 13(b), the Corporation shall give notice (such notice a “ Notice of Mandatory Conversion ”) by (i) providing a notice of such conversion by first class mail to each Holder of record for the shares of Series L Preferred Stock to be converted or (ii) issuing a press release and making this information available on its website. The Conversion Date shall be a date selected by the Corporation (the “ Mandatory Conversion Date ”), not less than 10 days, and not more than 20 days, after the date on which the Corporation provides the Notice of Mandatory Conversion. In addition to any information required by applicable law or regulation, the Notice of Mandatory Conversion shall state, as appropriate:

(A)       the Mandatory Conversion Date;

(B)       the number of shares of Common Stock to be issued upon conversion of each share of Series L Preferred Stock; and

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(C)       the aggregate number of shares of Series L Preferred Stock to be converted.

(c)        Conversion upon Make-Whole Acquisition

(i)         In the event of a Make-Whole Acquisition occurring prior to a Mandatory Conversion Date or Conversion Date, each Holder shall have the option to convert its shares of Series L Preferred Stock (a “ Make-Whole Acquisition Conversion ”) during the period (the “ Make-Whole Acquisition Conversion Period ”) beginning on the effective date of the Make-Whole Acquisition (the “ Make-Whole Acquisition Effective Date ”) and ending on the date that is 30 days after the Make-Whole Acquisition Effective Date and receive an additional number of shares of Common Stock (the “ Make-Whole Shares ”) as set forth in clause (ii) below.

(ii)        The number of Make-Whole Shares per share of Series L Preferred Stock shall be determined by reference to the table below for the applicable Make-Whole Acquisition Effective Date and the applicable Make-Whole Acquisition Stock Price:

Make-Whole Acquisition Stock Price

Effective Date

$120.54

$125.57

$138.12

$150.68

$156.71

$175.79

$203.72

$226.02

$251.13

$301.36

$401.81

$502.26

April 17, 2008........

1.9153

1.8855

1.5191

1.1110

0.9497

0.6471

0.3962

0.2847

0.2091

0.1354

0.0757

0.0458

March 15, 2009........

1.9153

1.8775

1.5052

1.0951

0.9437

0.6331

0.3763

0.2588

0.1852

0.1175

0.0697

0.0438

March 15, 2010........

1.9153

1.8397

1.4913

1.0871

0.9378

0.6073

0.3365

0.2210

0.1533

0.0956

0.0577

0.0358

March 15, 2011........

1.9153

1.7899

1.4694

1.0731

0.9238

0.5794

0.2887

0.1712

0.1075

0.0657

0.0398

0.0259

March 15, 2012........

1.9153

1.7561

1.4355

1.0652

0.9139

0.5356

0.2051

0.0896

0.0458

0.0299

0.0199

0.0119

March 15, 2013........

1.9153

1.6704

1.4275

1.0592

0.9119

0.5097

0.0916

0.0000

0.0000

0.0000

0.0000

0.0000

Thereafter................

1.9153

1.6704

1.4275

1.0592

0.9119

0.5097

0.0916

0.0000

0.0000

0.0000

0.0000

0.0000

 

(A)       The exact Make-Whole Acquisition Stock Prices and Make-Whole Acquisition Effective Dates may not be set forth in the table, in which case:

(1)        if the Make-Whole Acquisition Stock Price is between two Make-Whole Acquisition Stock Price amounts in the table or the Make-Whole Acquisition Effective Date is between two dates in the table, the number of Make-Whole Shares will be determined by straight-line interpolation between the number of Make-Whole Shares set forth for the higher and lower Make-Whole Acquisition Stock Price amounts and the two Make-Whole Acquisition Effective Dates, as applicable, based on a 365-day year;

(2)        if the Make-Whole Acquisition Stock Price is in excess of $502.26 per share (subject to adjustment pursuant to Section 14), no Make-Whole Shares will be issued upon conversion of the Series L Preferred Stock; and

(3)        if the Make-Whole Acquisition Stock Price is less than $120.54 per share (subject to adjustment pursuant to Section 14), no Make-Whole Shares will be issued upon conversion of the Series L Preferred Stock.

(B)       The Make-Whole Acquisition Stock Prices set forth in the table above are subject to adjustment pursuant to Section 14 hereof and shall be adjusted as of any date the Conversion Rate is adjusted. The adjusted Make-Whole Acquisition Stock Prices will equal the Make-Whole Acquisition Stock Prices applicable immediately prior to such adjustment multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to the adjustment giving rise to the Make-Whole Acquisition Stock Prices adjustment and the denominator of which is the Conversion Rate as so adjusted. Each of the number of Make-Whole Shares in the table shall also be subject to adjustment in the same manner as the Conversion Rate pursuant to Section 14.

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(iii)       On or before the twentieth day prior to the date the Corporation anticipates being the effective date for the Make-Whole Acquisition or within two business days of becoming aware of a Make-Whole Acquisition of the type set forth in clause (a) of the definition Make-Whole Acquisition, a written notice shall be sent by or on behalf of the Corporation, by first-class mail, postage prepaid, to the Holders as they appear in the records of the Corporation. Such notice shall contain:

(A)       the anticipated effective date or effective date of the Make-Whole Acquisition; and

(B)       the date, which shall be 30 days after the Make-Whole Acquisition Effective Date, by which a Make-Whole Acquisition Conversion must be exercised.

(iv)       On the Make-Whole Acquisition Effective Date or as soon as practicable thereafter, another written notice shall be sent by or on behalf of the Corporation, by first-class mail, postage prepaid, to the Holders as they appear in the records of the Corporation. Such notice shall contain:

(A)       the date that shall be 30 days after the Make-Whole Acquisition Effective Date;

(B)       the number of Make-Whole Shares;

(C)       the amount of cash, securities and other consideration receivable by a Holder of Series L Preferred Stock upon conversion; and

(D)       the instructions a Holder must follow to exercise its conversion option in connection with such Make-Whole Acquisition.

(v)        To exercise a Make-Whole Acquisition Conversion option, a Holder must, no later than 5:00 p.m., New York City time on or before the date by which the Make-Whole Acquisition Conversion option must be exercised as specified in the notice delivered under clause (iv) above, comply with the procedures set forth in Section 13(a)(iv)(B).

(vi)       If a Holder does not elect to exercise the Make-Whole Acquisition Conversion option in accordance with the provisions specified in this Section 13(c), the shares of Series L Preferred Stock or successor security held by it shall remain outstanding (unless otherwise converted as provided herein), and the Holder will not be eligible to receive Make-Whole Shares.

(vii)      Upon a Make-Whole Acquisition Conversion, the Conversion Agent shall, except as otherwise provided in the instructions provided by the Holder thereof in the written notice provided to the Corporation or its successor as set forth in Section 13(a)(iv) above, deliver to the Holder such cash, securities or other property as are issuable with respect to Make-Whole Shares in the Make-Whole Acquisition.

(viii)     In the event that a Make-Whole Acquisition Conversion is effected with respect to shares of Series L Preferred Stock or a successor security representing less than all the shares of Series L Preferred Stock or a successor security held by a Holder, upon such Make-Whole Acquisition Conversion the Corporation or its successor shall execute and the Conversion Agent shall, unless otherwise instructed in writing, countersign and deliver to the Holder thereof, at the expense of the Corporation or its successors, a certificate evidencing the shares of Series L Preferred Stock or such successor security held by the Holder as to which a Make-Whole Acquisition Conversion was not effected.

(d)        Conversion Upon Fundamental Change

(i)         If the Reference Price in connection with a Make-Whole Acquisition is less than $120.54 (a “ Fundamental Change ”), a Holder may elect to convert each share of Series L Preferred Stock during the period beginning on the effective date of the Fundamental Change and ending on the date that is 30 days after the effective date of such Fundamental Change at an adjusted conversion price equal to the greater of (1) the Reference Price

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and (2) $60.27, subject to adjustment as described in clause (ii) below (the “ Base Price ”). If the Reference Price is less than the Base Price, Holders will receive a maximum of 16.5916 shares of Common Stock per share of Series L Preferred Stock converted, subject to adjustment as a result of any adjustment to the Base Price described in clause (ii) below.

(ii)        The Base Price shall be adjusted as of any date the Conversion Rate of the Series L Preferred Stock is adjusted pursuant to Section 14. The adjusted Base Price shall equal the Base Price applicable immediately prior to such adjustment multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to the adjustment giving rise to the Conversion Rate adjustment and the denominator of which is the Conversion Rate as so adjusted.

(iii)       In lieu of issuing Common Stock upon conversion in the event of a Fundamental Change, the Corporation may at its option, and if it obtains any necessary regulatory approval, pay an amount in cash (computed to the nearest cent) equal to the Reference Price for each share of Common Stock otherwise issuable upon conversion.

(iv)       On or before the twentieth day prior to the date the Corporation anticipates being the effective date for the Fundamental Change or within two business days of becoming aware of the Fundamental Change if it is a Make-Whole Acquisition of the type set forth in clause (a) of the definition Make-Whole Acquisition, a written notice shall be sent by or on behalf of the Corporation, by first-class mail, postage prepaid, to the Holders as they appear in the records of the Corporation. Such notice shall contain:

(A)       the anticipated effective date of the Fundamental Change; and

(B)       the date, which shall be 30 days after the anticipated effective date of a Fundamental Change, by which a Fundamental Change conversion must be exercised.

(v)        On the effective date of a Fundamental Change or as soon as practicable thereafter, another written notice shall be sent by or on behalf of the Corporation, by first-class mail, postage prepaid, to the Holders as they appear in the records of the Corporation. Such notice shall contain:

(A)       the date that shall be 30 days after the effective date of the Fundamental Change;

(B)       the adjusted conversion price following the Fundamental Change;

(C)       the amount of cash, securities and other consideration received by a Holder of Series L Preferred Stock upon conversion; and

(D)       the instructions a Holder must follow to exercise its conversion option in connection with such Fundamental Change.

(vi)       To exercise its conversion option upon a Fundamental Change, a Holder must, no later than 5:00 p.m., New York City time on or before the date by which the conversion option upon the Fundamental Change must be exercised as specified in the notice delivered under clause (v) above, comply with the procedures set forth in Section 13 (a)(v)(B) and indicate that it is exercising the Fundamental Change conversion option.

(vii)      If a Holder does not elect to exercise its conversion option upon a Fundamental Change in accordance with the provisions specified in this Section 13(d), the shares of Series L Preferred Stock or successor security held by it shall remain outstanding (unless otherwise converted as provided herein) and the Holder will not be eligible to convert its shares pursuant to this Section 13(d).

(viii)     Upon a conversion upon a Fundamental Change, the Conversion Agent shall, except as otherwise provided in the instructions provided by the Holder thereof in the written notice provided to the Corporation or its successor as set forth in Section 13(a)(iv), deliver to the Holder such cash, securities or other property as are issuable with respect to the adjusted conversion price following the Fundamental Change.

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(ix)       In the event that a conversion upon a Fundamental Change is effected with respect to shares of Series L Preferred Stock or a successor security representing less than all the shares of Series L Preferred Stock or a successor security held by a Holder, upon such conversion the Corporation or its successor shall execute and the Conversion Agent shall, unless otherwise instructed in writing, countersign and deliver to the Holder thereof, at the expense of the Corporation, a certificate evidencing the shares of Series L Preferred Stock or such successor security held by the Holder as to which a conversion upon a Fundamental Change was not effected.

Section 14.   Anti-Dilution Adjustments

(a)        Adjustments .  The Conversion Rate will be subject to adjustment, without duplication, under the following circumstances:

(i)         The issuance of Common Stock as a dividend or distribution to all holders of Common Stock or a subdivision or combination of Common Stock (other than in connection with a Reorganization Event), in which event the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x (OS 1 / OS 0 )

where,

CR 0           =          the Conversion Rate in effect at the close of business on the Record Date

CR 1           =          the Conversion Rate in effect immediately after the Record Date

OS 0           =          the number of shares of Common Stock outstanding at the close of business on the Record Date prior to giving effect to such event

OS 1           =          the number of shares of Common Stock that would be outstanding immediately after, and solely as a result of, such event

Notwithstanding the foregoing, (1) no adjustment will be made for the issuance of Common Stock as a dividend or distribution to all holders of Common Stock that is made in lieu of a quarterly or annual cash dividend or distribution to such holders, to the extent such dividend or distribution does not exceed the applicable Dividend Threshold Amount (with the amount of any such dividend or distribution equaling the number of such shares being issued multiplied by the average of the VWAP of the Common Stock over each of the five consecutive VWAP Trading Days prior to the Ex-Date for such dividend or distribution) and (2) in the event any dividend, distribution, subdivision or combination that is the subject of this Section 14(a)(i) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the board of directors publicly announces its decision not to pay or make such dividend or distribution or effect such subdivision or combination, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared or such subdivision or combination had not been announced.

(ii)        The issuance to all holders of Common Stock of certain rights or warrants (other than rights issued pursuant to a shareholder rights plan or rights or warrants issued in connection with a Reorganization Event) entitling them for a period expiring 60 days or less from the date of issuance of such rights or warrants to purchase shares of Common Stock (or securities convertible into Common Stock) at less than (or having a conversion price per share less than) the Current Market Price as of the Record Date, in which event each Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x [(OS 0 + X) / (OS 0 + Y)]

where,

CR 0           =          the Conversion Rate in effect at the close of business on the Record Date

CR 1           =          the Conversion Rate in effect immediately after the Record Date

OS 0           =          the number of shares of Common Stock outstanding at the close of business on the Record Date

X           =          the total number of shares of Common Stock issuable pursuant to such rights or warrants (or upon conversion of such securities)

Y           =          the number of shares equal to the quotient of the aggregate price payable to exercise such rights or warrants (or the conversion price for such securities paid upon conversion) divided by the

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average of the VWAP of the Common Stock over each of the ten consecutive VWAP Trading Days prior to the Business Day immediately preceding the announcement of the issuance of such rights or warrants

Notwithstanding the foregoing, (1) in the event that such rights or warrants described in this Section 14(a)(ii) are not so issued, the Conversion Rate shall be immediately readjusted, effective as of the date the board of directors publicly announces its decision not to issue such rights or warrants, to the Conversion Rate that would then be in effect if such issuance had not been declared and (2) to the extent that such rights or warrants are not exercised prior to their expiration or shares of the Common Stock are otherwise not delivered pursuant to such rights or warrants upon the exercise of such rights or warrants, the Conversion Rate shall be readjusted to the Conversion Rate that would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered.

In determining the aggregate price payable for such shares of the Common Stock, there shall be taken into account any consideration received by the Corporation for such rights or warrants and the value of such consideration (if other than cash, to be determined by the board of directors). If an adjustment to the Conversion Rate may be required pursuant to this Section 14(a)(ii), delivery of any additional shares of Common Stock that may be deliverable upon conversion as a result of an adjustment required pursuant to this Section 14(a)(ii) shall be delayed to the extent necessary in order to complete the calculations provided for in this Section 14(a)(ii).

(iii)       The dividend or other distribution to all holders of Common Stock of shares of capital stock of the Corporation (other than Common Stock) or evidences of its indebtedness or its assets (excluding any dividend, distribution or issuance covered by clauses (a)(i) or (a)(ii) above or (a)(iv) below, any dividend or distribution in connection with a Reorganization Event or any spin-off to which the provisions set forth below in this clause (a)(iii) apply) in which event the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x [SP 0 / (SP 0 – FMV)]

where,

CR 0           =          the Conversion Rate in effect at the close of business on the Record Date

CR 1           =          the Conversion Rate in effect immediately after the Record Date

SP 0            =          the Current Market Price as of the Record Date

FMV     =          the fair market value (as determined by the board of directors) on the Record Date of the shares of capital stock of the Corporation, evidences of indebtedness or assets so distributed, applicable to one share of Common Stock

However, if the transaction that gives rise to an adjustment pursuant to this clause (iii) is one pursuant to which the payment of a dividend or other distribution on Common Stock consists of shares of capital stock of the Corporation of, or similar equity interests in, a subsidiary or other business unit of the Corporation ( i.e.,  a spin-off) that are, or, when issued, will be, traded on the New York Stock Exchange, the Nasdaq Stock Market or any other national or regional securities exchange or market, then the Conversion Rate will instead be adjusted based on the following formula:

CR 1 = CR 0 x [(FMV 0 + MP 0 ) / MP 0 ]

where,

CR 0           =          the Conversion Rate in effect at the close of business on the Record Date

CR 1           =          the Conversion Rate in effect immediately after the Record Date

FMV 0       =          the average of the VWAP of the Capital Stock distributed to holders of Common Stock applicable to one share of Common Stock over each of the 10 consecutive VWAP Trading Days commencing on and including the third VWAP Trading Day after the date on which “ex-distribution trading” commences for such dividend or distribution on the NYSE or such other national or regional exchange or association or over-the-counter market, or, if not so traded or quoted, the fair market value of the capital stock or similar equity interests distributed to holders

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of Common Stock applicable to one share of Common Stock as determined by the board of directors

MP 0      =          the average of the VWAP of the Common Stock over each of the 10 consecutive VWAP Trading Days commencing on and including the third VWAP Trading Day after the date on which “ex-distribution trading” commences for such dividend or distribution on the NYSE or such other national or regional exchange or association or over-the-counter market on which Common Stock is then traded or quoted

Notwithstanding the foregoing, (1) if any dividend or distribution of the type described in this Section 14(a)(iii) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the board of directors publicly announces its decision not to pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared. If an adjustment to the Conversion Rate may be required under this Section 14(a)(iii), delivery of any additional shares of Common Stock that may be deliverable upon conversion as a result of an adjustment required under this Section 14(a)(iii) shall be delayed to the extent necessary in order to complete the calculations provided for in this Section 14(a)(iii).

(iv)       The Corporation makes a distribution consisting exclusively of cash to all holders of Common Stock, excluding (a) any regular cash dividend on Common Stock to the extent that the aggregate cash dividend per share of Common Stock does not exceed $1.8835 in any fiscal quarter (the “ Dividend Threshold Amount ”) and (b) any consideration payable in connection with a tender or exchange offer made by the Corporation or any its subsidiaries referred to in clause (v) below, in which event, the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x [SP 0 / (SP 0 – C)]

where,

CR 0           =          the Conversion Rate in effect at the close of business on the Record Date

CR 1           =          the Conversion Rate in effect immediately after the Record Date

SP 0            =          the Current Market Price as of the Record Date

C           =          the amount in cash per share equal to (1) in the case of a regular quarterly dividend, the amount the Corporation distributes to holders or pays, less the Dividend Threshold Amount or (2) in any other case, the amount the Corporation distributes to holders or pays

The Dividend Threshold Amount is subject to adjustment on an inversely proportional basis whenever the Conversion Rate is adjusted; provided that no adjustment will be made to the Dividend Threshold Amount for any adjustment made to the Conversion Rate pursuant to this clause (iv).

Notwithstanding the foregoing, if any dividend or distribution of the type described in this Section 14(a)(iv) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the board of directors publicly announces its decision not to pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

(v)        The Corporation or one or more of its subsidiaries make purchases of Common Stock pursuant to a tender offer or exchange offer by the Corporation or a subsidiary of the Corporation for Common Stock to the extent that the cash and value (as determined by the board of directors) of any other consideration included in the payment per share of Common Stock validly tendered or exchanged exceeds the VWAP per share of Common Stock on the VWAP Trading Day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer (the “ Expiration Date ”), in which event the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x [(FMV + (SP 1 x OS 1 ) / (SP 1 x OS 0 )]

where,

CR 0           =          the Conversion Rate in effect at the close of business on the Expiration Date

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CR 1           =          the Conversion Rate in effect immediately after the Expiration Date

FMV     =          the fair market value (as determined by the board of directors), on the Expiration Date, of the aggregate value of all cash and any other consideration paid or payable for shares validly tendered or exchanged and not withdrawn as of the Expiration Date (the “ Purchased Shares ”) 

OS 1           =          the number of shares of Common Stock outstanding as of the last time tenders or exchanges may be made pursuant to such tender or exchange offer (the “ Expiration Time ”) less any Purchased Shares

OS 0           =          the number of shares of Common Stock outstanding at the Expiration Time, including any Purchased Shares

SP 1            =          the average of the VWAP of the Common Stock over each of the ten consecutive VWAP Trading Days commencing with the VWAP Trading Day immediately after the Expiration Date.

Notwithstanding the foregoing, if the Corporation, or one of its subsidiaries, is obligated to purchase shares of Common Stock pursuant to any such tender or exchange offer, but the Corporation or such subsidiary is permanently prevented by applicable law from effecting any such purchases, or all such purchases are rescinded, then the Conversion Rate shall be readjusted to be the Conversion Rate that would then be in effect if such tender or exchange offer had not been made. If an adjustment to the Conversion Rate may be required under this Section 14(a)(v), delivery of any additional shares of Common Stock that may be deliverable upon conversion as a result of an adjustment required under this Section 14(a)(v) shall be delayed to the extent necessary in order to complete the calculations provided for in this Section 14(a)(v).

(b)        Calculation of Adjustments .  All adjustments to the Conversion Rate shall be calculated by the Corporation to the nearest 1/10,000th of one share of Common Stock (or if there is not a nearest 1/10,000th of a share, to the next lower 1/10,000th of a share). No adjustment to the Conversion Rate will be required unless such adjustment would require an increase or decrease of at least one percent; provided , however , that any such minor adjustments that are not required to be made will be carried forward and taken into account in any subsequent adjustment, and provided further that any such adjustment of less than one percent that has not been made will be made prior to any conversion pursuant to Section 13(b), Section 13(c) or Section 13(d).

(c)        When No Adjustment Required

(i)         Except as otherwise provided in this Section 14, the Conversion Rate will not be adjusted for the issuance of Common Stock or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing or for the repurchase of Common Stock.

(ii)        Rights Plans .  To the extent that the Corporation has a stockholders’ rights plan in effect upon conversion of the Series L Preferred Stock into Common Stock, Holders will receive, in addition to any of Common Stock deliverable and in lieu of any adjustment to the Conversion Rate, the rights under the stockholders’ rights plan, unless prior to any conversion, the rights have separated from Common Stock, in which case the Conversion Rate will be adjusted at the time of separation as if we distributed to all holders of Common Stock, shares of the Corporation’s Capital Stock, evidences of indebtedness or assets as described in Section 14(a)(iii). A further adjustment will occur as described in Section 14(a)(iii), if such rights become exercisable to purchase different securities, evidences of indebtedness or assets, subject to readjustment in the event of the expiration, termination or redemption of such rights.

(iii)       No adjustment to the Conversion Rate need be made:

(A)       upon the issuance of any shares of Common Stock pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on securities of the Corporation and the investment of additional optional amounts in Common Stock under any plan;

(B)       upon the issuance of any shares of Common Stock or options or rights to purchase those shares pursuant to any present or future employee, director or consultant benefit plan or program of or assumed by the Corporation or any of its subsidiaries; or

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(C)       upon the issuance of any shares of Common Stock pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security outstanding as of the date the Series L Preferred Stock was first issued.

(iv)       No adjustment to the Conversion Rate need be made for a transaction referred to in Section 14(a)(i) through (v) if Holders may participate in the transaction on a basis and with notice that the board of directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction.

(v)        No adjustment to the Conversion Rate need be made for a change in the par value or no par value of the Common Stock.

(vi)       No adjustment to the Conversion Rate will be made to the extent that such adjustment would result in the Conversion Price being less than the par value of the Common Stock.

(d)        Record Date .  For purposes of this Section 14, “Record Date” means, with respect to any dividend, distribution or other transaction or event in which the holders of the Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of holders of the Common Stock entitled to receive such cash, securities or other property (whether such date is fixed by the board of directors or by statute, contract or otherwise).

(e)        Successive Adjustments .  After an adjustment to the Conversion Rate under this Section 14, any subsequent event requiring an adjustment under this Section 14 shall cause an adjustment to such Conversion Rate as so adjusted.

(f)        Multiple Adjustments .  For the avoidance of doubt, if an event occurs that would trigger an adjustment to the Conversion Rate pursuant to this Section 14 under more than one subsection hereof, such event, to the extent fully taken into account in a single adjustment, shall not result in multiple adjustments hereunder.

(g)        Other Adjustments .  The Corporation may (but is not required to) make such increases in the Conversion Rate, in addition to those required by Section 14(a)(i) through (v), as the board of directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes.

In addition to the foregoing, to the extent permitted by applicable law and subject to the applicable rules of the New York Stock Exchange, the Corporation from time to time may increase the Conversion Rate by any amount for any period of time if the period is at least 20 business days, the increase is irrevocable during the period and the board of directors shall have made a determination that such increase would be in the best interests of the Corporation, which determination shall be conclusive.

(h)        Notice of Adjustments .  Whenever a Conversion Rate is adjusted as provided under Section 14, the Corporation shall within 10 Business Days following the occurrence of an event that requires such adjustment (or if the Corporation is not aware of such occurrence, as soon as reasonably practicable after becoming so aware) or within 15 calendar days of the date the Corporation makes an adjustment pursuant to Section 14(g):

(i)         compute the adjusted applicable Conversion Rate in accordance with Section 14 and prepare and transmit to the Conversion Agent an Officers’ Certificate setting forth the applicable Conversion Rate, as the case may be, the method of calculation thereof in reasonable detail, and the facts requiring such adjustment and upon which such adjustment is based; and

(ii)        provide a written notice to the Holders of the occurrence of such event and a statement in reasonable detail setting forth the method by which the adjustment to the applicable Conversion Rate was determined and setting forth the adjusted applicable Conversion Rate.

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(i)         Conversion Agent .  The Conversion Agent shall not at any time be under any duty or responsibility to any Holder to determine whether any facts exist that may require any adjustment of the applicable Conversion Rate or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed in making the same. The Conversion Agent shall be fully authorized and protected in relying on any Officers’ Certificate delivered pursuant to Section 14(h) and any adjustment contained therein and the Conversion Agent shall not be deemed to have knowledge of any adjustment unless and until it has received such certificate. The Conversion Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, that may at the time be issued or delivered with respect to any of the Series L Preferred Stock; and the Conversion Agent makes no representation with respect thereto. The Conversion Agent shall not be responsible for any failure of the Corporation to issue, transfer or deliver any shares of Common Stock pursuant to a the conversion of the Series L Preferred Stock or to comply with any of the duties, responsibilities or covenants of the Corporation contained in this Section 14.

Section 15.   Reorganization Events

(a)        In the event of:

(i)         any consolidation or merger of the Corporation with or into another Person, in each case pursuant to which the Common Stock will be converted into cash, securities, or other property of the Corporation or another Person;

(ii)        any sale, transfer, lease, or conveyance to another Person of all or substantially all of the consolidated assets of the Corporation and its subsidiaries, taken as a whole, in each case pursuant to which the Common Stock will be converted into cash, securities, or other property; or

(iii)       any reclassification of the Common Stock into securities, including securities other than the Common Stock; or

(iv)       any statutory exchange of the Corporation’s securities with another Person (other than in connection with a merger or acquisition);

(any such event specified in this Section 15(a), a “ Reorganization Event ”); each share of Series L Preferred Stock outstanding immediately prior to such Reorganization Event shall, without the consent of Holders, become convertible into the types and amounts of securities, cash, and other property that is or was receivable in such Reorganization Event by a holder of the shares of Common Stock that was not the counterparty to the Reorganization Event or an affiliate of such other party in exchange for such Common Stock (such securities, cash, and other property, the “ Exchange Property ”). 

(b)        In the event that holders of the shares of the Common Stock have the opportunity to elect the form of consideration to be received in such transaction, the consideration that the Holders are entitled to receive upon conversion shall be deemed to be the types and amounts of consideration received by the majority of the holders of the shares of the Common Stock that affirmatively make an election (or of all such holders if none make an election). On each Conversion Date following a Reorganization Event, the Conversion Rate then in effect will be applied to the value on such Conversion Date of the securities, cash, or other property received per share of Common Stock, determined as set forth above. The amount of Exchange Property receivable upon conversion of any Series L Preferred Stock in accordance with Section 12, Section 13(b), Section 13(c) or Section 13(d) hereof shall be determined based upon the then Applicable Conversion Rate.

(c)        The above provisions of this Section 15 shall similarly apply to successive Reorganization Events and the provisions of Section 14 shall apply to any shares of Capital Stock of the Corporation (or any successor) received by the holders of the Common Stock in any such Reorganization Event.

(d)        The Corporation (or any successor) shall, within 20 days of the occurrence of any Reorganization Event, provide written notice to the Holders of such occurrence of such event and of the type and amount of the cash, securities or other property that constitutes the Exchange Property. Failure to deliver such notice shall not affect the operation of this Section 15.

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Section 16.   Fractional Shares

(a)        No fractional shares of Common Stock will be issued as a result of any conversion of shares of Series L Preferred Stock.

(b)        In lieu of any fractional share of Common Stock otherwise issuable in respect of any conversion at the Corporation’s option pursuant to Section 13(b) hereof or any conversion at the option of the Holder pursuant to Section 12, Section 13(c) or Section 13(d) hereof, the Corporation shall pay an amount in cash (computed to the nearest cent) equal to the same fraction of the Closing Price of the Common Stock determined as of the second Trading Day immediately preceding the effective date of conversion.

(c)        If more than one share of the Series L Preferred Stock is surrendered for conversion at one time by or for the same Holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of the Series L Preferred Stock so surrendered.

Section 17.   Reservation of Common Stock

(a)        The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of Series L Preferred Stock as provided in this Certificate of Designations, free from any preemptive or other similar rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of Series L Preferred Stock then outstanding, calculated assuming the Applicable Conversion Price equals the Base Price, subject to adjustment as described under Section 14. For purposes of this Section 17(a), the number of shares of Common Stock that shall be deliverable upon the conversion of all outstanding shares of Series L Preferred Stock shall be computed as if at the time of computation all such outstanding shares were held by a single Holder.

(b)        All shares of Common Stock delivered upon conversion of the Series L Preferred Stock shall be duly authorized, validly issued, fully paid and non-assessable, free and clear of all liens, claims, security interests and other encumbrances (other than liens, charges, security interests and other encumbrances created by the Holders).

(c)        Prior to the delivery of any securities that the Corporation shall be obligated to deliver upon conversion of the Series L Preferred Stock, the Corporation shall use its reasonable best efforts to comply with all federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority.

(d)        The Corporation hereby covenants and agrees that, so long as the Common Stock shall be listed on the New York Stock Exchange or any other national securities exchange or automated quotation system, the Corporation will, if permitted by the rules of such exchange or automated quotation system, list and keep listed all the Common Stock issuable upon conversion of the Series L Preferred Stock; provided however , that if the rules of such exchange or automated quotation system permit the Corporation to defer the listing of such Common Stock until the first conversion of Series L Preferred Stock into Common Stock in accordance with the provisions hereof, the Corporation covenants to list such Common Stock issuable upon conversion of the Series L Preferred Stock in accordance with the requirements of such exchange or automated quotation system at such time.

Ssection 18.  Limitations on Beneficial Ownership .  Notwithstanding anything to the contrary contained herein, and subject to the last sentence of this Section 18, no holder of Series L Preferred Stock will be entitled to receive shares of Common Stock upon conversion pursuant to Section 12 and Section 13 hereof to the extent, but only to the extent, that such receipt would cause such converting holder to become, directly or indirectly, a “beneficial owner” (within the meaning of Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) of more than 9.9% of the shares of Common Stock outstanding at such time. Any delivery of shares of Common Stock upon a purported conversion of Series L Preferred Stock shall be void and have no effect and such shares shall for all purposes continue to represent outstanding shares of Series L Preferred Stock to the extent (but only to the extent) that such delivery would result in the converting holder becoming the beneficial owner of more than 9.9% of the shares of Common Stock outstanding at such time. If any delivery of shares of Common Stock owed to a holder upon conversion of Series L Preferred Stock is not made, in whole or in part, as a result of this limitation, the Corporation’s obligation to make such delivery shall not be extinguished and the Corporation shall deliver such shares as promptly as practicable after any such

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converting holder gives notice to the Corporation that such delivery would not result in it being the beneficial owner of more than 9.9% of the shares of Common Stock outstanding at such time. Notwithstanding anything in this paragraph to the contrary, these limitations on beneficial ownership shall not be applicable to or limit the number of shares of Series L Preferred Stock to be converted as a result of a mandatory conversion by the Corporation pursuant to Section 13(b).

Section 19.   Preemptive or Subscription Rights .  The Holders of Series L Preferred Stock shall not have any preemptive or subscription rights.

IN WITNESS WHEREOF, WELLS FARGO & COMPANY has caused this Certificate of Designations to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Laurel A. Holschuh, its Secretary, this  30 th  day of December, 2008.

WELLS FARGO & COMPANY


By:      
            /s/ Barbara S. Brett                              
            Barbara S. Brett, Senior Vice President
            and Assistant Treasurer

            /s/ Laurel A. Holschuh            
Laurel A. Holschuh, Secretary

 

 

[As filed with the Delaware Secretary of State on December 30, 2008.]

WELLS FARGO & COMPANY

___________________________________

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

___________________________________

 

2010 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Without Par Value)

___________________________________

 

 

            WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Company”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the “Board”) by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the “Preferred Stock”), and pursuant to authority conferred upon the ESOP Preferred Stock Committee I of the Board (the “ESOP Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at meetings of the Board duly held on January 25, 2000 and February 24, 2009, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on March 23, 2010, in accordance with Section 141(f) of the General Corporation Law:

 

            1.         On January 25, 2000, the Board adopted the following resolutions (the “ESOP Board Resolutions”) appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of Preferred Stock (“ESOP Preferred Stock”) to the trustee on behalf of the Company’s 401(k) Plan hereinafter referred to:

 

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RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee I (the “First Committee”), which shall have and may exercise the full powers of the Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1 2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the First Committee in its discretion shall approve, and to take any and all actions as the First Committee shall deem necessary or appropriate.

 

            2.         Pursuant to resolutions adopted on February 24, 2009, the Board designated John G. Stumpf as the sole member of the ESOP Committee, effective April 29, 2009.

 

3.         On March 23, 2010, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions, the ESOP Committee adopted the following resolutions by written consent in accordance with Section 141(f) of the General Corporation Law:

 

            RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows:

 

2010 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

 

            1.   Designation and Number of Shares; Restricted Issue

 

                        (a) The designation of the series of Preferred Stock, without par value, provided for herein shall be “2010 ESOP Cumulative Convertible Preferred Stock” (hereinafter referred to as the “2010 ESOP Preferred Stock”) and the number of authorized shares constituting the 2010 ESOP Preferred Stock is 1,000,000, based on an offering price for the 2010 ESOP Preferred Stock of $1,080.00 per share.  Each share of 2010 ESOP Preferred Stock shall have a stated value of $1,000.00 per share.  The number of authorized shares of 2010 ESOP Preferred Stock may be reduced by further resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2010 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2010 ESOP Preferred Stock shall not be increased.  All shares of the 2010 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of 2010 ESOP Preferred Stock.

 

                        (b)  Shares of 2010 ESOP Preferred Stock shall be issued only to a trustee (the “Trustee”) acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the “Plan”).  All references to the holder of shares of 2010 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan.  In the event of any transfer of record ownership of shares of 2010 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2010 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the “Common Stock”) on the terms otherwise provided for the conversion of the shares of 2010 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2010 ESOP Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of 2010 ESOP Preferred Stock shall be so converted.  In the event of such a conversion, the transferee of the shares of 2010 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of 2010 ESOP Preferred Stock have been automatically converted as of the date of such transfer.  Shares of 2010 ESOP Preferred Stock may be certificated or uncertificated, at the Company’s option.  Certificates representing shares of 2010 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions.  In the case of

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uncertificated 2010 ESOP Preferred Stock, the transfer agent for the 2010 ESOP Preferred Stock shall note the foregoing provisions on each 2010 ESOP Preferred Stock book entry account.  The Company may require that, as a condition to transferring record ownership of any uncertificated 2010 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2010 ESOP Preferred Stock are subject to the foregoing provisions.  Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2010 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof.

            2.   Voting Rights .  No shares of 2010 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows:

 

                        (a)  Whenever, at any time or times, dividends payable on shares of 2010 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2010 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the shares of 2010 ESOP Preferred Stock, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the shares of 2010 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2010 ESOP Preferred Stock (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such shares of 2010 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such shares of 2010 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2010 ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

                        (b)  Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

                        (c)  So long as any shares of 2010 ESOP Preferred Stock remain outstanding, the consent of the holders of the outstanding shares of 2010 ESOP Preferred Stock and outstanding shares of all other series of Preferred Stock ranking on a parity with such shares of 2010 ESOP Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding shares of 2010 ESOP Preferred Stock and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

                                    (i)  the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2010 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

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                                    (ii)  the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designations designating shares of 2010 ESOP Preferred Stock and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2010 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2010 ESOP Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

                        (d)  The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2010 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            3.         Dividends .  (a)(i)  Holders of shares of 2010 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $95.00 (the “Base Dividend”) per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3.

 

                                    (ii)  The Base Dividend shall be adjusted, effective on December 1, 2011 and on each December 1 thereafter until December 1, 2019, as follows: 

 

                                                (1)  If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2010 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $100.00 per share (the “First Adjusted Dividend”). 

 

                                                (2)  If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2010 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $105.00 per share (the “Second Adjusted Dividend”).

 

                                                (3)  If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2010 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend.

23)                 

24)               Dividend Adjustment Table

 

25)                           Closing Price on 11/30

26)                                 First Target Price

27)                                       Second Target Price

2011

35.445

41.275

2012

38.990

49.530

2013

42.889

59.436

2014

47.178

71.323

2015

51.895

85.588

2016

57.085

102.706

2017

62.793

123.247

2018

69.073

147.896

2019

75.980

177.475

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                                                (4)  As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2011, the Current Market Price of one share of Common Stock is $40.00, then the cash dividend payable for the immediately following twelve month period per share of 2010 ESOP Preferred Stock would equal $100.00, with the first quarterly payment of such $100.00 dividend to be made on March 1, 2012.  If on November 30, 2012, the Current Market Price of one share of Common Stock is $60.00, then the cash dividend payable for the immediately following twelve month period per share of 2010 ESOP Preferred Stock would equal $105.00, with the first quarterly payment of such $105.00 dividend to be made on March 1, 2013.  If on November 30, 2013, the Current Market Price of one share of Common Stock is $40.00, then the cash dividend payable for the immediately following twelve month period per share of 2010 ESOP Preferred Stock would equal $95.00, with the first quarterly payment of such $95.00 dividend to be made on March 1, 2014.

 

                                                (5)  For purposes of this Section 3, the terms “First Adjusted Dividend” and “Second Adjusted Dividend” are sometimes referred to as an “Adjusted Dividend;” the term “Current Market Price” shall have the meaning given to it in Section 4(c)(iv); and the term “Trading Day” shall have the meaning given to it in Section 4(c)(vi).

 

                                    (iii)  If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted.

 

                                    (iv)  Dividends payable on shares of the 2010 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 of each year, commencing June 1, 2010.  Dividends on shares of the 2010 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2010 ESOP Preferred Stock.  Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof.  The amount of dividends payable per share for each dividend period shall be computed by dividing by four the Base Dividend or the Adjusted Dividend, whichever is then applicable.  The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months.

 

                        (b)(i)  No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2010 ESOP Preferred Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2010 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends.  When dividends are not paid in full, as aforesaid, upon the shares of 2010 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2010 ESOP Preferred Stock, all dividends declared upon shares of 2010 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2010 ESOP Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on 2010 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2010 ESOP Preferred Stock and such other series of Preferred Stock bear to each other.  Holders of shares of 2010 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2010 ESOP Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2010 ESOP Preferred Stock which may be in arrears.

 

                                    (ii)  So long as any shares of 2010 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common Stock or any other stock ranking junior to 2010 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2010 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of

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the Company ranking junior to or on a parity with 2010 ESOP Preferred Stock as to dividends or upon liquidation be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to 2010 ESOP Preferred Stock as to dividends or upon liquidation), unless, in each case, the full cumulative dividends on all outstanding shares of 2010 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods.

 

            4.   Conversion .  Shares of 2010 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2010 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows:

 

                        (a)  Each share of 2010 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the “Release Date”), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2010 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (b)  Subject to and upon compliance with the provisions of this Section 4, a holder of 2010 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2010 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2010 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (c)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

 

                                    (i)  The “Average Current Market Price” per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the “Purchase Offer” is made (as that term is defined in Section 6(d) hereof).

 

                                    (ii)  A “Business Day” means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open.

 

                                    (iii)  (A)  For purposes of a mandatory conversion of shares of 2010 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the “Conversion Price” for such shares of 2010 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date.

 

                                                (B)  For purposes of an optional conversion of shares of 2010 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the “Conversion Price” for such shares of 2010 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2010 ESOP Preferred Stock or by any agent for conversion of the 2010 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4.

 

                                                (C)  For purposes of a conversion of shares of 2010 ESOP Preferred Stock into shares of Common Stock in connection with a “Purchase Offer” (as defined in Section 6(d) hereof), the “Conversion Price” for such shares of 2010 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock.

 

Each share of 2010 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2010 ESOP Preferred Stock will be converted. 

 

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                                    (iv)  The “Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange only or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof.

                                    (v)  “Common Stock” shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designations or as such stock may be constituted from time to time.

 

                                    (vi)  “Trading Day” with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day.

                                      (d)  In connection with any conversion of 2010 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the “Conversion Notice”) shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2010 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2010 ESOP Preferred Stock by the Company or the transfer agent for the 2010 ESOP Preferred Stock, which notice shall be accompanied by (a) in the case of certificated 2010 ESOP Preferred Stock, the certificate or certificates representing the shares of 2010 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) and (b) in the case of uncertificated 2010 ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2010 ESOP Preferred Stock being converted pursuant to this Section 4.  Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2010 ESOP Preferred Stock released from the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2010 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2010 ESOP Preferred Stock, for any shares of 2010 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request.

 

                        (e)  Upon delivery to the Company or the transfer agent for the 2010 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4,  the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder’s designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion.  If there shall have been surrendered a certificate or certificates representing shares of 2010 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder’s designee, in the manner set

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forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2010 ESOP Preferred Stock which shall not have been converted.

                        (f)  The issuance by the Company of shares of Common Stock upon a conversion of shares of 2010 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2010 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder’s designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2010 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4.  On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date.  The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2010 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares.

                        (g)  The Company shall not be obligated to deliver to holders of 2010 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2010 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law.

                        (h)  The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2010 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2010 ESOP Preferred Stock then outstanding.

                        (i)  The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2010 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

                        (j)  The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2010 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2010 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

                        5.   Redemption At the Option of the Company .  (a)  The 2010 ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2010 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2010 ESOP Preferred Stock on the date fixed for redemption.  Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5.  From and after the date fixed for redemption, dividends on shares of 2010 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price.  Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1.  If the full cumulative dividends have not been paid, or contemporaneously declared and set aside for payment, on all outstanding shares of 2010 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2010 ESOP Preferred Stock pursuant to this Section 5.

                        (b)  Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2010 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the

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2010 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date.  Each such notice shall state:  (i) the redemption date; (ii) the total number of shares of the 2010 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2010 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable upon conversion of a share of 2010 ESOP Preferred Stock will be determined.  The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2010 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state).

                        (c)  The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2010 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2010 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2010 ESOP Preferred Stock then being redeemed.

                        (d)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

                                    (i)  “Adjustment Period” shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined.

                                    (ii)  “Fair Market Value” shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period.  The “Fair Market Value” of any security which is not publicly traded (other than the 2010 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof.  The “Fair Market Value” of the 2010 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2010 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section).  For purposes of determining the Fair Market Value of the 2010 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2010 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2010 ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2010 ESOP Cumulative Convertible Preferred Stock Note Agreement dated on or about March 26, 2010 between the Company and the Plan (including any amendments or modifications thereto).

            6.   Consolidation, Merger, etc.   (a)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes “qualifying employer securities” with respect to a holder of 2010 ESOP Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2010 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and

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relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2010 ESOP Preferred Stock had immediately prior to such transaction, subject to the following:

                        (1)  After such transaction each share of the 2010 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2010 ESOP Preferred Stock could have been converted immediately prior to such transaction.

                        (2)  The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2010 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid.

                        (b)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2010 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2010 ESOP Preferred Stock could have been converted at such time so that each share of 2010 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2010 ESOP Preferred Stock could have been converted immediately prior to such transaction.  However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2010 ESOP Preferred Stock, then the shares of 2010 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2010 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction.  If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares.

                        (c)  In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a “Business Combination”), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2010 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2010 ESOP Preferred Stock, a cash payment per share of 2010 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2010 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is consummated.  No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction.

 

                        (d)  In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2010 ESOP Preferred Stock shall have the right to convert shares of 2010 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase

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Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the “Purchase Offer Conversion Period”), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period.

 

                        For purposes of this paragraph (d), the following terms shall have the meanings set forth below:

 

                                    (i)  “Beneficial Ownership” shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and “person” shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.

 

                                    (ii)  A “Purchase Offer” shall have been made when any person (other than the Company or any affiliate of the Company) shall have “commenced” (as such term is defined in Rule 14d-2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company.

 

            7.   Liquidation Rights .  (a)  Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2010 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to 2010 ESOP Preferred Stock upon liquidation, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.

 

                        (b)  Neither the sale of all or substantially all the property and assets of the Company, nor the merger or consolidation of the Company into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7.

 

                        (c)  After the payment to the holders of the shares of 2010 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2010 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company.

 

                        (d)  In the event the assets of the Company available for distribution to the holders of shares of 2010 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2010 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2010 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up.

             

                        (e)  Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on a parity with or prior to the shares of 2010 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2010 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2010 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2010 ESOP Preferred Stock shall not be entitled to share therein.

 

            8.   Ranking .  For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank:

 

                        (a)  prior to the shares of 2010 ESOP Preferred Stock, either as to dividends or upon liquidation, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon

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dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2010 ESOP Preferred Stock;

 

                        (b)  on a parity with shares of 2010 ESOP Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2010 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2010 ESOP Preferred Stock; and

 

                        (c)  junior to shares of 2010 ESOP Preferred Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of 2010 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes.

 

            9.   Priority of 2010 ESOP Preferred Stock .  The shares of 2010 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company’s 2001 ESOP Cumulative Convertible Preferred Stock, its 2002 ESOP Cumulative Convertible Preferred Stock, its 2003 ESOP Cumulative Convertible Preferred Stock, its 2004 ESOP Cumulative Convertible Preferred Stock, its 2005 ESOP Cumulative Convertible Preferred Stock, its 2006 ESOP Cumulative Convertible Preferred Stock, its 2007 ESOP Cumulative Convertible Preferred Stock and its 2008 ESOP Cumulative Convertible Preferred Stock. 

 

IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by John G. Stumpf, its Chairman, President and Chief Executive Officer, and attested by Jeannine E. Zahn, its Assistant Secretary, whereby such President and Chief Executive Officer affirms, under penalties of perjury, that this Certificate of Designations is the act and deed of the Company and that the facts stated herein are true, this  23 rd  day of March, 2010.

 

WELLS FARGO & COMPANY

 

 

 

By         /s/ John G. Stumpf                                  

John G. Stumpf

i)                             Chairman, President and

ii)                           Chief Executive Officer

 

 

Attest:

 

    /s/ Jeannine E. Zahn                                    

Jeannine E. Zahn

Assistant Secretary

 

[As filed with the Delaware Secretary of State on March 23, 2010.]

WELLS FARGO & COMPANY

_______________

 

CERTIFICATE OF AMENDMENT

 OF  

CERTIFICATE OF INCORPORATION 

_______________

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Pursuant to Section 242 of the

General Corporation Law of the State of Delaware

_______________

 

Laurel A. Holschuh, Senior Vice President, and Rachelle M. Graham, Assistant Secretary, of Wells Fargo & Company, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “Company”), do hereby certify:

 

FIRST:  That at a meeting of the Board of Directors of the Company duly held on February 23, 2010, a resolution was duly adopted setting forth a proposed amendment of the Restated Certificate of Incorporation of the Company, declaring the advisability of the amendment, and directing that the amendment be presented to stockholders of the Company for their consideration at the next annual meeting of the stockholders to be held on April 27, 2010.  The resolution setting forth the proposed amendment is as follows:

 

RESOLVED that an amendment to ARTICLE FOURTH of the Company’s Restated Certificate of Incorporation, as amended, to increase the authorized common stock to 9,000,000,000 shares is hereby proposed and declared advisable, and the following amendment to the first sentence of ARTICLE FOURTH is hereby directed to be presented to the stockholders of the Company for consideration at the annual meeting of stockholders to be held on April 27, 2010:

 

            FOURTH:  The total number of shares of all classes of stock which the corporation shall have authority to issue is Nine Billion Twenty-Four Million (9,024,000,000), consisting of Twenty Million (20,000,000) shares of Preferred Stock without par value, Four Million (4,000,000) shares of Preference Stock without par value, and Nine Billion (9,000,000,000) shares of Common Stock of the par value of $1 2/3 per share.

 

            SECOND:  That at such annual meeting of stockholders, duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, which notice set forth in full the proposed amendment, a majority of the outstanding shares of common stock of the Company were voted in favor of the amendment.

 

            THIRD:  That the amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

 

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IN WITNESS WHEREOF, WELLS FARGO & COMPANY has caused this Certificate to be signed by Laurel A. Holschuh, its Senior Vice President, and attested by Rachelle M. Graham, its Assistant Secretary, this  29 th  day of April, 2010.

 

 

WELLS FARGO & COMPANY:

 

(Corporate Seal)

 

By:             /s/ Laurel A. Holschuh                

Senior Vice President

 

 

ATTEST:

 

 

 

By:         /s/ Rachelle M. Graham       

Assistant Secretary

 

 

[As filed with the Delaware Secretary of State on April 29, 2010.]

 

WELLS FARGO & COMPANY

___________________________________

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

___________________________________

 

2011 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Without Par Value)

___________________________________

 

 

            WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Company”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the “Board”) by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the “Preferred Stock”), and pursuant to authority conferred upon the ESOP Preferred Stock Committee I of the Board (the “ESOP Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at meetings of the Board duly held on January 25, 2000 and February 24, 2009, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on March 15, 2011, in accordance with Section 141(f) of the General Corporation Law:

 

            1.         On January 25, 2000, the Board adopted the following resolutions (the “ESOP Board Resolutions”) appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of Preferred Stock (“ESOP Preferred Stock”) to the trustee on behalf of the Company’s 401(k) Plan hereinafter referred to:

 

RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee I (the “First Committee”), which shall have and may exercise the full powers of the

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Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1 2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the First Committee in its discretion shall approve, and to take any and all actions as the First Committee shall deem necessary or appropriate.

 

            2.         Pursuant to resolutions adopted on February 24, 2009, the Board designated John G. Stumpf as the sole member of the ESOP Committee, effective April 29, 2009.

 

3.         On March 15, 2011, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions, the ESOP Committee adopted the following resolutions by written consent in accordance with Section 141(f) of the General Corporation Law:

 

            RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows:

 

2011 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

 

            1.   Designation and Number of Shares; Restricted Issue

 

                        (a) The designation of the series of Preferred Stock, without par value, provided for herein shall be “2011 ESOP Cumulative Convertible Preferred Stock” (hereinafter referred to as the “2011 ESOP Preferred Stock”) and the number of authorized shares constituting the 2011 ESOP Preferred Stock is 1,200,000, based on an offering price for the 2011 ESOP Preferred Stock of $1,085.00 per share.  Each share of 2011 ESOP Preferred Stock shall have a stated value of $1,000.00 per share.  The number of authorized shares of 2011 ESOP Preferred Stock may be reduced by further resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2011 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2011 ESOP Preferred Stock shall not be increased.  All shares of the 2011 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of 2011 ESOP Preferred Stock.

 

                        (b)  Shares of 2011 ESOP Preferred Stock shall be issued only to a trustee (the “Trustee”) acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the “Plan”).  All references to the holder of shares of 2011 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan.  In the event of any transfer of record ownership of shares of 2011 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2011 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the “Common Stock”) on the terms otherwise provided for the conversion of the shares of 2011 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2011 ESOP Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of 2011 ESOP Preferred Stock shall be so converted.  In the event of such a conversion, the transferee of the shares of 2011 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of 2011 ESOP Preferred Stock have been automatically converted as of the date of such transfer.  Shares of 2011 ESOP Preferred Stock may be certificated or uncertificated, at the Company’s option.  Certificates representing shares of 2011 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions.  In the case of uncertificated 2011 ESOP Preferred Stock, the transfer agent for the 2011 ESOP Preferred Stock shall note the foregoing provisions on each 2011 ESOP Preferred Stock book entry account.  The Company may require that, as a condition to

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transferring record ownership of any uncertificated 2011 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2011 ESOP Preferred Stock are subject to the foregoing provisions.  Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2011 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof.

            2.   Voting Rights .  No shares of 2011 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows:

 

                        (a)  Whenever, at any time or times, dividends payable on shares of 2011 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2011 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the shares of 2011 ESOP Preferred Stock, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the shares of 2011 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2011 ESOP Preferred Stock (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such shares of 2011 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such shares of 2011 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2011 ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

                        (b)  Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

                        (c)  So long as any shares of 2011 ESOP Preferred Stock remain outstanding, the consent of the holders of the outstanding shares of 2011 ESOP Preferred Stock and outstanding shares of all other series of Preferred Stock ranking on a parity with such shares of 2011 ESOP Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding shares of 2011 ESOP Preferred Stock and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

 

                                    (i)  the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2011 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

                                    (ii)  the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designations

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designating shares of 2011 ESOP Preferred Stock and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2011 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2011 ESOP Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

                        (d)  The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2011 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            3.         Dividends .  (a)(i)  Holders of shares of 2011 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $90.00 (the “Base Dividend”) per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3.

 

                                    (ii)  The Base Dividend shall be adjusted, effective on December 1, 2012 and on each December 1 thereafter until December 1, 2020, as follows: 

 

                                                (1)  If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2011 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $95.00 per share (the “First Adjusted Dividend”). 

 

                                                (2)  If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2011 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $100.00 per share (the “Second Adjusted Dividend”).

 

                                                (3)  If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2011 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend.

28)               Dividend Adjustment Table

 

29)                           Closing Price on 11/30

30)                                 First Target Price

31)                                       Second Target Price

2012

38.559

45.346

2013

42.705

55.095

2014

47.295

66.941

2015

52.380

81.333

2016

58.010

98.820

2017

64.247

120.066

2018

71.153

145.880

2019

78.802

177.244

2020

87.273

215.352

 

                                                (4)  As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2012, the Current Market Price of one share of Common Stock is $40.00, then the cash

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dividend payable for the immediately following twelve month period per share of 2011 ESOP Preferred Stock would equal $95.00, with the first quarterly payment of such $95.00 dividend to be made on March 1, 2013.  If on November 30, 2013, the Current Market Price of one share of Common Stock is $60.00, then the cash dividend payable for the immediately following twelve month period per share of 2011 ESOP Preferred Stock would equal $100.00, with the first quarterly payment of such $100.00 dividend to be made on March 1, 2014.  If on November 30, 2014, the Current Market Price of one share of Common Stock is $40.00, then the cash dividend payable for the immediately following twelve month period per share of 2011 ESOP Preferred Stock would equal $90.00, with the first quarterly payment of such $90.00 dividend to be made on March 1, 2015.

 

                                                (5)  For purposes of this Section 3, the terms “First Adjusted Dividend” and “Second Adjusted Dividend” are sometimes referred to as an “Adjusted Dividend;” the term “Current Market Price” shall have the meaning given to it in Section 4(c)(iv); and the term “Trading Day” shall have the meaning given to it in Section 4(c)(vi).

 

                                    (iii)  If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted.

 

                                    (iv)  Dividends payable on shares of the 2011 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 of each year, commencing June 1, 2011.  Dividends on shares of the 2011 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2011 ESOP Preferred Stock.  Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof.  The amount of dividends payable per share for each dividend period shall be computed by dividing by four the Base Dividend or the Adjusted Dividend, whichever is then applicable.  The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months.

 

                        (b)(i)  No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2011 ESOP Preferred Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2011 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends.  When dividends are not paid in full, as aforesaid, upon the shares of 2011 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2011 ESOP Preferred Stock, all dividends declared upon shares of 2011 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2011 ESOP Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on 2011 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2011 ESOP Preferred Stock and such other series of Preferred Stock bear to each other.  Holders of shares of 2011 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2011 ESOP Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2011 ESOP Preferred Stock which may be in arrears.

 

                                    (ii)  So long as any shares of 2011 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common Stock or any other stock ranking junior to 2011 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2011 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2011 ESOP Preferred Stock as to dividends or upon liquidation be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange

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for stock of the Company ranking junior to 2011 ESOP Preferred Stock as to dividends or upon liquidation), unless, in each case, the full cumulative dividends on all outstanding shares of 2011 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods.

 

            4.   Conversion .  Shares of 2011 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2011 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows:

 

                        (a)  Each share of 2011 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the “Release Date”), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2011 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (b)  Subject to and upon compliance with the provisions of this Section 4, a holder of 2011 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2011 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2011 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (c)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

 

                                    (i)  The “Average Current Market Price” per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the “Purchase Offer” is made (as that term is defined in Section 6(d) hereof).

 

                                    (ii)  A “Business Day” means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open.

 

                                    (iii)  (A)  For purposes of a mandatory conversion of shares of 2011 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the “Conversion Price” for such shares of 2011 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date.

 

                                                (B)  For purposes of an optional conversion of shares of 2011 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the “Conversion Price” for such shares of 2011 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2011 ESOP Preferred Stock or by any agent for conversion of the 2011 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4.

 

                                                (C)  For purposes of a conversion of shares of 2011 ESOP Preferred Stock into shares of Common Stock in connection with a “Purchase Offer” (as defined in Section 6(d) hereof), the “Conversion Price” for such shares of 2011 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock.

 

Each share of 2011 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2011 ESOP Preferred Stock will be converted. 

 

                                    (iv)  The “Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange only or, if the Common Stock is not listed or admitted to

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trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof.

                                    (v)  “Common Stock” shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designations or as such stock may be constituted from time to time.

 

                                    (vi)  “Trading Day” with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day.

                                      (d)  In connection with any conversion of 2011 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the “Conversion Notice”) shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2011 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2011 ESOP Preferred Stock by the Company or the transfer agent for the 2011 ESOP Preferred Stock, which notice shall be accompanied by (a) in the case of certificated 2011 ESOP Preferred Stock, the certificate or certificates representing the shares of 2011 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) and (b) in the case of uncertificated 2011 ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2011 ESOP Preferred Stock being converted pursuant to this Section 4.  Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2011 ESOP Preferred Stock released from the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2011 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2011 ESOP Preferred Stock, for any shares of 2011 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request.

 

                        (e)  Upon delivery to the Company or the transfer agent for the 2011 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4,  the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder’s designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion.  If there shall have been surrendered a certificate or certificates representing shares of 2011 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder’s designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2011 ESOP Preferred Stock which shall not have been converted.

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                        (f)  The issuance by the Company of shares of Common Stock upon a conversion of shares of 2011 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2011 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder’s designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2011 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4.  On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date.  The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2011 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares.

                        (g)  The Company shall not be obligated to deliver to holders of 2011 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2011 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law.

                        (h)  The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2011 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2011 ESOP Preferred Stock then outstanding.

                        (i)  The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2011 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

                        (j)  The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2011 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2011 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

            5.   Redemption At the Option of the Company .  (a)  The 2011 ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2011 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2011 ESOP Preferred Stock on the date fixed for redemption.  Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5.  From and after the date fixed for redemption, dividends on shares of 2011 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price.  Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1.  If the full cumulative dividends have not been paid, or contemporaneously declared and set aside for payment, on all outstanding shares of 2011 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2011 ESOP Preferred Stock pursuant to this Section 5.

                        (b)  Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2011 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the 2011 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date.  Each such notice shall state:  (i) the redemption date; (ii) the total number of shares of the 2011 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price

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shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2011 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable upon conversion of a share of 2011 ESOP Preferred Stock will be determined.  The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2011 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state).

                        (c)  The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2011 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2011 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2011 ESOP Preferred Stock then being redeemed.

                        (d)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

                                    (i)  “Adjustment Period” shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined.

                                    (ii)  “Fair Market Value” shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period.  The “Fair Market Value” of any security which is not publicly traded (other than the 2011 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof.  The “Fair Market Value” of the 2011 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2011 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section).  For purposes of determining the Fair Market Value of the 2011 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2011 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2011 ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2011 ESOP Cumulative Convertible Preferred Stock Note Agreement dated on or about March 18, 2011 between the Company and the Plan (including any amendments or modifications thereto).

            6.   Consolidation, Merger, etc.   (a)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes “qualifying employer securities” with respect to a holder of 2011 ESOP Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2011 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2011 ESOP Preferred Stock had immediately prior to such transaction, subject to the following:

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                        (1)  After such transaction each share of the 2011 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2011 ESOP Preferred Stock could have been converted immediately prior to such transaction.

                        (2)  The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2011 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid.

                        (b)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2011 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2011 ESOP Preferred Stock could have been converted at such time so that each share of 2011 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2011 ESOP Preferred Stock could have been converted immediately prior to such transaction.  However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2011 ESOP Preferred Stock, then the shares of 2011 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2011 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction.  If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares.

                        (c)  In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a “Business Combination”), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2011 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2011 ESOP Preferred Stock, a cash payment per share of 2011 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2011 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is consummated.  No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction.

 

                        (d)  In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2011 ESOP Preferred Stock shall have the right to convert shares of 2011 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the “Purchase Offer Conversion Period”), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period.

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                        For purposes of this paragraph (d), the following terms shall have the meanings set forth below:

 

                                    (i)  “Beneficial Ownership” shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and “person” shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.

 

                                    (ii)  A “Purchase Offer” shall have been made when any person (other than the Company or any affiliate of the Company) shall have “commenced” (as such term is defined in Rule 14d-2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company.

 

            7.   Liquidation Rights .  (a)  Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2011 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to 2011 ESOP Preferred Stock upon liquidation, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.

 

                        (b)  Neither the sale of all or substantially all the property and assets of the Company, nor the merger or consolidation of the Company into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7.

 

                        (c)  After the payment to the holders of the shares of 2011 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2011 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company.

 

                        (d)  In the event the assets of the Company available for distribution to the holders of shares of 2011 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2011 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2011 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up.

             

(e)  Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on a parity with or prior to the shares of 2011 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2011 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2011 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2011 ESOP Preferred Stock shall not be entitled to share therein.

 

            8.   Ranking .  For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank:

 

                        (a)  prior to the shares of 2011 ESOP Preferred Stock, either as to dividends or upon liquidation, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2011 ESOP Preferred Stock;

 

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                        (b)  on a parity with shares of 2011 ESOP Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2011 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2011 ESOP Preferred Stock; and

 

                        (c)  junior to shares of 2011 ESOP Preferred Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of 2011 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes.

 

            9.   Priority of 2011 ESOP Preferred Stock .  The shares of 2011 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company’s 2002 ESOP Cumulative Convertible Preferred Stock, its 2003 ESOP Cumulative Convertible Preferred Stock, its 2004 ESOP Cumulative Convertible Preferred Stock, its 2005 ESOP Cumulative Convertible Preferred Stock, its 2006 ESOP Cumulative Convertible Preferred Stock, its 2007 ESOP Cumulative Convertible Preferred Stock, its 2008 ESOP Cumulative Convertible Preferred Stock and its 2010 ESOP Cumulative Convertible Preferred Stock. 

 

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IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by John G. Stumpf, its Chairman, President and Chief Executive Officer, and attested by Jeannine E. Zahn, its Assistant Secretary, whereby such President and Chief Executive Officer affirms, under penalties of perjury, that this Certificate of Designations is the act and deed of the Company and that the facts stated herein are true, this 17th day of March, 2011.

 

 

WELLS FARGO & COMPANY

 

 

 

By         /s/ John G. Stumpf                           

John G. Stumpf

i)                             Chairman, President and

ii)                           Chief Executive Officer

 

 

Attest:

 

/s/ Jeannine E. Zahn                                        

Jeannine E. Zahn

Assistant Secretary

 

 

 

[As filed with the Delaware Secretary of State on March 17, 2011.]

 

WELLS FARGO & COMPANY

___________________________________

 

CERTIFICATE OF DESIGNATIONS

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

___________________________________

 

2012 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Without Par Value)

___________________________________

 

 

            WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Company”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the “Board”) by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the “Preferred Stock”), and pursuant to authority conferred upon the ESOP Preferred Stock Committee I of the Board (the “ESOP Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at meetings of the Board duly held on January 25, 2000 and February 24, 2009, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on January 9, 2012, in accordance with Section 141(f) of the General Corporation Law:

 

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            1.         On January 25, 2000, the Board adopted the following resolutions (the “ESOP Board Resolutions”) appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of Preferred Stock (“ESOP Preferred Stock”) to the trustee on behalf of the Company’s 401(k) Plan hereinafter referred to:

 

RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee I (the “First Committee”), which shall have and may exercise the full powers of the Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1 2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the First Committee in its discretion shall approve, and to take any and all actions as the First Committee shall deem necessary or appropriate.

 

            2.         Pursuant to resolutions adopted on February 24, 2009, the Board designated John G. Stumpf as the sole member of the ESOP Committee, effective April 29, 2009.

 

3.         On January 9, 2012, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions, the ESOP Committee adopted the following resolutions by written consent in accordance with Section 141(f) of the General Corporation Law:

 

            RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows:

 

2012 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

 

            1.   Designation and Number of Shares; Restricted Issue

 

                        (a) The designation of the series of Preferred Stock, without par value, provided for herein shall be “2012 ESOP Cumulative Convertible Preferred Stock” (hereinafter referred to as the “2012 ESOP Preferred Stock”) and the number of authorized shares constituting the 2012 ESOP Preferred Stock is 940,000, based on an offering price for the 2012 ESOP Preferred Stock of $1,094.00 per share.  Each share of 2012 ESOP Preferred Stock shall have a stated value of $1,000.00 per share.  The number of authorized shares of 2012 ESOP Preferred Stock may be reduced by further resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2012 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2012 ESOP Preferred Stock shall not be increased.  All shares of the 2012 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of 2012 ESOP Preferred Stock.

 

                        (b)  Shares of 2012 ESOP Preferred Stock shall be issued only to a trustee (the “Trustee”) acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the “Plan”).  All references to the holder of shares of 2012 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan.  In the event of any transfer of record ownership of shares of 2012 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2012 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the “Common Stock”) on the terms otherwise provided for the conversion of the shares of 2012 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2012 ESOP Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which

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such shares of 2012 ESOP Preferred Stock shall be so converted.  In the event of such a conversion, the transferee of the shares of 2012 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of 2012 ESOP Preferred Stock have been automatically converted as of the date of such transfer.  Shares of 2012 ESOP Preferred Stock may be certificated or uncertificated, at the Company’s option.  Certificates representing shares of 2012 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions.  In the case of uncertificated 2012 ESOP Preferred Stock, the transfer agent for the 2012 ESOP Preferred Stock shall note the foregoing provisions on each 2012 ESOP Preferred Stock book entry account.  The Company may require that, as a condition to transferring record ownership of any uncertificated 2012 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2012 ESOP Preferred Stock are subject to the foregoing provisions.  Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2012 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof.

            2.   Voting Rights .  No shares of 2012 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows:

 

                        (a)  Whenever, at any time or times, dividends payable on shares of 2012 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2012 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the shares of 2012 ESOP Preferred Stock, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders.  At elections for such directors, each holder of the shares of 2012 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2012 ESOP Preferred Stock (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth.  The right of such holders of such shares of 2012 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such shares of 2012 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2012 ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

                        (b)  Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately.  If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution.

 

                        (c)  So long as any shares of 2012 ESOP Preferred Stock remain outstanding, the consent of the holders of the outstanding shares of 2012 ESOP Preferred Stock and outstanding shares of all other series of Preferred Stock ranking on a parity with such shares of 2012 ESOP Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding shares of 2012 ESOP Preferred Stock and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following:

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                                    (i)  the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2012 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or

 

                                    (ii)  the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designations designating shares of 2012 ESOP Preferred Stock and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2012 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2012 ESOP Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

                        (d)  The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2012 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption.

 

            3.         Dividends .  (a)(i)  Holders of shares of 2012 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $100.00 (the “Base Dividend”) per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3.

 

                                    (ii)  The Base Dividend shall be adjusted, effective on December 1, 2013 and on each December 1 thereafter until December 1, 2021, as follows: 

 

                                                (1)  If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2012 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $105.00 per share (the “First Adjusted Dividend”). 

 

                                                (2)  If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2012 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $110.00 per share (the “Second Adjusted Dividend”).

 

                                                (3)  If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2012 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend.

32)                 

33)               Dividend Adjustment Table

 

34)                           Closing Price on 11/30

35)                                 First Target Price

36)                                       Second Target Price

 

 

 

2013

28.424

30.617

2014

31.124

34.980

2015

34.081

39.964

2016

37.319

45.659

2017

40.864

52.166

2018

44.746

59.599

2019

48.997

68.092

2020

53.652

77.795

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                                                (4)  As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2013, the Current Market Price of one share of Common Stock is $30.00, then the cash dividend payable for the immediately following twelve month period per share of 2012 ESOP Preferred Stock would equal $105.00, with the first quarterly payment of such $105.00 dividend to be made on March 1, 2014.  If on November 30, 2014, the Current Market Price of one share of Common Stock is $40.00, then the cash dividend payable for the immediately following twelve month period per share of 2012 ESOP Preferred Stock would equal $110.00, with the first quarterly payment of such $110.00 dividend to be made on March 1, 2015.  If on November 30, 2015, the Current Market Price of one share of Common Stock is $30.00, then the cash dividend payable for the immediately following twelve month period per share of 2012 ESOP Preferred Stock would equal $100.00, with the first quarterly payment of such $100.00 dividend to be made on March 1, 2016.

 

                                                (5)  For purposes of this Section 3, the terms “First Adjusted Dividend” and “Second Adjusted Dividend” are sometimes referred to as an “Adjusted Dividend;” the term “Current Market Price” shall have the meaning given to it in Section 4(c)(iv); and the term “Trading Day” shall have the meaning given to it in Section 4(c)(vi).

 

                                    (iii)  If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted.

 

                                    (iv)  Dividends payable on shares of the 2012 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 of each year, commencing March 1, 2012.  Dividends on shares of the 2012 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2012 ESOP Preferred Stock.  Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof.  The amount of dividends payable per share for each dividend period shall be computed by dividing by four the Base Dividend or the Adjusted Dividend, whichever is then applicable.  The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months.

 

                        (b)(i)  No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2012 ESOP Preferred Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2012 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends.  When dividends are not paid in full, as aforesaid, upon the shares of 2012 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2012 ESOP Preferred Stock, all dividends declared upon shares of 2012 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2012 ESOP Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on 2012 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2012 ESOP Preferred Stock and such other series of Preferred Stock bear to each other.  Holders of shares of 2012 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2012 ESOP Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2012 ESOP Preferred Stock which may be in arrears.

 

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                                    (ii)  So long as any shares of 2012 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common Stock or any other stock ranking junior to 2012 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2012 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2012 ESOP Preferred Stock as to dividends or upon liquidation be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to 2012 ESOP Preferred Stock as to dividends or upon liquidation), unless, in each case, the full cumulative dividends on all outstanding shares of 2012 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods.

 

            4.   Conversion .  Shares of 2012 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2012 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows:

 

                        (a)  Each share of 2012 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the “Release Date”), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2012 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (b)  Subject to and upon compliance with the provisions of this Section 4, a holder of 2012 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2012 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2012 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (c)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

 

                                    (i)  The “Average Current Market Price” per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the “Purchase Offer” is made (as that term is defined in Section 6(d) hereof).

 

                                    (ii)  A “Business Day” means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open.

 

                                    (iii)  (A)  For purposes of a mandatory conversion of shares of 2012 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the “Conversion Price” for such shares of 2012 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date.

 

                                                (B)  For purposes of an optional conversion of shares of 2012 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the “Conversion Price” for such shares of 2012 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2012 ESOP Preferred Stock or by any agent for conversion of the 2012 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4.

 

                                                (C)  For purposes of a conversion of shares of 2012 ESOP Preferred Stock into shares of Common Stock in connection with a “Purchase Offer” (as defined in Section 6(d) hereof), the “Conversion Price” for such shares of 2012 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock.

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Each share of 2012 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2012 ESOP Preferred Stock will be converted. 

 

                                    (iv)  The “Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange only or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof.

                                    (v)  “Common Stock” shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designations or as such stock may be constituted from time to time.

 

                                    (vi)  “Trading Day” with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day.

                                      (d)  In connection with any conversion of 2012 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the “Conversion Notice”) shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2012 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2012 ESOP Preferred Stock by the Company or the transfer agent for the 2012 ESOP Preferred Stock, which notice shall be accompanied by (a) in the case of certificated 2012 ESOP Preferred Stock, the certificate or certificates representing the shares of 2012 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) and (b) in the case of uncertificated 2012 ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2012 ESOP Preferred Stock being converted pursuant to this Section 4.  Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2012 ESOP Preferred Stock released from the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2012 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2012 ESOP Preferred Stock, for any shares of 2012 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request.

 

                        (e)  Upon delivery to the Company or the transfer agent for the 2012 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4,  the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder’s designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion.  If there

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shall have been surrendered a certificate or certificates representing shares of 2012 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder’s designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2012 ESOP Preferred Stock which shall not have been converted.

                        (f)  The issuance by the Company of shares of Common Stock upon a conversion of shares of 2012 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2012 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder’s designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2012 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4.  On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date.  The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2012 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares.

                        (g)  The Company shall not be obligated to deliver to holders of 2012 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2012 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law.

                        (h)  The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2012 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2012 ESOP Preferred Stock then outstanding.

                        (i)  The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2012 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

                        (j)  The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2012 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2012 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

                        5.   Redemption At the Option of the Company .  (a)  The 2012 ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2012 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2012 ESOP Preferred Stock on the date fixed for redemption.  Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5.  From and after the date fixed for redemption, dividends on shares of 2012 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price.  Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1.  If the full cumulative dividends have not been paid, or

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contemporaneously declared and set aside for payment, on all outstanding shares of 2012 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2012 ESOP Preferred Stock pursuant to this Section 5.

                        (b)  Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2012 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the 2012 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date.  Each such notice shall state:  (i) the redemption date; (ii) the total number of shares of the 2012 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2012 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable upon conversion of a share of 2012 ESOP Preferred Stock will be determined.  The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2012 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state).

                        (c)  The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2012 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2012 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2012 ESOP Preferred Stock then being redeemed.

                        (d)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

                                    (i)  “Adjustment Period” shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined.

                                    (ii)  “Fair Market Value” shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period.  The “Fair Market Value” of any security which is not publicly traded (other than the 2012 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof.  The “Fair Market Value” of the 2012 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2012 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section).  For purposes of determining the Fair Market Value of the 2012 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2012 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2012 ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2012 ESOP Cumulative Convertible Preferred Stock Note Agreement dated on or about January 12, 2012 between the Company and the Plan (including any amendments or modifications thereto).

            6.   Consolidation, Merger, etc.   (a)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes “qualifying employer securities” with respect to a holder of 2012 ESOP Preferred Stock within the meaning of

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Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2012 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2012 ESOP Preferred Stock had immediately prior to such transaction, subject to the following:

                        (1)  After such transaction each share of the 2012 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2012 ESOP Preferred Stock could have been converted immediately prior to such transaction.

                        (2)  The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2012 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid.

                        (b)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2012 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2012 ESOP Preferred Stock could have been converted at such time so that each share of 2012 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2012 ESOP Preferred Stock could have been converted immediately prior to such transaction.  However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2012 ESOP Preferred Stock, then the shares of 2012 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2012 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction.  If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares.

                        (c)  In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a “Business Combination”), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2012 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2012 ESOP Preferred Stock, a cash payment per share of 2012 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2012 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is consummated.  No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction.

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                        (d)  In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2012 ESOP Preferred Stock shall have the right to convert shares of 2012 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the “Purchase Offer Conversion Period”), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period.

 

                        For purposes of this paragraph (d), the following terms shall have the meanings set forth below:

 

                                    (i)  “Beneficial Ownership” shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and “person” shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.

 

                                    (ii)  A “Purchase Offer” shall have been made when any person (other than the Company or any affiliate of the Company) shall have “commenced” (as such term is defined in Rule 14d-2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company.

 

            7.   Liquidation Rights .  (a)  Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2012 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to 2012 ESOP Preferred Stock upon liquidation, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.

 

                        (b)  Neither the sale of all or substantially all the property and assets of the Company, nor the merger or consolidation of the Company into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7.

 

                        (c)  After the payment to the holders of the shares of 2012 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2012 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company.

 

                        (d)  In the event the assets of the Company available for distribution to the holders of shares of 2012 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2012 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2012 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up.

             

(e)  Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on a parity with or prior to the shares of 2012 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2012 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2012 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2012 ESOP Preferred Stock shall not be entitled to share therein.

 

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            8.   Ranking .  For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank:

 

                        (a)  prior to the shares of 2012 ESOP Preferred Stock, either as to dividends or upon liquidation, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2012 ESOP Preferred Stock;

 

                        (b)  on a parity with shares of 2012 ESOP Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2012 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2012 ESOP Preferred Stock; and

 

                        (c)  junior to shares of 2012 ESOP Preferred Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of 2012 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes.

 

            9.   Priority of 2012 ESOP Preferred Stock .  The shares of 2012 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company’s 2003 ESOP Cumulative Convertible Preferred Stock, its 2004 ESOP Cumulative Convertible Preferred Stock, its 2005 ESOP Cumulative Convertible Preferred Stock, its 2006 ESOP Cumulative Convertible Preferred Stock, its 2007 ESOP Cumulative Convertible Preferred Stock, its 2008 ESOP Cumulative Convertible Preferred Stock, its 2010 ESOP Cumulative Convertible Preferred Stock and its 2011 ESOP Cumulative Convertible Preferred Stock. 

 

IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by John G. Stumpf, its Chairman, President and Chief Executive Officer, and attested by Jeannine E. Zahn, its Assistant Secretary, whereby such President and Chief Executive Officer affirms, under penalties of perjury, that this Certificate of Designations is the act and deed of the Company and that the facts stated herein are true, this 10th day of January, 2012.

 

 

WELLS FARGO & COMPANY

 

 

 

By         /s/ John G. Stumpf                                  

John G. Stumpf

i)                             Chairman, President and

ii)                           Chief Executive Officer

 

 

Attest:

 

/s/ Jeannine E. Zahn                                        

Jeannine E. Zahn

Assistant Secretary

 

[As filed with the Delaware Secretary of State on January 10, 2012.]

WELLS FARGO & COMPANY

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_____________________

CERTIFICATE OF DESIGNATION
Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware
_____________________

NON-CUMULATIVE PERPETUAL CLASS A PREFERRED STOCK, SERIES N
(Without Par Value)

_____________________

                        WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “ Board of Directors ”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorize the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “ Committee ”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “ General Corporation Law ”), the following resolutions were duly adopted by the Committee pursuant to the unanimous written consent of the Committee duly adopted on August 14, 2012, in accordance with Section 141(f) of the General Corporation Law:

 

                        Resolved, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated January 27, 2009, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation, and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

 

RIGHTS AND PREFERENCES

 

            Section 1.        Designation .  The shares of such series of Preferred Stock shall be designated Non-Cumulative Perpetual Class A Preferred Stock, Series N, with no par value and a liquidation preference amount of $25,000 per share  (the “ Series N Preferred Stock ”).  Each share of Series N Preferred Stock shall be identical in all respects to every other share of Series N Preferred Stock except with respect to the date from which dividends may accrue. Series N Preferred Stock will rank equally with Parity Stock with respect to the payment of dividends and distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation and will rank senior to Junior Stock with respect to the payment of dividends and/or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

 

            Section 2.        Number of Shares .  The number of authorized shares of Series N Preferred Stock shall be 30,000.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series N Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation and by the filing of a certificate pursuant to the provisions of the General Corporation Law stating that such increase or decrease, as the case may be, has been so authorized.  The Corporation shall have the authority to issue fractional shares of Series N Preferred Stock.

Section 3.        Definitions .  As used herein with respect to Series N Preferred Stock:

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Business Day ” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in New York, New York.

Certificate of Designation ” means this Certificate of Designation relating to the Series N Preferred Stock, as it may be amended from time to time.

“Common Stock” means the common stock of the Corporation, par value $1⅔ per share, as the same exists at the date of this Certificate of Designation or as such stock may be constituted from time to time.

Depositary Company ” has the meaning set forth in Section 6(d) hereof.

“Dividend Payment Date” has the meaning set forth in Section 4(a) hereof.

Dividend Period ” has the meaning set forth in Section 4(a) hereof.

DTC ” means The Depository Trust Company, together with its successors and assigns.

 “Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation now existing or hereafter authorized over which the Series N Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Liquidation Preference ” has the meaning set forth in Section 5(a) hereof.

Nonpayment Event ” shall have the meaning set forth in Section 7(b).

Parity Stock ” means any other class or series of stock of the Corporation now existing or hereafter authorized that ranks on par with the Series N Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Preference Stock ” means any and all series of preference stock, having no par value, of the Corporation. 

Preferred Stock ” means any and all series of preferred stock, having no par value, of the Corporation, including the Series N Preferred Stock.

Preferred Stock Directors ” shall have the meaning set forth in Section 7(b).

Regulatory Capital Treatment Event ” means the Corporation’s reasonable determination that as a result of any (i) amendment to, or change (including any announced prospective change) in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective after the initial issuance of any shares of Series N Preferred Stock; (ii) proposed change in those laws or regulations that is announced or becomes effective after the initial issuance of any shares of Series N Preferred Stock; or (iii) official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced after the initial issuance of any shares of Series N Preferred Stock, there is more than an insubstantial risk that the Corporation will not be entitled to treat the full liquidation preference amount of all shares of Series N Preferred Stock then outstanding as Tier 1 capital (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the appropriate federal banking agency, as then in effect and applicable, for as long as any share of Series N Preferred Stock is outstanding.

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Series N Preferred Stock ” has the meaning set forth in Section 1 hereof.

iii)                                                                                         Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series N Preferred Stock.

iv)                                                                                           

            Section 4.        Dividends.

(a)        Rate .  Dividends on the Series N Preferred Stock will not be mandatory.  Holders of Series N Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation, but only out of assets legally available therefor, non-cumulative cash dividends on the liquidation preference amount of $25,000 per share of the Series N Preferred Stock, payable quarterly in arrears on the 15th day of March, June, September and December of each year (commencing on December 15, 2012); provided , however , if any such day is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding day that is a Business Day, without any interest or other payment in respect of such delay (each such day on which dividends are payable a “ Dividend Payment Date ”).  A “ Dividend Period ” means the period from, and including, a Dividend Payment Date to, but excluding, the next succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, August 16, 2012 to, but excluding, December 15, 2012.  Dividends on each share of Series N Preferred Stock will accrue at a rate per annum equal to 5.20%.  The record date for payment of dividends on the Series N Preferred Stock shall be the last Business Day of the calendar month immediately preceding the month during which the Dividend Payment Date falls or such other date as determined by the Corporation’s Board of Directors.  The amount of dividends payable shall be computed on the basis of a 360-day year of twelve 30-day months.  Dollar amounts resulting from that calculation will be rounded to the nearest cent, with one-half cent being rounded upward.

(b)       Non-Cumulative Dividends .  Dividends on shares of Series N Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series N Preferred Stock on any Dividend Payment Date are not declared prior to such Dividend Payment Date, then such dividends shall not cumulate and shall cease to accrue and be payable, and the Corporation shall have no obligation to pay, and the holders of Series N Preferred Stock shall have no right to receive, dividends accrued for such Dividend Period on the Dividend Payment Date for such Dividend Period or at any time in the future or interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Series N Preferred Stock or any other series of authorized Preferred Stock, Preference Stock, or Common Stock of the Corporation.

(c)                     Priority of Dividends .  So long as any shares of Series N Preferred Stock remain outstanding,

 

(1)                no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Common Stock, and no shares of Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Common Stock by the Corporation (other than (i) a dividend payable in Common Stock or (ii) the acquisition of shares of Common Stock in exchange for, or through application of proceeds of the sale of, shares of Common Stock);

 

(2)                no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Junior Stock other than Common Stock, and no shares of Junior Stock other than Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Junior Stock other than Common Stock by the Corporation (other than (i) a dividend payable solely in shares of Junior Stock, (ii) any dividend in connection with the implementation of a

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stockholder rights plan, or the redemption or repurchase of any rights under any such plan, (iii) any dividend in the form of stock, warrants, options or other rights where the dividend stock or stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks equally with or junior to such stock, (iv) as a result of a reclassification of Junior Stock other than Common Stock for or into other Junior Stock, (v) the exchange or conversion of one share of Junior Stock other than Common Stock for or into another share of Junior Stock, (vi) through the use of proceeds of a substantially contemporaneous sale of other shares of Junior Stock, (vii) any purchase, redemption or other acquisition of Junior Stock other than Common Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after August 9, 2012, (viii) any purchase of fractional interests in shares of Junior Stock other than Common Stock pursuant to the conversion or exchange provisions of such Junior Stock other than Common Stock or the securities being converted or exchanged, (ix) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (x) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business); and

 

(3)                no shares of Parity Stock will be repurchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series N Preferred Stock and such Parity Stock during a Dividend Period (other than (i) as a result of a reclassification of Parity Stock for or into other Parity Stock or Junior Stock, (ii) the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or Junior Stock, (iii) through the use of proceeds of a substantially contemporaneous sale of other shares of Parity Stock or Junior Stock, (iv) any purchase, redemption or other acquisition of Parity Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after August 9, 2012, (v) any purchase of fractional interests in shares of Parity Stock pursuant to the conversion or exchange provisions of such Parity Stock or the securities being converted or exchanged, (vi) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (vii) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business),

 

unless, in each case, the full dividends for the then-current Dividend Period on all outstanding shares of the Series N Preferred Stock have been declared and paid or declared and a sum sufficient for the payment of those dividends has been set aside.

 

Subject to the succeeding sentence, for so long as any shares of Series N Preferred Stock remain outstanding, no dividends shall be declared, paid, or set aside for payment on any Parity Stock for any period unless full dividends on all outstanding shares of Series N Preferred Stock for the then-current Dividend Period have been paid in full or declared and a sum sufficient for the payment thereof set aside.  To the extent the Corporation declares dividends on the Series N Preferred Stock and on any Parity Stock but cannot make full payment of those declared dividends, the Corporation will allocate the dividend payments on a proportional basis among the holders of shares of Series N Preferred Stock and the holders of any Parity Stock then outstanding where the terms of such Parity Stock provide similar dividend rights. 

 

            Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors of the Corporation or any duly authorized committee of the board of Directors of the Corporation may be declared and paid on the Common Stock and any other stock that is Parity Stock or Junior Stock, from time to time out of any assets legally available for such payment, and the shares of Series N Preferred Stock shall not be entitled to participate in any such dividends.

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Section 5.        Liquidation Rights.

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series N Preferred Stock shall be entitled to receive in full out of assets available for distribution to its stockholders before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of the Common Stock or any other Junior Stock, and subject to the rights of the holders of Parity Stock or any stock of the Corporation ranking senior to the Series N Preferred Stock as to such distribution, a liquidating distribution in the amount of $25,000 per share, plus an amount equal to any dividends which have been declared but not yet paid, without accumulation of any undeclared dividends, to the date of liquidation (the “ Liquidation Preference ”).  The holders of Series N Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b)       Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the Liquidation Preference to all holders of Series N Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of Series N Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preference of Series N Preferred Stock and all such Parity Stock. 

(c)        Residual Distributions .  If the Liquidation Preference has been paid in full to all holders of Series N Preferred Stock and all other amounts payable upon liquidation, dissolution or winding up of the Corporation have been paid in full to all holders of any Parity Stock, the holders of Common Stock and any other Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)       Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.        Redemption.

(a)        Optional Redemption .  The Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may redeem, subject to the prior approval of the Federal Reserve Board, out of funds legally available therefor, in whole or in part, the shares of Series N Preferred Stock at the time outstanding, at any time on any Dividend Payment Date on or after September 15, 2017, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series N Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid up to the redemption date without accumulation of any undeclared dividends.

Notwithstanding the foregoing, within 90 days of the Corporation’s good faith determination that a Regulatory Capital Treatment Event has occurred, the Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may, subject to the approval of the appropriate federal banking agency, redeem out of funds legally available therefor, in whole, but not in part, the shares of Series N Preferred Stock at the time outstanding, prior to September 15, 2017, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series N Preferred Stock shall be $25,000

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per share plus an amount equal to any dividends that have been declared but not paid, without accumulation of any undeclared dividends.

(b)       Notice of Redemption .  Notice of every redemption of shares of Series N Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of such shares to be redeemed at their respective last addresses appearing on the stock register of the Corporation.  Such mailing shall be at least 40 days and not more than 70 days before the date fixed for redemption.  Any notice mailed as provided in this Section 6(b) shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series N Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series N Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series N Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, if applicable, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where the certificates for those shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date.  Notwithstanding the foregoing, if the Series N Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC. 

(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series N Preferred Stock at the time outstanding, the shares of Series N Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series N Preferred Stock in proportion to the number of Series N Preferred Stock held by such holders or in such other manner as the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may determine to be fair and equitable.  Subject to the provisions of this Section 6, the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series N Preferred Stock shall be redeemed from time to time.

(d)       Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been irrevocably set aside by the Corporation, separate and apart from its other assets, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors (the “ Depositary Company ”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders  thereof to receive the amount payable on such redemption from the Depository Company at any time after the redemption date from the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any such interest.  Any funds so deposited and unclaimed at the end of two years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

Section 7.        Voting Rights.

(a)        General.  The holders of Series N Preferred Stock shall not be entitled to vote on any matter except as set forth in paragraph 7(b) below or as required by applicable law.

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(b)       Right To Elect Two Directors Upon Nonpayment Events.  Whenever dividends payable on any shares of Series N Preferred Stock or any class or series of Voting Parity Stock have not been declared and paid in an aggregate amount equal to, as to any class or series, at least six quarterly Dividend Periods or their equivalent, whether or not for consecutive Dividend Periods (a “ Nonpayment Event ”), the holders of the outstanding Series N Preferred Stock, voting together as a class with holders of Voting Parity Stock whose voting rights are exercisable, will be entitled to vote for the election of two additional directors of the Corporation’s Board of Directors at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders (the “ Preferred Stock Directors ”) by a plurality of the votes cast; provided that the Board of Directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board of Directors shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of the outstanding Series N Preferred Stock (together with the holders of shares of any one or more other series of Voting Parity Stock).  At elections for such directors, each holder of the Series N Preferred Stock shall be entitled to 25 votes for each share held (the holders of shares of any other series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock as may be granted to them).  The right of the holders of the Series N Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Voting Parity Stock) to elect Preferred Stock Directors shall continue until such time as the Corporation has paid in full dividends for the equivalent of at least four quarterly Dividend Periods or their equivalent, at which time such right with respect to the Series N Preferred Stock shall terminate, except as provided by law, and subject to revesting in the event of each and every subsequent default of the character described in this Section 7(b).

Upon any termination of the right of the holders of all shares of Series N Preferred Stock and Voting Parity Stock to vote for Preferred Stock Directors, the term of office of all Preferred Stock Directors then in office elected by only those holders voting as a class shall terminate immediately.  Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series N Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a class). In case any vacancy shall occur among the Preferred Stock Directors, a successor may be elected by a plurality of the votes cast by the holders of Series N Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a class, unless the vacancy has already been filled. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the Board of Directors for a vote.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this Section 7(b) shall have expired, the number of directors shall be such number as may be provided for in the By-Laws irrespective of any increase made pursuant to this Section 7(b).

(c)     Other Voting Rights .  In addition to any other vote required by law or the Restated Certificate of Incorporation, so long as any shares of the Series N Preferred Stock remain outstanding, the vote or consent of the holders of the outstanding shares of Series N Preferred Stock and outstanding shares of all other series of Voting Parity Stock entitled to vote on the matter, by a vote of at least 66 2/3% in voting power of all such outstanding Series N Preferred Stock and such Voting Parity Stock, voting together as a class, given in person or by proxy, either in writing without a meeting or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following actions, whether or not such approval is required by Delaware law: (i) the issuance of any class or series of Preferred Stock or Preference Stock ranking senior to the Series N Preferred Stock in the payment of dividends or the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; (ii) any amendment, alteration or repeal of any provision of the Restated Certificate of Incorporation, including the Certificate of Designation, or the Bylaws that would adversely affect the rights, preferences, privileges or voting powers of the Series N Preferred Stock; (iii) any amendment or alteration of the Restated Certificate of Incorporation, including the Certificate of Designation, or Bylaws to authorize, create, or increase the authorized amount of, any shares of,

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or any securities convertible into shares of, any class or series of the Corporation’s capital stock ranking senior to the Series N Preferred Stock with respect to either the payment of dividends or in the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; or (iv) any consummation of a reclassification involving the Series N Preferred Stock or a merger or consolidation with another corporation or other entity, except holders of the Series N Preferred Stock will have no right to vote under this section 7(c)(iv) if in each case (a) the shares of Series N Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (b) such shares of Series N Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series N Preferred Stock, taken as a whole; provided, however , that any authorization, creation or increase in the authorized amount of or issuance of the Series N Preferred Stock or any Parity Stock or Junior Stock or any securities convertible into any class or series of Parity Stock (whether dividends payable in respect of such Parity Stock are cumulative or non-cumulative) or Junior Stock will be deemed not to adversely affect the rights, preferences, privileges or voting powers of the Series N Preferred Stock, and holders of the Series N Preferred Stock shall have no right to vote thereon.

If any amendment, alteration, repeal, reclassification, merger or consolidation specified in this Section 7(c) would adversely affect one or more but not all series of voting Preferred Stock (including the Series N Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a  class (in lieu of all other series of Preferred Stock).

Each holder of the Series N Preferred Stock will have 25 votes per share on any matter on which holders of the Series N Preferred Stock are entitled to vote, whether separately or together with any other series of stock of the Corporation (the holders of any shares of any other series of stock being entitled to such number of votes, if any, for each share of stock as may be granted to them), pursuant to Delaware law or otherwise, including by written consent.

(1)           (d)       Changes after Provision for Redemption.  No vote or consent of the holders of Series N Preferred Stock shall be required pursuant to Section 7(b) or (c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding Series N Preferred Stock shall have been redeemed, or notice of redemption has been given and sufficient funds shall have been irrevocably deposited in trust to effect such redemption.

 

(e)        Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Series N Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Restated Certificate of Incorporation, the Bylaws, applicable law and any national securities exchange or other trading facility in which the Series N Preferred Stock is listed or traded at the time.

Section 8.        Preemption and Conversion .  The holders of Series N Preferred Stock shall not have any rights of preemption or rights to convert such Series N Preferred Stock into shares of any other class of capital stock of the Corporation.

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Section 9.        Reacquired Shares .  Shares of Series N Preferred Stock which have been issued and redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 10.      No Sinking Fund .  Shares of Series N Preferred Stock are not subject to the operation of a sinking fund.

Section 11.      Additional Classes or Series of Stock .  Notwithstanding anything set forth in the Restated Certificate of Incorporation or this Certificate of Designation to the contrary, the Board of Directors of the Corporation, or any authorized committee of the Board of Directors of the Corporation, (i) without the vote of the holders of the Series N Preferred Stock, may authorize and issue additional shares of Junior Stock and Parity Stock and (ii) with the requisite vote of the holders of the Series N Preferred Stock and Parity Stock entitled to vote thereon, may authorize and issue any additional class or series of Preferred Stock or Preference Stock senior to the Series N Preferred Stock as to the payment of dividends and/or the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

 

 

                        In Witness Whereof, Wells Fargo & Company has caused this Certificate of Designation to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Jeannine E. Zahn, its Assistant Secretary, this 14 th day of August, 2012.

 

Wells Fargo & Company

By

/s/ Barbara S. Brett

 

Barbara S. Brett, Senior Vice President and Assistant Treasurer

 

 

/s/ Jeannine E. Zahn                           
Jeannine E. Zahn, Assistant Secretary

 

[As filed with the Delaware Secretary of State on August 15, 2012.]

WELLS FARGO & COMPANY

_____________________

CERTIFICATE OF DESIGNATION
Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware
_____________________

NON-CUMULATIVE PERPETUAL CLASS A PREFERRED STOCK, SERIES O
(Without Par Value)

_____________________

                        WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “ Board of Directors ”) by the provisions of the Restated Certificate of

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Incorporation of the Corporation, as amended, which authorize the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “ Committee ”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “ General Corporation Law ”), the following resolutions were duly adopted by the Committee pursuant to the unanimous written consent of the Committee duly adopted on November 16, 2012, in accordance with Section 141(f) of the General Corporation Law:

 

                        Resolved, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated January 27, 2009, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation, and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

 

RIGHTS AND PREFERENCES

 

            Section 1.        Designation .  The shares of such series of Preferred Stock shall be designated Non-Cumulative Perpetual Class A Preferred Stock, Series O, with no par value and a liquidation preference amount of $25,000 per share  (the “ Series O Preferred Stock ”).  Each share of Series O Preferred Stock shall be identical in all respects to every other share of Series O Preferred Stock except with respect to the date from which dividends may accrue. Series O Preferred Stock will rank equally with Parity Stock with respect to the payment of dividends and distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation and will rank senior to Junior Stock with respect to the payment of dividends and/or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

 

            Section 2.        Number of Shares .  The number of authorized shares of Series O Preferred Stock shall be 27,600.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series O Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation and by the filing of a certificate pursuant to the provisions of the General Corporation Law stating that such increase or decrease, as the case may be, has been so authorized.  The Corporation shall have the authority to issue fractional shares of Series O Preferred Stock.

Section 3.        Definitions .  As used herein with respect to Series O Preferred Stock:

Business Day ” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in New York, New York.

Certificate of Designation ” means this Certificate of Designation relating to the Series O Preferred Stock, as it may be amended from time to time.

“Common Stock” means the common stock of the Corporation, par value $1⅔ per share, as the same exists at the date of this Certificate of Designation or as such stock may be constituted from time to time.

Depositary Company ” has the meaning set forth in Section 6(d) hereof.

“Dividend Payment Date” has the meaning set forth in Section 4(a) hereof.

Dividend Period ” has the meaning set forth in Section 4(a) hereof.

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DTC ” means The Depository Trust Company, together with its successors and assigns.

 “Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation now existing or hereafter authorized over which the Series O Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Liquidation Preference ” has the meaning set forth in Section 5(a) hereof.

Nonpayment Event ” shall have the meaning set forth in Section 7(b).

Parity Stock ” means any other class or series of stock of the Corporation now existing or hereafter authorized that ranks on par with the Series O Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Preference Stock ” means any and all series of preference stock, having no par value, of the Corporation. 

Preferred Stock ” means any and all series of preferred stock, having no par value, of the Corporation, including the Series O Preferred Stock.

Preferred Stock Directors ” shall have the meaning set forth in Section 7(b).

Regulatory Capital Treatment Event ” means the Corporation’s reasonable determination that as a result of any (i) amendment to, clarification of, or change (including any announced prospective change) in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective on or after November 13, 2012; (ii) proposed change in those laws or regulations that is announced or becomes effective on or after November 13, 2012; or (iii) official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced on or after November 13, 2012, there is more than an insubstantial risk that the Corporation will not be entitled to treat the full liquidation preference amount of all shares of Series O Preferred Stock then outstanding as Tier 1 capital (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the appropriate federal banking agency, as then in effect and applicable, for as long as any share of Series O Preferred Stock is outstanding.

Series O Preferred Stock ” has the meaning set forth in Section 1 hereof.

v)                                                                                           Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series O Preferred Stock.

 

vi)                     Section 4.        Dividends.

(a)        Rate .  Dividends on the Series O Preferred Stock will not be mandatory.  Holders of Series O Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation, but only out of assets legally available therefor, non-cumulative cash dividends on the liquidation preference amount of $25,000 per share of the Series O Preferred Stock, payable quarterly in arrears on the 15th day of March, June, September and December of each year (commencing on March 15, 2013); provided , however , if any such day is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding day that is a Business Day, without any interest or other payment in respect of such delay (each such

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day on which dividends are payable a “ Dividend Payment Date ”).  A “ Dividend Period ” means the period from, and including, a Dividend Payment Date to, but excluding, the next succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, November 20, 2012 to, but excluding, March 15, 2013.  Dividends on each share of Series O Preferred Stock will accrue at a rate per annum equal to 5.125%.  The record date for payment of dividends on the Series O Preferred Stock shall be the last Business Day of the calendar month immediately preceding the month during which the Dividend Payment Date falls or such other date as determined by the Corporation’s Board of Directors.  The amount of dividends payable shall be computed on the basis of a 360-day year of twelve 30-day months.  Dollar amounts resulting from that calculation will be rounded to the nearest cent, with one-half cent being rounded upward.

(b)       Non-Cumulative Dividends .  Dividends on shares of Series O Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series O Preferred Stock on any Dividend Payment Date are not declared prior to such Dividend Payment Date, then such dividends shall not cumulate and shall cease to accrue and be payable, and the Corporation shall have no obligation to pay, and the holders of Series O Preferred Stock shall have no right to receive, dividends accrued for such Dividend Period on the Dividend Payment Date for such Dividend Period or at any time in the future or interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Series O Preferred Stock or any other series of authorized Preferred Stock, Preference Stock, or Common Stock of the Corporation.

(c)                     Priority of Dividends .  So long as any shares of Series O Preferred Stock remain outstanding,

 

(1) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Common Stock, and no shares of Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Common Stock by the Corporation (other than (i) a dividend payable in Common Stock or (ii) the acquisition of shares of Common Stock in exchange for, or through application of proceeds of the sale of, shares of Common Stock);

 

(2) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Junior Stock other than Common Stock, and no shares of Junior Stock other than Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Junior Stock other than Common Stock by the Corporation (other than (i) a dividend payable solely in shares of Junior Stock, (ii) any dividend in connection with the implementation of a stockholder rights plan, or the redemption or repurchase of any rights under any such plan, (iii) any dividend in the form of stock, warrants, options or other rights where the dividend stock or stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks equally with or junior to such stock, (iv) as a result of a reclassification of Junior Stock other than Common Stock for or into other Junior Stock, (v) the exchange or conversion of one share of Junior Stock other than Common Stock for or into another share of Junior Stock, (vi) through the use of proceeds of a substantially contemporaneous sale of other shares of Junior Stock, (vii) any purchase, redemption or other acquisition of Junior Stock other than Common Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after November 13, 2012, (viii) any purchase of fractional interests in shares of Junior Stock other than Common Stock pursuant to the conversion or exchange provisions of such Junior Stock other than Common Stock or the securities being converted or exchanged, (ix) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (x) the purchase of Junior Stock other than

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Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business); and

 

(3) no shares of Parity Stock will be repurchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series O Preferred Stock and such Parity Stock during a Dividend Period (other than (i) as a result of a reclassification of Parity Stock for or into other Parity Stock or Junior Stock, (ii) the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or Junior Stock, (iii) through the use of proceeds of a substantially contemporaneous sale of other shares of Parity Stock or Junior Stock, (iv) any purchase, redemption or other acquisition of Parity Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after November 13, 2012, (v) any purchase of fractional interests in shares of Parity Stock pursuant to the conversion or exchange provisions of such Parity Stock or the securities being converted or exchanged, (vi) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (vii) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business),

 

unless, in each case, the full dividends for the then-current Dividend Period on all outstanding shares of the Series O Preferred Stock have been declared and paid or declared and a sum sufficient for the payment of those dividends has been set aside.

 

  Subject to the succeeding sentence, for so long as any shares of Series O Preferred Stock remain outstanding, no dividends shall be declared, paid, or set aside for payment on any Parity Stock for any period unless full dividends on all outstanding shares of Series O Preferred Stock for the then-current Dividend Period have been paid in full or declared and a sum sufficient for the payment thereof set aside.  To the extent the Corporation declares dividends on the Series O Preferred Stock and on any Parity Stock but cannot make full payment of those declared dividends, the Corporation will allocate the dividend payments on a proportional basis among the holders of shares of Series O Preferred Stock and the holders of any Parity Stock then outstanding where the terms of such Parity Stock provide similar dividend rights. 

 

            Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors of the Corporation or any duly authorized committee of the board of Directors of the Corporation may be declared and paid on the Common Stock and any other stock that is Parity Stock or Junior Stock, from time to time out of any assets legally available for such payment, and the shares of Series O Preferred Stock shall not be entitled to participate in any such dividends.

 

Section 5.        Liquidation Rights.

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series O Preferred Stock shall be entitled to receive in full out of assets available for distribution to its stockholders before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of the Common Stock or any other Junior Stock, and subject to the rights of the holders of Parity Stock or any stock of the Corporation ranking senior to the Series O Preferred Stock as to such distribution, a liquidating distribution in the amount of $25,000 per share, plus an amount equal to any dividends which have been declared but not yet paid, without accumulation of any undeclared dividends, to the date of liquidation (the “ Liquidation Preference ”).  The holders of Series O Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

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(b)       Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the Liquidation Preference to all holders of Series O Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of Series O Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preference of Series O Preferred Stock and all such Parity Stock. 

(c)        Residual Distributions .  If the Liquidation Preference has been paid in full to all holders of Series O Preferred Stock and all other amounts payable upon liquidation, dissolution or winding up of the Corporation have been paid in full to all holders of any Parity Stock, the holders of Common Stock and any other Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)       Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.        Redemption.

(a)        Optional Redemption .  The Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may redeem, subject to the prior approval of the Federal Reserve Board, out of funds legally available therefor, in whole or in part, the shares of Series O Preferred Stock at the time outstanding, at any time on any Dividend Payment Date on or after December 15, 2017, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series O Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid up to the redemption date without accumulation of any undeclared dividends.

Notwithstanding the foregoing, within 90 days of the Corporation’s good faith determination that a Regulatory Capital Treatment Event has occurred, the Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may, subject to the approval of the appropriate federal banking agency, redeem out of funds legally available therefor, in whole, but not in part, the shares of Series O Preferred Stock at the time outstanding, prior to December 15, 2017, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series O Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid, without accumulation of any undeclared dividends.

(b)       Notice of Redemption .  Notice of every redemption of shares of Series O Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of such shares to be redeemed at their respective last addresses appearing on the stock register of the Corporation.  Such mailing shall be at least 40 days and not more than 70 days before the date fixed for redemption.  Any notice mailed as provided in this Section 6(b) shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series O Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series O Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series O Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, if applicable, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where the certificates for those shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease

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to accrue on the redemption date.  Notwithstanding the foregoing, if the Series O Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC. 

(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series O Preferred Stock at the time outstanding, the shares of Series O Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series O Preferred Stock in proportion to the number of Series O Preferred Stock held by such holders or in such other manner as the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may determine to be fair and equitable.  Subject to the provisions of this Section 6, the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series O Preferred Stock shall be redeemed from time to time.

(d)       Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been irrevocably set aside by the Corporation, separate and apart from its other assets, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors (the “ Depositary Company ”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders  thereof to receive the amount payable on such redemption from the Depository Company at any time after the redemption date from the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any such interest.  Any funds so deposited and unclaimed at the end of two years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

Section 7.        Voting Rights.

(a)        General.  The holders of Series O Preferred Stock shall not be entitled to vote on any matter except as set forth in paragraph 7(b) below or as required by applicable law.

(b)       Right To Elect Two Directors Upon Nonpayment Events.  Whenever dividends payable on any shares of Series O Preferred Stock or any class or series of Voting Parity Stock have not been declared and paid in an aggregate amount equal to, as to any class or series, at least six quarterly Dividend Periods or their equivalent, whether or not for consecutive Dividend Periods (a “ Nonpayment Event ”), the holders of the outstanding Series O Preferred Stock, voting together as a class with holders of Voting Parity Stock whose voting rights are exercisable, will be entitled to vote for the election of two additional directors of the Corporation’s Board of Directors at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders (the “ Preferred Stock Directors ”) by a plurality of the votes cast; provided that the Board of Directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board of Directors shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of the outstanding Series O Preferred Stock (together with the holders of shares of any one or more other series of Voting Parity Stock).  At elections for such directors, each holder of the Series O Preferred Stock shall be entitled to 25 votes for each share held (the holders of shares of any other series of Voting Parity Stock being entitled to such number of votes, if any, for

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each share of such stock as may be granted to them).  The right of the holders of the Series O Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Voting Parity Stock) to elect Preferred Stock Directors shall continue until such time as the Corporation has paid in full dividends for the equivalent of at least four quarterly Dividend Periods or their equivalent, at which time such right with respect to the Series O Preferred Stock shall terminate, except as provided by law, and subject to revesting in the event of each and every subsequent default of the character described in this Section 7(b).

Upon any termination of the right of the holders of all shares of Series O Preferred Stock and Voting Parity Stock to vote for Preferred Stock Directors, the term of office of all Preferred Stock Directors then in office elected by only those holders voting as a class shall terminate immediately.  Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series O Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a class). In case any vacancy shall occur among the Preferred Stock Directors, a successor may be elected by a plurality of the votes cast by the holders of Series O Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a class, unless the vacancy has already been filled. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the Board of Directors for a vote.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this Section 7(b) shall have expired, the number of directors shall be such number as may be provided for in the By-Laws irrespective of any increase made pursuant to this Section 7(b).

(c)     Other Voting Rights .  In addition to any other vote required by law or the Restated Certificate of Incorporation, so long as any shares of the Series O Preferred Stock remain outstanding, the vote or consent of the holders of the outstanding shares of Series O Preferred Stock and outstanding shares of all other series of Voting Parity Stock entitled to vote on the matter, by a vote of at least 66 2/3% in voting power of all such outstanding Series O Preferred Stock and such Voting Parity Stock, voting together as a class, given in person or by proxy, either in writing without a meeting or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following actions, whether or not such approval is required by Delaware law: (i) the issuance of any class or series of Preferred Stock or Preference Stock ranking senior to the Series O Preferred Stock in the payment of dividends or the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; (ii) any amendment, alteration or repeal of any provision of the Restated Certificate of Incorporation, including the Certificate of Designation, or the Bylaws that would adversely affect the rights, preferences, privileges or voting powers of the Series O Preferred Stock; (iii) any amendment or alteration of the Restated Certificate of Incorporation, including the Certificate of Designation, or Bylaws to authorize, create, or increase the authorized amount of, any shares of, or any securities convertible into shares of, any class or series of the Corporation’s capital stock ranking senior to the Series O Preferred Stock with respect to either the payment of dividends or in the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; or (iv) any consummation of a reclassification involving the Series O Preferred Stock or a merger or consolidation with another corporation or other entity, except holders of the Series O Preferred Stock will have no right to vote under this section 7(c)(iv) if in each case (a) the shares of Series O Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (b) such shares of Series O Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series O Preferred Stock, taken as a whole; provided, however , that any authorization, creation or increase in the authorized amount of or issuance of the Series O Preferred Stock or any Parity Stock or Junior Stock or any securities convertible into any class or series of Parity Stock (whether dividends payable in respect of such Parity Stock are cumulative or non-cumulative) or Junior Stock will be deemed not to adversely affect

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the rights, preferences, privileges or voting powers of the Series O Preferred Stock, and holders of the Series O Preferred Stock shall have no right to vote thereon.

If any amendment, alteration, repeal, reclassification, merger or consolidation specified in this Section 7(c) would adversely affect one or more but not all series of voting Preferred Stock (including the Series O Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a  class (in lieu of all other series of Preferred Stock).

 

Each holder of the Series O Preferred Stock will have 25 votes per share on any matter on which holders of the Series O Preferred Stock are entitled to vote, whether separately or together with any other series of stock of the Corporation (the holders of any shares of any other series of stock being entitled to such number of votes, if any, for each share of stock as may be granted to them), pursuant to Delaware law or otherwise, including by written consent.

(1)           (d)       Changes after Provision for Redemption.  No vote or consent of the holders of Series O Preferred Stock shall be required pursuant to Section 7(b) or (c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding Series O Preferred Stock shall have been redeemed, or notice of redemption has been given and sufficient funds shall have been irrevocably deposited in trust to effect such redemption.

 

(e)        Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Series O Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Restated Certificate of Incorporation, the Bylaws, applicable law and any national securities exchange or other trading facility in which the Series O Preferred Stock is listed or traded at the time.

Section 8.        Preemption and Conversion .  The holders of Series O Preferred Stock shall not have any rights of preemption or rights to convert such Series O Preferred Stock into shares of any other class of capital stock of the Corporation.

Section 9.        Reacquired Shares .  Shares of Series O Preferred Stock which have been issued and redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 10.      No Sinking Fund .  Shares of Series O Preferred Stock are not subject to the operation of a sinking fund.

Section 11.      Additional Classes or Series of Stock .  Notwithstanding anything set forth in the Restated Certificate of Incorporation or this Certificate of Designation to the contrary, the Board of Directors of the Corporation, or any authorized committee of the Board of Directors of the Corporation, (i) without the vote of the holders of the Series O Preferred Stock, may authorize and issue additional shares of Junior Stock and Parity Stock and (ii) with the requisite vote of the holders of the Series O Preferred Stock and Parity Stock entitled to vote thereon, may authorize and issue any additional class or series of Preferred Stock or Preference Stock senior to the Series O Preferred Stock as to the payment of dividends and/or the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

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dms.us.51005459.05

 

 

                        In Witness Whereof, Wells Fargo & Company has caused this Certificate of Designation to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Jeannine E. Zahn, its Assistant Secretary, this 19 th day of November, 2012.

 

Wells Fargo & Company

By

/s/ Barbara S. Brett

 

Barbara S. Brett, Senior Vice President and Assistant Treasurer

 

 

 /s/ Jeannine E. Zahn                          
Jeannine E. Zahn, Assistant Secretary

 

[As filed with the Delaware Secretary of State on November 19, 2012.]

WELLS FARGO & COMPANY

___________________________________

 

CERTIFICATE OF DESIGNATION

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

___________________________________

 

2013 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Without Par Value)

___________________________________

 

 

            WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Company”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the “Board”) by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorize the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the “Preferred Stock”), and pursuant to authority conferred upon the ESOP Preferred Stock Committee I of the Board (the “ESOP Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at meetings of the Board duly held on January 25, 2000, January 27, 2009, and February 24, 2009, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on January 7, 2013, in accordance with Section 141(f) of the General Corporation Law:

 

            1.         On January 25, 2000, the Board adopted the following resolution (the “ESOP Board Resolutions”) appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of

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Preferred Stock (“ESOP Preferred Stock”) to the trustee on behalf of the Company’s 401(k) Plan hereinafter referred to:

 

RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee I (the “First Committee”), which shall have and may exercise the full powers of the Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1 2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the First Committee in its discretion shall approve, and to take any and all actions as the First Committee shall deem necessary or appropriate.

 

            2.         On January 27, 2009, the Board adopted the following resolutions (the “January 2009 Resolutions”) amending the ESOP Board Resolutions to allow the ESOP Committee to establish the voting rights of any series of ESOP Preferred Stock:

 

RESOLVED that the resolution set forth in the [ESOP Board Resolutions] under the caption “Voting Rights of ESOP Preferred Stock” is hereby deleted in its entirety.

 

RESOLVED that the [ESOP Board Resolutions] are hereby further amended to delete “Appendix A – Voting Rights” in its entirety.

 

3.         Pursuant to resolutions adopted on February 24, 2009, the Board designated John G. Stumpf as the sole member of the ESOP Committee, effective April 29, 2009.

 

4.         On January 7, 2013, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions as amended by the January 2009 Resolutions, the ESOP Committee adopted the following resolution by written consent in accordance with Section 141(f) of the General Corporation Law:

 

            RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows:

 

2013 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

 

            1.   Designation and Number of Shares; Restricted Issue

 

                        (a) The designation of the series of Preferred Stock, without par value, provided for herein shall be “2013 ESOP Cumulative Convertible Preferred Stock” (hereinafter referred to as the “2013 ESOP Preferred Stock”) and the number of authorized shares constituting the 2013 ESOP Preferred Stock is 1,200,000, based on an offering price for the 2013 ESOP Preferred Stock of $1,090.00 per share.  Each share of 2013 ESOP Preferred Stock shall have a stated value of $1,000.00 per share.  The number of authorized shares of 2013 ESOP Preferred Stock may be reduced by further resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2013 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2013 ESOP Preferred Stock shall not be increased.  All shares of the 2013 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred

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Stock, without designation as to series, and may thereafter be issued, but not as shares of 2013 ESOP Preferred Stock.

 

                        (b)  Shares of 2013 ESOP Preferred Stock shall be issued only to a trustee (the “Trustee”) acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the “Plan”).  All references to the holder of shares of 2013 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan.  In the event of any transfer of record ownership of shares of 2013 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2013 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the “Common Stock”) on the terms otherwise provided for the conversion of the shares of 2013 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2013 ESOP Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of 2013 ESOP Preferred Stock shall be so converted.  In the event of such a conversion, the transferee of the shares of 2013 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of 2013 ESOP Preferred Stock have been automatically converted as of the date of such transfer.  Shares of 2013 ESOP Preferred Stock may be certificated or uncertificated, at the Company’s option.  Certificates representing shares of 2013 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions.  In the case of uncertificated 2013 ESOP Preferred Stock, the transfer agent for the 2013 ESOP Preferred Stock shall note the foregoing provisions on each 2013 ESOP Preferred Stock book entry account.  The Company may require that, as a condition to transferring record ownership of any uncertificated 2013 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2013 ESOP Preferred Stock are subject to the foregoing provisions.  Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2013 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof.

            2.   Voting Rights .  No shares of 2013 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows:

 

                        (a)  Whenever, at any time or times, dividends payable on shares of 2013 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2013 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more series of Voting Parity Stock, as defined in paragraph (e) of this Section 2,whose voting rights are exercisable, to elect two directors of the Company’s Board at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders (the “Preferred Stock Directors”) by a plurality of the votes cast; provided that the Board of Directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).  At elections for such directors, each holder of the shares of 2013 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any series of Voting Parity Stock being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2013 ESOP Preferred Stock (together with the holders of shares of any one or more series of Voting Parity Stock whose voting rights are exercisable) as herein set forth.  The right of such holders of such shares of 2013 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or

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more series of Voting Parity Stock whose voting rights are exercisable) to elect Preferred Stock Directors as aforesaid shall continue until such time as all dividends accumulated on such shares of 2013 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2013 ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

                        (b)  Upon any termination of the right of the holders of all shares of 2013 ESOP Preferred Stock and Voting Parity Stock entitled to vote for Preferred Stock Directors, the term of office of all Preferred Stock Directors then in office elected by such holders voting as a class shall terminate immediately.  Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of 2013 ESOP Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a class). In case any vacancy shall occur among the Preferred Stock Directors, a successor may be elected by a plurality of the votes cast by the holders of 2013 ESOP Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a class, unless the vacancy has already been filled. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the Board of Directors for a vote.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this Section 2(b).

 

                        (c)  In addition to any other vote required by law or the Restated Certificate of Incorporation, so long as any shares of 2013 ESOP Preferred Stock remain outstanding, the vote or consent of the holders of the outstanding shares of 2013 ESOP Preferred Stock and outstanding shares of all series of Voting Parity Stock entitled to vote on the matter, by a vote of at least two-thirds in voting power of all such outstanding shares of 2013 ESOP Preferred Stock and such series of Voting Parity Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following whether or not such approval is required by Delaware law:

 

                                    (i)  the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2013 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on the Company’s voluntary or involuntary liquidation, dissolution or winding up, or

 

                                    (ii)  the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designation designating shares of 2013 ESOP Preferred Stock and the preferences, powers and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2013 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2013 ESOP Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

                        (d)  The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2013 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been irrevocably deposited in trust to effect such redemption.

 

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                        (e)  As used in this Section 2, “Voting Parity Stock” means any other class or series of stock of the Company now existing or hereafter authorized that ranks on par with the 2013 ESOP Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company and having similar voting rights as the 2013 ESOP Preferred Stock.

 

            3.         Dividends .  (a)(i)  Holders of shares of 2013 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $85.00 (the “Base Dividend”) per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3.

 

                                    (ii)  The Base Dividend shall be adjusted, effective on December 1, 2014 and on each December 1 thereafter until December 1, 2021, as follows: 

 

                                                (1)  If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2013 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $90.00 per share (the “First Adjusted Dividend”). 

 

                                                (2)  If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2013 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $95.00 per share (the “Second Adjusted Dividend”).

 

                                                (3)  If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2013 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend.

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Dividend Adjustment Table

 

Closing Price on 11/30

First Target Price

Second Target Price

 

 

 

 

 

 

2014

$36.562

$39.174

2015

$39.761

$44.316

2016

$43.240

$50.132

2017

$47.023

$56.712

2018

$51.138

$64.156

2019

$55.612

$72.576

2020

$60.479

$82.102

2021

$65.770

$92.878

 

                                                (4)  As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2014, the Current Market Price of one share of Common Stock is $37.00, then the cash dividend payable for the immediately following twelve month period per share of 2013 ESOP Preferred Stock would equal $90.00, with the first quarterly payment of such $90.00 dividend to be made on March 1, 2015.  If on November 30, 2015, the Current Market Price of one share of Common Stock is $45.00, then the cash dividend payable for the immediately following twelve month period per share of 2013 ESOP Preferred Stock would equal $95.00, with the first quarterly payment of such $95.00 dividend to be made on March 1, 2016.  If on November 30, 2016, the Current Market Price of one share of Common Stock is $40.00, then the cash dividend payable for the immediately following twelve month period per share of 2013 ESOP Preferred Stock would equal $85.00, with the first quarterly payment of such $85.00 dividend to be made on March 1, 2017.

 

                                                (5)  For purposes of this Section 3, the terms “First Adjusted Dividend” and “Second Adjusted Dividend” are sometimes referred to as an “Adjusted Dividend;” the term “Current Market Price” shall have the meaning given to it in Section 4(c)(iv); and the term “Trading Day” shall have the meaning given to it in Section 4(c)(vi).

 

                                    (iii)  If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted.

 

                                    (iv)  Dividends payable on shares of the 2013 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 of each year, commencing March 1, 2013.  Dividends on shares of the 2013 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2013 ESOP Preferred Stock.  Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof.  The amount of dividends payable per share for each dividend period shall be computed by dividing by four the Base Dividend or the Adjusted Dividend, whichever is then applicable.  The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months.

 

                        (b)(i)  No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2013 ESOP Preferred Stock for any period

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unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2013 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends.  When dividends are not paid in full, as aforesaid, upon the shares of 2013 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2013 ESOP Preferred Stock, all dividends declared upon shares of 2013 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2013 ESOP Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on 2013 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2013 ESOP Preferred Stock and such other series of Preferred Stock bear to each other.  Holders of shares of 2013 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2013 ESOP Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2013 ESOP Preferred Stock which may be in arrears.

 

                                    (ii)  So long as any shares of 2013 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common Stock or any other stock ranking junior to 2013 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2013 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2013 ESOP Preferred Stock as to dividends or upon liquidation, dissolution or winding up be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to 2013 ESOP Preferred Stock as to dividends or upon liquidation, dissolution or winding up), unless, in each case, the full cumulative dividends on all outstanding shares of 2013 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods.

 

            4.   Conversion .  Shares of 2013 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2013 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows:

 

                        (a)  Each share of 2013 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the “Release Date”), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2013 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (b)  Subject to and upon compliance with the provisions of this Section 4, a holder of 2013 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2013 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2013 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (c)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

 

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                                    (i)  The “Average Current Market Price” per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the “Purchase Offer” is made (as that term is defined in Section 6(d) hereof).

 

                                    (ii)  A “Business Day” means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open.

 

                                    (iii)  (A)  For purposes of a mandatory conversion of shares of 2013 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the “Conversion Price” for such shares of 2013 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date.

 

                                                (B)  For purposes of an optional conversion of shares of 2013 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the “Conversion Price” for such shares of 2013 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2013 ESOP Preferred Stock or by any agent for conversion of the 2013 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4.

 

                                                (C)  For purposes of a conversion of shares of 2013 ESOP Preferred Stock into shares of Common Stock in connection with a “Purchase Offer” (as defined in Section 6(d) hereof), the “Conversion Price” for such shares of 2013 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock.

 

Each share of 2013 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2013 ESOP Preferred Stock will be converted. 

 

                                    (iv)  The “Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange only or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof.

                                    (v)  “Common Stock” shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designation or as such stock may be constituted from time to time.

 

                                    (vi)  “Trading Day” with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if

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the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day.

                        (d)  In connection with any conversion of 2013 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the “Conversion Notice”) shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2013 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2013 ESOP Preferred Stock by the Company or the transfer agent for the 2013 ESOP Preferred Stock, which Conversion Notice shall be accompanied by (a) in the case of certificated 2013 ESOP Preferred Stock, the certificate or certificates representing the shares of 2013 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) and (b) in the case of uncertificated 2013 ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2013 ESOP Preferred Stock being converted pursuant to this Section 4.  Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2013 ESOP Preferred Stock released from the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2013 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2013 ESOP Preferred Stock, for any shares of 2013 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request.

 

                        (e)  Upon delivery to the Company or the transfer agent for the 2013 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4,  the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder’s designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion.  If there shall have been surrendered a certificate or certificates representing shares of 2013 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder’s designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2013 ESOP Preferred Stock which shall not have been converted.

                        (f)  The issuance by the Company of shares of Common Stock upon a conversion of shares of 2013 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2013 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder’s designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2013 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4.  On and after the effective date of a conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date.  The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2013 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares.

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                        (g)  The Company shall not be obligated to deliver to holders of 2013 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2013 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law.

                        (h)  The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2013 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2013 ESOP Preferred Stock then outstanding.

                        (i)  The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2013 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

                        (j)  The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2013 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2013 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

                        5.   Redemption At the Option of the Company .  (a)  The 2013 ESOP Preferred Stock shall be redeemable out of assets legally available therefor, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2013 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2013 ESOP Preferred Stock on the date fixed for redemption.  Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5.  From and after the date fixed for redemption, dividends on shares of 2013 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price.  Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1.  If the full cumulative dividends have not been paid, or contemporaneously declared and set aside for payment, on all outstanding shares of 2013 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2013 ESOP Preferred Stock pursuant to this Section 5.

                        (b)  Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2013 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the 2013 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date.  Each such notice shall state:  (i) the redemption date; (ii) the total number of shares of the 2013 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2013 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable

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upon conversion of a share of 2013 ESOP Preferred Stock will be determined.  The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2013 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state).

                        (c)  The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2013 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2013 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2013 ESOP Preferred Stock then being redeemed.

                        (d)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

                                    (i)  “Adjustment Period” shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined.

                                    (ii)  “Fair Market Value” shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period.  The “Fair Market Value” of any security which is not publicly traded (other than the 2013 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof.  The “Fair Market Value” of the 2013 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2013 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section).  For purposes of determining the Fair Market Value of the 2013 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2013 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2013 ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2013 ESOP Cumulative Convertible Preferred Stock Note Agreement dated on or about January 10, 2013 between the Company and the Plan (including any amendments or modifications thereto).

            6.   Consolidation, Merger, etc.   (a)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes “qualifying employer securities” with respect to a holder of 2013 ESOP Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2013 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and

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relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2013 ESOP Preferred Stock had immediately prior to such transaction, subject to the following:

                        (1)  After such transaction each share of the 2013 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2013 ESOP Preferred Stock could have been converted immediately prior to such transaction.

                        (2)  The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2013 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid.

                        (b)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2013 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2013 ESOP Preferred Stock could have been converted at such time so that each share of 2013 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2013 ESOP Preferred Stock could have been converted immediately prior to such transaction.  However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2013 ESOP Preferred Stock, then the shares of 2013 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2013 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction.  If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares.

                        (c)  In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a “Business Combination”), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2013 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2013 ESOP Preferred Stock, a cash payment per share of 2013 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2013 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is

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consummated.  No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction.

 

                        (d)  In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2013 ESOP Preferred Stock shall have the right to convert shares of 2013 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the “Purchase Offer Conversion Period”), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period.

 

                        For purposes of this paragraph (d), the following terms shall have the meanings set forth below:

 

                                    (i)  “Beneficial Ownership” shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and “person” shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.

 

                                    (ii)  A “Purchase Offer” shall have been made when any person (other than the Company or any affiliate of the Company) shall have “commenced” (as such term is defined in Rule 14d-2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company.

 

            7.   Liquidation Rights .  (a)  Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2013 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on or set aside for the Common Stock or any other class of stock ranking junior to 2013 ESOP Preferred Stock and subject to the rights of the holders of the shares of any series or class or classes of stock ranking on parity with or senior to the 2013 ESOP Preferred Stock, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.

 

                        (b)  Neither the sale of all or substantially all the property and assets of the Company, nor the merger, consolidation or other business combination of the Company into or with any other corporation, nor the merger, consolidation or other business combination of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7.

 

                        (c)  After the payment to the holders of the shares of 2013 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2013 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company.

 

                        (d)  In the event the assets of the Company available for distribution to the holders of shares of 2013 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any

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other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2013 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2013 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up.

             

(e)  Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on parity with or prior to the shares of 2013 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2013 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2013 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2013 ESOP Preferred Stock shall not be entitled to share therein.

 

            8.   Ranking .  For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank:

 

                        (a)  prior to the shares of 2013 ESOP Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2013 ESOP Preferred Stock;

 

                        (b)  on a parity with shares of 2013 ESOP Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2013 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2013 ESOP Preferred Stock; and

 

                        (c)  junior to shares of 2013 ESOP Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, if such class shall be Common Stock or if the holders of shares of 2013 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes.

 

            9.   Priority of 2013 ESOP Preferred Stock .  The shares of 2013 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company’s 2004 ESOP Cumulative Convertible Preferred Stock, its 2005 ESOP Cumulative Convertible Preferred Stock, its 2006 ESOP Cumulative Convertible Preferred Stock, its 2007 ESOP Cumulative Convertible Preferred Stock, its 2008 ESOP Cumulative Convertible Preferred Stock, its 2010 ESOP Cumulative Convertible Preferred Stock, its 2011 ESOP Cumulative Convertible Preferred Stock, and its 2012 ESOP Cumulative Convertible Preferred Stock. 

 

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IN WITNESS WHEREOF, the Company has caused this Certificate of Designation to be signed by John G. Stumpf, its Chairman, President and Chief Executive Officer, and attested by Jeannine E. Zahn, its Assistant Secretary, on this 9th day of January, 2013.

 

 

WELLS FARGO & COMPANY

 

 

 

By         /s/ John G. Stumpf                          

John G. Stumpf

Chairman, President and

Chief Executive Officer

 

 

Attest:

 

/s/ Jeannine E. Zahn                                       

Jeannine E. Zahn

Assistant Secretary

 

 

 

[As filed with the Delaware Secretary of State on January 9, 2013.]

WELLS FARGO & COMPANY

_____________________

CERTIFICATE OF DESIGNATION
Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware
_____________________

NON-CUMULATIVE PERPETUAL CLASS A PREFERRED STOCK, SERIES P
(Without Par Value)

_____________________

                        WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “ Board of Directors ”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorize the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “ Committee ”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “ General Corporation Law ”), the following resolutions were duly adopted by the Committee pursuant to the unanimous written consent of the Committee duly adopted on March 19, 2013, in accordance with Section 141(f) of the General Corporation Law:

 

                        Resolved, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated January 27, 2009, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation, and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the

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voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

 

RIGHTS AND PREFERENCES

 

            Section 1.        Designation .  The shares of such series of Preferred Stock shall be designated Non-Cumulative Perpetual Class A Preferred Stock, Series P, with no par value and a liquidation preference amount of $25,000 per share  (the “ Series P Preferred Stock ”).  Each share of Series P Preferred Stock shall be identical in all respects to every other share of Series P Preferred Stock except with respect to the date from which dividends may accrue. Series P Preferred Stock will rank equally with Parity Stock with respect to the payment of dividends and distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation and will rank senior to Junior Stock with respect to the payment of dividends and/or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

 

            Section 2.        Number of Shares .  The number of authorized shares of Series P Preferred Stock shall be 26,400.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series P Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation and by the filing of a certificate pursuant to the provisions of the General Corporation Law stating that such increase or decrease, as the case may be, has been so authorized.  The Corporation shall have the authority to issue fractional shares of Series P Preferred Stock.

Section 3.        Definitions .  As used herein with respect to Series P Preferred Stock:

Business Day ” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in New York, New York.

Certificate of Designation ” means this Certificate of Designation relating to the Series P Preferred Stock, as it may be amended from time to time.

“Common Stock” means the common stock of the Corporation, par value $1⅔ per share, as the same exists at the date of this Certificate of Designation or as such stock may be constituted from time to time.

Depositary Company ” has the meaning set forth in Section 6(d) hereof.

            “ Dividend Payment Date ” has the meaning set forth in Section 4(a) hereof.

Dividend Period ” has the meaning set forth in Section 4(a) hereof.

DTC ” means The Depository Trust Company, together with its successors and assigns.

 “Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation now existing or hereafter authorized over which the Series P Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Liquidation Preference ” has the meaning set forth in Section 5(a) hereof.

Nonpayment Event ” shall have the meaning set forth in Section 7(b).

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Parity Stock ” means any other class or series of stock of the Corporation now existing or hereafter authorized that ranks on par with the Series P Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Preference Stock ” means any and all series of preference stock, having no par value, of the Corporation. 

Preferred Stock ” means any and all series of preferred stock, having no par value, of the Corporation, including the Series P Preferred Stock.

Preferred Stock Directors ” shall have the meaning set forth in Section 7(b).

Regulatory Capital Treatment Event ” means the Corporation’s reasonable determination that as a result of any (i) amendment to, clarification of, or change (including any announced prospective change) in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective on or after March 15, 2013; (ii) proposed change in those laws or regulations that is announced or becomes effective on or after March 15, 2013; or (iii) official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced on or after March 15, 2013, there is more than an insubstantial risk that the Corporation will not be entitled to treat the full liquidation preference amount of all shares of Series P Preferred Stock then outstanding as Tier 1 capital (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the appropriate federal banking agency, as then in effect and applicable, for as long as any share of Series P Preferred Stock is outstanding.

Series P Preferred Stock ” has the meaning set forth in Section 1 hereof.

Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series P Preferred Stock.

            Section 4.        Dividends.

(a)        Rate .  Dividends on the Series P Preferred Stock will not be mandatory.  Holders of Series P Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation, but only out of assets legally available therefor, non-cumulative cash dividends on the liquidation preference amount of $25,000 per share of the Series P Preferred Stock, payable quarterly in arrears on the 15th day of March, June, September and December of each year (commencing on June 15, 2013); provided , however , if any such day is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding day that is a Business Day, without any interest or other payment in respect of such delay (each such day on which dividends are payable a “ Dividend Payment Date ”).  A “ Dividend Period ” means the period from, and including, a Dividend Payment Date to, but excluding, the next succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, March 22, 2013 to, but excluding, June 15, 2013.  Dividends on each share of Series P Preferred Stock will accrue at a rate per annum equal to 5.25%.  The record date for payment of dividends on the Series P Preferred Stock shall be the last Business Day of the calendar month immediately preceding the month during which the Dividend Payment Date falls or such other date as determined by the Corporation’s Board of Directors.  The amount of dividends payable shall be computed on the basis of a 360-day year of twelve 30-day months.  Dollar amounts resulting from that calculation will be rounded to the nearest cent, with one-half cent being rounded upward.

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(b)       Non-Cumulative Dividends .  Dividends on shares of Series P Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series P Preferred Stock on any Dividend Payment Date are not declared prior to such Dividend Payment Date, then such dividends shall not cumulate and shall cease to accrue and be payable, and the Corporation shall have no obligation to pay, and the holders of Series P Preferred Stock shall have no right to receive, dividends accrued for such Dividend Period on the Dividend Payment Date for such Dividend Period or at any time in the future or interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Series P Preferred Stock or any other series of authorized Preferred Stock, Preference Stock, or Common Stock of the Corporation.

(c)        Priority of Dividends .  So long as any shares of Series P Preferred Stock remain outstanding,

(1) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Common Stock, and no shares of Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Common Stock by the Corporation (other than (i) a dividend payable in Common Stock or (ii) the acquisition of shares of Common Stock in exchange for, or through application of proceeds of the sale of, shares of Common Stock);

(2) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Junior Stock other than Common Stock, and no shares of Junior Stock other than Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Junior Stock other than Common Stock by the Corporation (other than (i) a dividend payable solely in shares of Junior Stock, (ii) any dividend in connection with the implementation of a stockholder rights plan, or the redemption or repurchase of any rights under any such plan, (iii) any dividend in the form of stock, warrants, options or other rights where the dividend stock or stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks equally with or junior to such stock, (iv) as a result of a reclassification of Junior Stock other than Common Stock for or into other Junior Stock, (v) the exchange or conversion of one share of Junior Stock other than Common Stock for or into another share of Junior Stock, (vi) through the use of proceeds of a substantially contemporaneous sale of other shares of Junior Stock, (vii) any purchase, redemption or other acquisition of Junior Stock other than Common Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after March 15, 2013, (viii) any purchase of fractional interests in shares of Junior Stock other than Common Stock pursuant to the conversion or exchange provisions of such Junior Stock other than Common Stock or the securities being converted or exchanged, (ix) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (x) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business); and

(3) no shares of Parity Stock will be repurchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series P Preferred Stock and such Parity Stock during a Dividend Period (other than (i) as a result of a reclassification of Parity Stock for or into other Parity Stock or Junior Stock, (ii) the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or Junior Stock, (iii) through the use of proceeds of a substantially contemporaneous sale of other shares of Parity Stock or Junior Stock, (iv) any purchase, redemption or other acquisition of Parity Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after March 15, 2013, (v) any purchase of fractional

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interests in shares of Parity Stock pursuant to the conversion or exchange provisions of such Parity Stock or the securities being converted or exchanged, (vi) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (vii) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business), unless, in each case, the full dividends for the then-current Dividend Period on all outstanding shares of the Series P Preferred Stock have been declared and paid or declared and a sum sufficient for the payment of those dividends has been set aside.

  Subject to the succeeding sentence, for so long as any shares of Series P Preferred Stock remain outstanding, no dividends shall be declared, paid, or set aside for payment on any Parity Stock for any period unless full dividends on all outstanding shares of Series P Preferred Stock for the then-current Dividend Period have been paid in full or declared and a sum sufficient for the payment thereof set aside.  To the extent the Corporation declares dividends on the Series P Preferred Stock and on any Parity Stock but cannot make full payment of those declared dividends, the Corporation will allocate the dividend payments on a proportional basis among the holders of shares of Series P Preferred Stock and the holders of any Parity Stock then outstanding where the terms of such Parity Stock provide similar dividend rights. 

            Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors of the Corporation or any duly authorized committee of the board of Directors of the Corporation may be declared and paid on the Common Stock and any other stock that is Parity Stock or Junior Stock, from time to time out of any assets legally available for such payment, and the shares of Series P Preferred Stock shall not be entitled to participate in any such dividends.

Section 5.        Liquidation Rights.

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series P Preferred Stock shall be entitled to receive in full out of assets available for distribution to its stockholders before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of the Common Stock or any other Junior Stock, and subject to the rights of the holders of Parity Stock or any stock of the Corporation ranking senior to the Series P Preferred Stock as to such distribution, a liquidating distribution in the amount of $25,000 per share, plus an amount equal to any dividends which have been declared but not yet paid, without accumulation of any undeclared dividends, to the date of liquidation (the “ Liquidation Preference ”).  The holders of Series P Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b)       Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the Liquidation Preference to all holders of Series P Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of Series P Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preference of Series P Preferred Stock and all such Parity Stock. 

(c)        Residual Distributions .  If the Liquidation Preference has been paid in full to all holders of Series P Preferred Stock and all other amounts payable upon liquidation, dissolution or winding up of the Corporation have been paid in full to all holders of any Parity Stock, the holders of Common Stock and any other Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)       Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary

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dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.        Redemption.

(a)        Optional Redemption .  The Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may redeem, subject to the prior approval of the Federal Reserve Board, out of funds legally available therefor, in whole or in part, the shares of Series P Preferred Stock at the time outstanding, at any time on any Dividend Payment Date on or after June 15, 2018, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series P Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid up to the redemption date without accumulation of any undeclared dividends.

Notwithstanding the foregoing, within 90 days of the Corporation’s good faith determination that a Regulatory Capital Treatment Event has occurred, the Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may, subject to the approval of the appropriate federal banking agency, redeem out of funds legally available therefor, in whole, but not in part, the shares of Series P Preferred Stock at the time outstanding, prior to June 15, 2018, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series P Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid, without accumulation of any undeclared dividends.

(b)       Notice of Redemption .  Notice of every redemption of shares of Series P Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of such shares to be redeemed at their respective last addresses appearing on the stock register of the Corporation.  Such mailing shall be at least 40 days and not more than 70 days before the date fixed for redemption.  Any notice mailed as provided in this Section 6(b) shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series P Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series P Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series P Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, if applicable, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where the certificates for those shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date.  Notwithstanding the foregoing, if the Series P Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC. 

(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series P Preferred Stock at the time outstanding, the shares of Series P Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series P Preferred Stock in proportion to the number of Series P Preferred Stock held by such holders or in such other manner as the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may determine to be fair and equitable.  Subject to the provisions of this Section 6, the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series P Preferred Stock shall be redeemed from time to time.

(d)       Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been irrevocably set

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aside by the Corporation, separate and apart from its other assets, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors (the “ Depositary Company ”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders  thereof to receive the amount payable on such redemption from the Depository Company at any time after the redemption date from the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any such interest.  Any funds so deposited and unclaimed at the end of two years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

Section 7.        Voting Rights.

(a)        General.  The holders of Series P Preferred Stock shall not be entitled to vote on any matter except as set forth in paragraph 7(b) below or as required by applicable law.

(b)       Right To Elect Two Directors Upon Nonpayment Events.  Whenever dividends payable on any shares of Series P Preferred Stock or any class or series of Voting Parity Stock have not been declared and paid in an aggregate amount equal to, as to any class or series, at least six quarterly Dividend Periods or their equivalent, whether or not for consecutive Dividend Periods (a “ Nonpayment Event ”), the holders of the outstanding Series P Preferred Stock, voting together as a class with holders of Voting Parity Stock whose voting rights are exercisable, will be entitled to vote for the election of two additional directors of the Corporation’s Board of Directors at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders (the “ Preferred Stock Directors ”) by a plurality of the votes cast; provided that the Board of Directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board of Directors shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of the outstanding Series P Preferred Stock (together with the holders of shares of any one or more other series of Voting Parity Stock).  At elections for such directors, each holder of the Series P Preferred Stock shall be entitled to 25 votes for each share held (the holders of shares of any other series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock as may be granted to them).  The right of the holders of the Series P Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Voting Parity Stock) to elect Preferred Stock Directors shall continue until such time as the Corporation has paid in full dividends for the equivalent of at least four quarterly Dividend Periods or their equivalent, at which time such right with respect to the Series P Preferred Stock shall terminate, except as provided by law, and subject to revesting in the event of each and every subsequent default of the character described in this Section 7(b).

Upon any termination of the right of the holders of all shares of Series P Preferred Stock and Voting Parity Stock to vote for Preferred Stock Directors, the term of office of all Preferred Stock Directors then in office elected by only those holders voting as a class shall terminate immediately.  Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series P Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a class). In case any vacancy shall occur among the Preferred Stock Directors, a successor may be elected by a plurality of the votes cast by the holders of Series P Preferred Stock and Voting Parity Stock having the voting

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rights described above, voting together as a class, unless the vacancy has already been filled. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the Board of Directors for a vote.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this Section 7(b) shall have expired, the number of directors shall be such number as may be provided for in the By-Laws irrespective of any increase made pursuant to this Section 7(b).

(c)     Other Voting Rights .  In addition to any other vote required by law or the Restated Certificate of Incorporation, so long as any shares of the Series P Preferred Stock remain outstanding, the vote or consent of the holders of the outstanding shares of Series P Preferred Stock and outstanding shares of all other series of Voting Parity Stock entitled to vote on the matter, by a vote of at least 66 2/3% in voting power of all such outstanding Series P Preferred Stock and such Voting Parity Stock, voting together as a class, given in person or by proxy, either in writing without a meeting or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following actions, whether or not such approval is required by Delaware law: (i) the issuance of any class or series of Preferred Stock or Preference Stock ranking senior to the Series P Preferred Stock in the payment of dividends or the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; (ii) any amendment, alteration or repeal of any provision of the Restated Certificate of Incorporation, including the Certificate of Designation, or the Bylaws that would adversely affect the rights, preferences, privileges or voting powers of the Series P Preferred Stock; (iii) any amendment or alteration of the Restated Certificate of Incorporation, including the Certificate of Designation, or Bylaws to authorize, create, or increase the authorized amount of, any shares of, or any securities convertible into shares of, any class or series of the Corporation’s capital stock ranking senior to the Series P Preferred Stock with respect to either the payment of dividends or in the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; or (iv) any consummation of a reclassification involving the Series P Preferred Stock or a merger or consolidation with another corporation or other entity, except holders of the Series P Preferred Stock will have no right to vote under this section 7(c)(iv) if in each case (a) the shares of Series P Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (b) such shares of Series P Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series P Preferred Stock, taken as a whole; provided, however , that any authorization, creation or increase in the authorized amount of or issuance of the Series P Preferred Stock or any Parity Stock or Junior Stock or any securities convertible into any class or series of Parity Stock (whether dividends payable in respect of such Parity Stock are cumulative or non-cumulative) or Junior Stock will be deemed not to adversely affect the rights, preferences, privileges or voting powers of the Series P Preferred Stock, and holders of the Series P Preferred Stock shall have no right to vote thereon.

If any amendment, alteration, repeal, reclassification, merger or consolidation specified in this Section 7(c) would adversely affect one or more but not all series of voting Preferred Stock (including the Series P Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a class (in lieu of all other series of Preferred Stock).

Each holder of the Series P Preferred Stock will have 25 votes per share on any matter on which holders of the Series P Preferred Stock are entitled to vote, whether separately or together with any other series of stock of the Corporation (the holders of any shares of any other series of stock being entitled to such number of votes, if any, for each share of stock as may be granted to them), pursuant to Delaware law or otherwise, including by written consent.

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(d)       Changes after Provision for Redemption .  No vote or consent of the holders of Series P Preferred Stock shall be required pursuant to Section 7(b) or (c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding Series P Preferred Stock shall have been redeemed, or notice of redemption has been given and sufficient funds shall have been irrevocably deposited in trust to effect such redemption.

(e)        Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Series P Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Restated Certificate of Incorporation, the Bylaws, applicable law and any national securities exchange or other trading facility in which the Series P Preferred Stock is listed or traded at the time.

Section 8.        Preemption and Conversion .  The holders of Series P Preferred Stock shall not have any rights of preemption or rights to convert such Series P Preferred Stock into shares of any other class of capital stock of the Corporation.

Section 9.        Reacquired Shares .  Shares of Series P Preferred Stock which have been issued and redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 10.      No Sinking Fund .  Shares of Series P Preferred Stock are not subject to the operation of a sinking fund.

Section 11.      Additional Classes or Series of Stock .  Notwithstanding anything set forth in the Restated Certificate of Incorporation or this Certificate of Designation to the contrary, the Board of Directors of the Corporation, or any authorized committee of the Board of Directors of the Corporation, (i) without the vote of the holders of the Series P Preferred Stock, may authorize and issue additional shares of Junior Stock and Parity Stock and (ii) with the requisite vote of the holders of the Series P Preferred Stock and Parity Stock entitled to vote thereon, may authorize and issue any additional class or series of Preferred Stock or Preference Stock senior to the Series P Preferred Stock as to the payment of dividends and/or the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

                        In Witness Whereof, Wells Fargo & Company has caused this Certificate of Designation to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Jeannine E. Zahn, its Assistant Secretary, this 21 st day of March, 2013.

 

Wells Fargo & Company

By:

/s/ Barbara S. Brett

 

Barbara S. Brett, Senior Vice President and Assistant Treasurer

 

 

/s/ Jeannine E. Zahn                           
Jeannine E. Zahn, Assistant Secretary

 

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 [As filed with the Delaware Secretary of State on March 21, 2013.]

WELLS FARGO & COMPANY

_____________________

CERTIFICATE OF DESIGNATION
Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware
_____________________

5.85% FIXED-TO-FLOATING RATE NON-CUMULATIVE PERPETUAL
CLASS A PREFERRED STOCK, SERIES Q
(Without Par Value)

_____________________

                        WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “ Board of Directors ”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorize the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “ Committee ”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “ General Corporation Law ”), the following resolutions were duly adopted by the Committee pursuant to the unanimous written consent of the Committee duly adopted on July 19, 2013, in accordance with Section 141(f) of the General Corporation Law:

 

                        Resolved, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated January 27, 2009, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation, and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

 

RIGHTS AND PREFERENCES

 

            Section 1.        Designation .  The shares of such series of Preferred Stock shall be designated 5.85% Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series Q, with no par value and a liquidation preference amount of $25,000 per share (the “ Series Q Preferred Stock ”).  Each share of Series Q Preferred Stock shall be identical in all respects to every other share of Series Q Preferred Stock except with respect to the date from which dividends may accrue. Series Q Preferred Stock will rank equally with Parity Stock with respect to the payment of dividends and distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation and will rank senior to Junior Stock with respect to the payment of dividends and/or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

 

            Section 2.        Number of Shares .  The number of authorized shares of Series Q Preferred Stock shall be 69,000.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series Q Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation and by the filing of a certificate pursuant to the provisions of the General Corporation Law stating that such increase or decrease, as the case

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may be, has been so authorized.  The Corporation shall have the authority to issue fractional shares of Series Q Preferred Stock.

Section 3.        Definitions .  As used herein with respect to Series Q Preferred Stock:

Business Day ” means for dividends payable for the Fixed Rate Period (as defined below) any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in New York, New York, and for dividends payable for the Floating Rate Period (as defined below), it means any date that would be considered a Business Day during the Fixed Rate Period that is also a London Banking Day (as defined below).

Calculation Agent ”  means Wells Fargo Bank, N.A. or any other successor appointed by the Corporation, acting as Calculation Agent.

Certificate of Designation ” means this Certificate of Designation relating to the Series Q Preferred Stock, as it may be amended from time to time.

“Common Stock” means the common stock of the Corporation, par value $1⅔ per share, as the same exists at the date of this Certificate of Designation or as such stock may be constituted from time to time.

Depositary Company ” has the meaning set forth in Section 6(d) hereof.

Designated LIBOR Page” means the display on Reuters, or any successor service, on page LIBOR01, or any other page as may replace that page on that service, for the purpose of displaying the London interbank rates for U.S. dollars.

            “ Dividend Payment Date ” has the meaning set forth in Section 4(a) hereof.

Dividend Period ” has the meaning set forth in Section 4(a) hereof.

DTC ” means The Depository Trust Company, together with its successors and assigns.

Fixed Rate Period ” has the meaning set forth in Section 4(a) hereof.

Floating Rate Period ” has the meaning set forth in Section 4(a) hereof.

“Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation now existing or hereafter authorized over which the Series Q Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

LIBOR Determination Date ” means the second London Banking Day immediately preceding the first day of the relevant Dividend Period.

Liquidation Preference ” has the meaning set forth in Section 5(a) hereof.

London Banking Day ” means any day on which commercial banks and foreign exchange markets settle payments in London.

Nonpayment Event ” shall have the meaning set forth in Section 7(b).

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Parity Stock ” means any other class or series of stock of the Corporation now existing or hereafter authorized that ranks on par with the Series Q Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Preference Stock ” means any and all series of preference stock, having no par value, of the Corporation. 

Preferred Stock ” means any and all series of preferred stock, having no par value, of the Corporation, including the Series Q Preferred Stock.

Preferred Stock Directors ” shall have the meaning set forth in Section 7(b).

Regulatory Capital Treatment Event ” means the Corporation’s reasonable determination that as a result of any (i) amendment to, clarification of, or change (including any announced prospective change) in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective on or after July 15, 2013; (ii) proposed change in those laws or regulations that is announced or becomes effective on or after July 15, 2013; or (iii) official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced on or after July 15, 2013, there is more than an insubstantial risk that the Corporation will not be entitled to treat the full liquidation preference amount of all shares of Series Q Preferred Stock then outstanding as Tier 1 capital (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the appropriate federal banking agency, as then in effect and applicable, for as long as any share of Series Q Preferred Stock is outstanding.

Series Q Preferred Stock ” has the meaning set forth in Section 1 hereof.

Three-month LIBOR ” means, for any LIBOR Determination Date, the arithmetic mean of the offered rates for deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that LIBOR Determination Date that appear on the Designated LIBOR Page as of 11:00 a.m., London time, on that LIBOR Determination Date, if at least two offered rates appear on the Designated LIBOR Page, provided that if the specified Designated LIBOR Page by its terms provides only for a single rate, that single rate will be used.  If (i) fewer than two offered rates appear or (ii) no rate appears and the Designated LIBOR Page by its terms provides only for a single rate, then the Calculation Agent will request the principal London offices of each of four major banks in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered quotation for deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that LIBOR Determination Date to prime banks in the London interbank market at approximately 11:00 a.m., London time, on that LIBOR Determination Date and in a principal amount that is representative of a single transaction in U.S. dollars in that market at that time.  If at least two quotations are provided, Three-month LIBOR determined on that LIBOR Determination Date will be the arithmetic mean of those quotations.  If fewer than two quotations are provided, Three-month LIBOR will be the arithmetic mean of the rates quoted at approximately 11:00 a.m., New York City time, on that LIBOR Determination Date by three major banks in New York City selected by the Calculation Agent for loans in U.S. dollars to leading European banks for a three-month period and in a principal amount that is representative of a single transaction in U.S. dollars in that market at that time.  If the banks so selected by the Calculation Agent are not quoting as set forth above, Three-month LIBOR for that LIBOR Determination Date will remain Three-month LIBOR for the immediately preceding Dividend Period or, in the case of the Dividend Period beginning September 15, 2023, 5.85%.  All percentages used in or resulting from any calculation of Three-month LIBOR will be rounded, if necessary, to the nearest one hundred-thousandth of a percentages point, with .000005% rounded up to .00001%.  The determination of Three-month

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LIBOR for each relevant Dividend Period by the Calculation Agent will (in the absence of manifest error) be final and binding.

Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series Q Preferred Stock.

            Section 4.        Dividends.

(a)        Rate .  Dividends on the Series Q Preferred Stock will not be mandatory.  Holders of Series Q Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation, but only out of assets legally available therefor, non-cumulative cash dividends on the liquidation preference amount of $25,000 per share of the Series Q Preferred Stock, payable quarterly in arrears on the 15 th day of March, June, September and December, commencing September 15, 2013.  From July 22, 2013 to, but excluding, September 15, 2023 (the “ Fixed Rate Period ”), dividends will accrue at an annual rate of 5.85%, and from, and including, September 15, 2023 (the “ Floating Rate Period ”), dividends will accrue at an annual rate equal to Three-month LIBOR plus 3.09%.  Notwithstanding the foregoing, if any date on or prior to September 15, 2023 on which dividends otherwise would be payable is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding day that is a Business Day, without any interest or other payment in respect of such delay, and if any date after September 15, 2023 on which dividends otherwise would be payable is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding Business Day unless that day falls in the next calendar month, in which case payment of any dividend otherwise payable on that date will be the immediately preceding Business Day, and dividends will accrue to the actual payment date (each such day on which dividends are payable a “ Dividend Payment Date ”).  A “ Dividend Period ” means the period from, and including, a Dividend Payment Date to, but excluding, the next succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, July 22, 2013 to, but excluding, September 15, 2013.  The record date for payment of dividends on the Series Q Preferred Stock shall be the last Business Day of the calendar month immediately preceding the month during which the Dividend Payment Date falls or such other date as determined by the Corporation’s Board of Directors.  The amount of dividends payable for the Fixed Rate Period shall be computed on the basis of a 360-day year of twelve 30-day months.  The amount of dividends payable for the Floating Rate Period shall be computed on the basis of a 360-day year and the actual number of days elapsed.  Dollar amounts resulting from that calculation will be rounded to the nearest cent, with one-half cent being rounded upward.  The Calculation Agent’s determination of any dividend rate, and its calculation of the amount of dividends payable for the Floating Rate Period, will be maintained on file at the Calculation Agent’s principal offices.

(b)       Non-Cumulative Dividends .  Dividends on shares of Series Q Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series Q Preferred Stock on any Dividend Payment Date are not declared prior to such Dividend Payment Date, then such dividends shall not cumulate and shall cease to accrue and be payable, and the Corporation shall have no obligation to pay, and the holders of Series Q Preferred Stock shall have no right to receive, dividends accrued for such Dividend Period on the Dividend Payment Date for such Dividend Period or at any time in the future or interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Series Q Preferred Stock or any other series of authorized Preferred Stock, Preference Stock, or Common Stock of the Corporation.

(c)        Priority of Dividends .  So long as any shares of Series Q Preferred Stock remain outstanding,

(1) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Common Stock, and no shares of Common Stock shall be

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repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Common Stock by the Corporation (other than (i) a dividend payable in Common Stock or (ii) the acquisition of shares of Common Stock in exchange for, or through application of proceeds of the sale of, shares of Common Stock);

(2) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Junior Stock other than Common Stock, and no shares of Junior Stock other than Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Junior Stock other than Common Stock by the Corporation (other than (i) a dividend payable solely in shares of Junior Stock, (ii) any dividend in connection with the implementation of a stockholder rights plan, or the redemption or repurchase of any rights under any such plan, (iii) any dividend in the form of stock, warrants, options or other rights where the dividend stock or stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks equally with or junior to such stock, (iv) as a result of a reclassification of Junior Stock other than Common Stock for or into other Junior Stock, (v) the exchange or conversion of one share of Junior Stock other than Common Stock for or into another share of Junior Stock, (vi) through the use of proceeds of a substantially contemporaneous sale of other shares of Junior Stock, (vii) any purchase, redemption or other acquisition of Junior Stock other than Common Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after July 15, 2013, (viii) any purchase of fractional interests in shares of Junior Stock other than Common Stock pursuant to the conversion or exchange provisions of such Junior Stock other than Common Stock or the securities being converted or exchanged, (ix) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (x) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business); and

(3) no shares of Parity Stock will be repurchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series Q Preferred Stock and such Parity Stock during a Dividend Period (other than (i) as a result of a reclassification of Parity Stock for or into other Parity Stock or Junior Stock, (ii) the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or Junior Stock, (iii) through the use of proceeds of a substantially contemporaneous sale of other shares of Parity Stock or Junior Stock, (iv) any purchase, redemption or other acquisition of Parity Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after July 15, 2013, (v) any purchase of fractional interests in shares of Parity Stock pursuant to the conversion or exchange provisions of such Parity Stock or the securities being converted or exchanged, (vi) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (vii) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business),

unless, in each case, the full dividends for the then-current Dividend Period on all outstanding shares of the Series Q Preferred Stock have been declared and paid or declared and a sum sufficient for the payment of those dividends has been set aside.

  Subject to the succeeding sentence, for so long as any shares of Series Q Preferred Stock remain outstanding, no dividends shall be declared, paid, or set aside for payment on any Parity Stock for any period unless full dividends on all outstanding shares of Series Q Preferred Stock for the then-current Dividend Period have been paid in full or declared and a sum sufficient for the payment thereof set aside.  To the extent the

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Corporation declares dividends on the Series Q Preferred Stock and on any Parity Stock but cannot make full payment of those declared dividends, the Corporation will allocate the dividend payments on a proportional basis among the holders of shares of Series Q Preferred Stock and the holders of any Parity Stock then outstanding where the terms of such Parity Stock provide similar dividend rights. 

            Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may be declared and paid on the Common Stock and any other stock that is Parity Stock or Junior Stock, from time to time out of any assets legally available for such payment, and the shares of Series Q Preferred Stock shall not be entitled to participate in any such dividends.

Section 5.        Liquidation Rights.

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series Q Preferred Stock shall be entitled to receive in full out of assets available for distribution to its stockholders before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of the Common Stock or any other Junior Stock, and subject to the rights of the holders of Parity Stock or any stock of the Corporation ranking senior to the Series Q Preferred Stock as to such distribution, a liquidating distribution in the amount of $25,000 per share, plus an amount equal to any dividends which have been declared but not yet paid, without accumulation of any undeclared dividends, to the date of liquidation (the “ Liquidation Preference ”).  The holders of Series Q Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b)       Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the Liquidation Preference to all holders of Series Q Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of Series Q Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preference of Series Q Preferred Stock and all such Parity Stock. 

(c)        Residual Distributions .  If the Liquidation Preference has been paid in full to all holders of Series Q Preferred Stock and all other amounts payable upon liquidation, dissolution or winding up of the Corporation have been paid in full to all holders of any Parity Stock, the holders of Common Stock and any other Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)       Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.        Redemption.

(a)        Optional Redemption .  The Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may redeem, subject to the prior approval of the Federal Reserve Board, out of funds legally available therefor, in whole or in part, the shares of Series Q Preferred Stock at the time outstanding, at any time on any Dividend Payment Date on or after September 15,

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2023, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series Q Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid up to the redemption date without accumulation of any undeclared dividends.

Notwithstanding the foregoing, within 90 days of the Corporation’s good faith determination that a Regulatory Capital Treatment Event has occurred, the Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may, subject to the approval of the appropriate federal banking agency, redeem out of funds legally available therefor, in whole, but not in part, the shares of Series Q Preferred Stock at the time outstanding, prior to September 15, 2023, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series Q Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid, without accumulation of any undeclared dividends.

(b)       Notice of Redemption .  Notice of every redemption of shares of Series Q Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of such shares to be redeemed at their respective last addresses appearing on the stock register of the Corporation.  Such mailing shall be at least 40 days and not more than 70 days before the date fixed for redemption.  Any notice mailed as provided in this Section 6(b) shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series Q Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series Q Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series Q Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, if applicable, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where the certificates for those shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date.  Notwithstanding the foregoing, if the Series Q Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC. 

(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series Q Preferred Stock at the time outstanding, the shares of Series Q Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series Q Preferred Stock in proportion to the number of Series Q Preferred Stock held by such holders or in such other manner as the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may determine to be fair and equitable.  Subject to the provisions of this Section 6, the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series Q Preferred Stock shall be redeemed from time to time.

(d)       Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been irrevocably set aside by the Corporation, separate and apart from its other assets, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors (the “ Depositary Company ”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders  thereof to receive the amount payable on such redemption from the Depository Company at any time after the redemption date from the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any

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such interest.  Any funds so deposited and unclaimed at the end of two years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

Section 7.        Voting Rights.

(a)        General.  The holders of Series Q Preferred Stock shall not be entitled to vote on any matter except as set forth in paragraph 7(b) below or as required by applicable law.

(b)       Right To Elect Two Directors Upon Nonpayment Events.  Whenever dividends payable on any shares of Series Q Preferred Stock or any class or series of Voting Parity Stock have not been declared and paid in an aggregate amount equal to, as to any class or series, at least six quarterly Dividend Periods or their equivalent, whether or not for consecutive Dividend Periods (a “ Nonpayment Event ”), the holders of the outstanding Series Q Preferred Stock, voting together as a class with holders of Voting Parity Stock whose voting rights are exercisable, will be entitled to vote for the election of two additional directors of the Corporation’s Board of Directors at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders (the “ Preferred Stock Directors ”) by a plurality of the votes cast; provided that the Board of Directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board of Directors shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of the outstanding Series Q Preferred Stock (together with the holders of shares of any one or more other series of Voting Parity Stock).  At elections for such directors, each holder of the Series Q Preferred Stock shall be entitled to 25 votes for each share held (the holders of shares of any other series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock as may be granted to them).  The right of the holders of the Series Q Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Voting Parity Stock) to elect Preferred Stock Directors shall continue until such time as the Corporation has paid in full dividends for the equivalent of at least four quarterly Dividend Periods or their equivalent, at which time such right with respect to the Series Q Preferred Stock shall terminate, except as provided by law, and subject to revesting in the event of each and every subsequent default of the character described in this Section 7(b).

Upon any termination of the right of the holders of all shares of Series Q Preferred Stock and Voting Parity Stock to vote for Preferred Stock Directors, the term of office of all Preferred Stock Directors then in office elected by only those holders voting as a class shall terminate immediately.  Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series Q Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a class). In case any vacancy shall occur among the Preferred Stock Directors, a successor may be elected by a plurality of the votes cast by the holders of Series Q Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a class, unless the vacancy has already been filled. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the Board of Directors for a vote.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this Section 7(b) shall have expired, the number of directors shall be such number as may be provided for in the By-Laws irrespective of any increase made pursuant to this Section 7(b).

(c)     Other Voting Rights .  In addition to any other vote required by law or the Restated Certificate of Incorporation, so long as any shares of the Series Q Preferred Stock remain outstanding, the vote or consent of the holders of the outstanding shares of Series Q Preferred Stock and outstanding shares of all other series of Voting Parity Stock entitled to vote on the matter, by a vote of at least 66 2/3% in voting power of all such outstanding Series Q Preferred Stock and such Voting Parity Stock, voting together as a class, given in person

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or by proxy, either in writing without a meeting or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following actions, whether or not such approval is required by Delaware law: (i) the issuance of any class or series of Preferred Stock or Preference Stock ranking senior to the Series Q Preferred Stock in the payment of dividends or the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; (ii) any amendment, alteration or repeal of any provision of the Restated Certificate of Incorporation, including the Certificate of Designation, or the Bylaws that would adversely affect the rights, preferences, privileges or voting powers of the Series Q Preferred Stock; (iii) any amendment or alteration of the Restated Certificate of Incorporation, including the Certificate of Designation, or Bylaws to authorize, create, or increase the authorized amount of, any shares of, or any securities convertible into shares of, any class or series of the Corporation’s capital stock ranking senior to the Series Q Preferred Stock with respect to either the payment of dividends or in the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; or (iv) any consummation of a reclassification involving the Series Q Preferred Stock or a merger or consolidation with another corporation or other entity, except holders of the Series Q Preferred Stock will have no right to vote under this section 7(c)(iv) if in each case (a) the shares of Series Q Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (b) such shares of Series Q Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series Q Preferred Stock, taken as a whole; provided, however , that any authorization, creation or increase in the authorized amount of or issuance of the Series Q Preferred Stock or any Parity Stock or Junior Stock or any securities convertible into any class or series of Parity Stock (whether dividends payable in respect of such Parity Stock are cumulative or non-cumulative) or Junior Stock will be deemed not to adversely affect the rights, preferences, privileges or voting powers of the Series Q Preferred Stock, and holders of the Series Q Preferred Stock shall have no right to vote thereon.

If any amendment, alteration, repeal, reclassification, merger or consolidation specified in this Section 7(c) would adversely affect one or more but not all series of voting Preferred Stock (including the Series Q Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a class (in lieu of all other series of Preferred Stock).

Each holder of the Series Q Preferred Stock will have 25 votes per share on any matter on which holders of the Series Q Preferred Stock are entitled to vote, whether separately or together with any other series of stock of the Corporation (the holders of any shares of any other series of stock being entitled to such number of votes, if any, for each share of stock as may be granted to them), pursuant to Delaware law or otherwise, including by written consent.

(d)       Changes after Provision for Redemption .  No vote or consent of the holders of Series Q Preferred Stock shall be required pursuant to Section 7(b) or (c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding Series Q Preferred Stock shall have been redeemed, or notice of redemption has been given and sufficient funds shall have been irrevocably deposited in trust to effect such redemption.

(e)        Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Series Q Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Restated Certificate of Incorporation, the Bylaws, applicable law and any national securities exchange or other trading facility in which the Series Q Preferred Stock is listed or traded at the time.

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Section 8.        Preemption and Conversion .  The holders of Series Q Preferred Stock shall not have any rights of preemption or rights to convert such Series Q Preferred Stock into shares of any other class of capital stock of the Corporation.

Section 9.        Reacquired Shares .  Shares of Series Q Preferred Stock which have been issued and redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 10.      No Sinking Fund .  Shares of Series Q Preferred Stock are not subject to the operation of a sinking fund.

Section 11.      Additional Classes or Series of Stock .  Notwithstanding anything set forth in the Restated Certificate of Incorporation or this Certificate of Designation to the contrary, the Board of Directors of the Corporation, or any authorized committee of the Board of Directors of the Corporation, (i) without the vote of the holders of the Series Q Preferred Stock, may authorize and issue additional shares of Junior Stock and Parity Stock and (ii) with the requisite vote of the holders of the Series Q Preferred Stock and Parity Stock entitled to vote thereon, may authorize and issue any additional class or series of Preferred Stock or Preference Stock senior to the Series Q Preferred Stock as to the payment of dividends and/or the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

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                        In Witness Whereof, Wells Fargo & Company has caused this Certificate of Designation to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Jeannine E. Zahn, its Assistant Secretary, this 19th day of July, 2013.

 

Wells Fargo & Company

By:

/s/ Barbara S. Brett

 

Barbara S. Brett, Senior Vice President and Assistant Treasurer

 

 

/s/ Jeannine E. Zahn                           
Jeannine E. Zahn, Assistant Secretary

 

[As filed with the Delaware Secretary of State on July 19, 2013.]

 

WELLS FARGO & COMPANY

_____________________

CERTIFICATE OF DESIGNATION
Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware
_____________________

6.625% FIXED-TO-FLOATING RATE NON-CUMULATIVE PERPETUAL
CLASS A PREFERRED STOCK, SERIES R
(Without Par Value)

_____________________

                        WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “ Board of Directors ”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorize the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “ Committee ”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “ General Corporation Law ”), the following resolutions were duly adopted by the Committee pursuant to the unanimous written consent of the Committee duly adopted on December 11, 2013, in accordance with Section 141(f) of the General Corporation Law:

 

                        Resolved, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated January 27, 2009, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation, and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

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RIGHTS AND PREFERENCES

 

            Section 1.        Designation .  The shares of such series of Preferred Stock shall be designated 6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series R, with no par value and a liquidation preference amount of $25,000 per share (the “ Series R Preferred Stock ”).  Each share of Series R Preferred Stock shall be identical in all respects to every other share of Series R Preferred Stock except with respect to the date from which dividends may accrue. Series R Preferred Stock will rank equally with Parity Stock with respect to the payment of dividends and distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation and will rank senior to Junior Stock with respect to the payment of dividends and/or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

 

            Section 2.        Number of Shares .  The number of authorized shares of Series R Preferred Stock shall be 34,500.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series R Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation and by the filing of a certificate pursuant to the provisions of the General Corporation Law stating that such increase or decrease, as the case may be, has been so authorized.  The Corporation shall have the authority to issue fractional shares of Series R Preferred Stock.

Section 3.        Definitions .  As used herein with respect to Series R Preferred Stock:

Business Day ” means for dividends payable for the Fixed Rate Period (as defined below) any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in New York, New York, and for dividends payable for the Floating Rate Period (as defined below), it means any date that would be considered a Business Day during the Fixed Rate Period that is also a London Banking Day (as defined below).

Calculation Agent ”  means Wells Fargo Bank, N.A. or any other successor appointed by the Corporation, acting as Calculation Agent.

Certificate of Designation ” means this Certificate of Designation relating to the Series R Preferred Stock, as it may be amended from time to time.

“Common Stock” means the common stock of the Corporation, par value $1⅔ per share, as the same exists at the date of this Certificate of Designation or as such stock may be constituted from time to time.

Depositary Company ” has the meaning set forth in Section 6(d) hereof.

Designated LIBOR Page” means the display on Reuters, or any successor service, on page LIBOR01, or any other page as may replace that page on that service, for the purpose of displaying the London interbank rates for U.S. dollars.

            “ Dividend Payment Date ” has the meaning set forth in Section 4(a) hereof.

Dividend Period ” has the meaning set forth in Section 4(a) hereof.

DTC ” means The Depository Trust Company, together with its successors and assigns.

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Fixed Rate Period ” has the meaning set forth in Section 4(a) hereof.

Floating Rate Period ” has the meaning set forth in Section 4(a) hereof.

“Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation now existing or hereafter authorized over which the Series R Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

LIBOR Determination Date ” means the second London Banking Day immediately preceding the first day of the relevant Dividend Period.

Liquidation Preference ” has the meaning set forth in Section 5(a) hereof.

London Banking Day ” means any day on which commercial banks and foreign exchange markets settle payments in London.

Nonpayment Event ” shall have the meaning set forth in Section 7(b).

Parity Stock ” means any other class or series of stock of the Corporation now existing or hereafter authorized that ranks on par with the Series R Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Preference Stock ” means any and all series of preference stock, having no par value, of the Corporation. 

Preferred Stock ” means any and all series of preferred stock, having no par value, of the Corporation, including the Series R Preferred Stock.

Preferred Stock Directors ” shall have the meaning set forth in Section 7(b).

Regulatory Capital Treatment Event ” means the Corporation’s reasonable determination that as a result of any (i) amendment to, clarification of, or change (including any announced prospective change) in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective on or after December 11, 2013; (ii) proposed change in those laws or regulations that is announced or becomes effective on or after December 11, 2013; or (iii) official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced on or after December 11, 2013, there is more than an insubstantial risk that the Corporation will not be entitled to treat the full liquidation preference amount of all shares of Series R Preferred Stock then outstanding as Tier 1 capital (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the appropriate federal banking agency, as then in effect and applicable, for as long as any share of Series R Preferred Stock is outstanding.

Series R Preferred Stock ” has the meaning set forth in Section 1 hereof.

Three-month LIBOR ” means, for any LIBOR Determination Date, the arithmetic mean of the offered rates for deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that LIBOR Determination Date that appear on the Designated LIBOR Page as of 11:00 a.m., London time, on that LIBOR Determination Date, if at least two offered rates appear on the Designated LIBOR Page, provided that if the specified Designated LIBOR Page by its terms provides only for a single rate,

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that single rate will be used.  If (i) fewer than two offered rates appear or (ii) no rate appears and the Designated LIBOR Page by its terms provides only for a single rate, then the Calculation Agent will request the principal London offices of each of four major banks in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered quotation for deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that LIBOR Determination Date to prime banks in the London interbank market at approximately 11:00 a.m., London time, on that LIBOR Determination Date and in a principal amount that is representative of a single transaction in U.S. dollars in that market at that time.  If at least two quotations are provided, Three-month LIBOR determined on that LIBOR Determination Date will be the arithmetic mean of those quotations.  If fewer than two quotations are provided, Three-month LIBOR will be the arithmetic mean of the rates quoted at approximately 11:00 a.m., New York City time, on that LIBOR Determination Date by three major banks in New York City selected by the Calculation Agent for loans in U.S. dollars to leading European banks for a three-month period and in a principal amount that is representative of a single transaction in U.S. dollars in that market at that time.  If the banks so selected by the Calculation Agent are not quoting as set forth above, Three-month LIBOR for that LIBOR Determination Date will remain Three-month LIBOR for the immediately preceding Dividend Period or, in the case of the Dividend Period beginning March 15, 2024, 6.625%.  All percentages used in or resulting from any calculation of Three-month LIBOR will be rounded, if necessary, to the nearest one hundred-thousandth of a percentages point, with .000005% rounded up to .00001%.  The determination of Three-month LIBOR for each relevant Dividend Period by the Calculation Agent will (in the absence of manifest error) be final and binding.

Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series R Preferred Stock.

            Section 4.        Dividends.

(a)        Rate .  Dividends on the Series R Preferred Stock will not be mandatory.  Holders of Series R Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation, but only out of assets legally available therefor, non-cumulative cash dividends on the liquidation preference amount of $25,000 per share of the Series R Preferred Stock, payable quarterly in arrears on the 15 th day of March, June, September and December, commencing March 15, 2014,   From December 18, 2013 to, but excluding, March 15, 2024 (the “ Fixed Rate Period ”), dividends will accrue at an annual rate of 6.625%, and from, and including, March 15, 2024 (the “ Floating Rate Period ”), dividends will accrue at an annual rate equal to Three-month LIBOR plus 3.69%.  Notwithstanding the foregoing, if any date on or prior to March 15, 2024 on which dividends otherwise would be payable is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding day that is a Business Day, without any interest or other payment in respect of such delay, and if any date after March 15, 2024 on which dividends otherwise would be payable is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding Business Day unless that day falls in the next calendar month, in which case payment of any dividend otherwise payable on that date will be the immediately preceding Business Day, and dividends will accrue to the actual payment date (each such day on which dividends are payable a “ Dividend Payment Date ”).  A “ Dividend Period ” means the period from, and including, a Dividend Payment Date to, but excluding, the next succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, December 18, 2013 to, but excluding, March 15, 2014.  The record date for payment of dividends on the Series R Preferred Stock shall be the last Business Day of the calendar month immediately preceding the month during which the Dividend Payment Date falls or such other date as determined by the Corporation’s Board of Directors.  The amount of dividends payable for the Fixed Rate Period shall be computed on the basis of a 360-day year of twelve 30-day months.  The amount of dividends payable for the Floating Rate Period shall be computed on the basis of a 360-day year and the actual number of days elapsed.  Dollar amounts resulting from that calculation will be rounded to the nearest cent, with one-half

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cent being rounded upward.  The Calculation Agent’s determination of any dividend rate, and its calculation of the amount of dividends payable for the Floating Rate Period, will be maintained on file at the Calculation Agent’s principal offices.

(b)       Non-Cumulative Dividends .  Dividends on shares of Series R Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series R Preferred Stock on any Dividend Payment Date are not declared prior to such Dividend Payment Date, then such dividends shall not cumulate and shall cease to accrue and be payable, and the Corporation shall have no obligation to pay, and the holders of Series R Preferred Stock shall have no right to receive, dividends accrued for such Dividend Period on the Dividend Payment Date for such Dividend Period or at any time in the future or interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Series R Preferred Stock or any other series of authorized Preferred Stock, Preference Stock, or Common Stock of the Corporation.

(c)        Priority of Dividends .  So long as any shares of Series R Preferred Stock remain outstanding,

(1) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Common Stock, and no shares of Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Common Stock by the Corporation (other than (i) a dividend payable in Common Stock or (ii) the acquisition of shares of Common Stock in exchange for, or through application of proceeds of the sale of, shares of Common Stock);

(2) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Junior Stock other than Common Stock, and no shares of Junior Stock other than Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Junior Stock other than Common Stock by the Corporation (other than (i) a dividend payable solely in shares of Junior Stock, (ii) any dividend in connection with the implementation of a stockholder rights plan, or the redemption or repurchase of any rights under any such plan, (iii) any dividend in the form of stock, warrants, options or other rights where the dividend stock or stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks equally with or junior to such stock, (iv) as a result of a reclassification of Junior Stock other than Common Stock for or into other Junior Stock, (v) the exchange or conversion of one share of Junior Stock other than Common Stock for or into another share of Junior Stock, (vi) through the use of proceeds of a substantially contemporaneous sale of other shares of Junior Stock, (vii) any purchase, redemption or other acquisition of Junior Stock other than Common Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after December 11, 2013, (viii) any purchase of fractional interests in shares of Junior Stock other than Common Stock pursuant to the conversion or exchange provisions of such Junior Stock other than Common Stock or the securities being converted or exchanged, (ix) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (x) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business); and

(3) no shares of Parity Stock will be repurchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series R Preferred Stock and such Parity Stock during a Dividend Period (other than (i) as a result of a reclassification of Parity Stock for or into other Parity Stock or Junior Stock, (ii) the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or Junior Stock, (iii) through the use of proceeds of a

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substantially contemporaneous sale of other shares of Parity Stock or Junior Stock, (iv) any purchase, redemption or other acquisition of Parity Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after December 11, 2013, (v) any purchase of fractional interests in shares of Parity Stock pursuant to the conversion or exchange provisions of such Parity Stock or the securities being converted or exchanged, (vi) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (vii) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business),

unless, in each case, the full dividends for the then-current Dividend Period on all outstanding shares of the Series R Preferred Stock have been declared and paid or declared and a sum sufficient for the payment of those dividends has been set aside.

  Subject to the succeeding sentence, for so long as any shares of Series R Preferred Stock remain outstanding, no dividends shall be declared, paid, or set aside for payment on any Parity Stock for any period unless full dividends on all outstanding shares of Series R Preferred Stock for the then-current Dividend Period have been paid in full or declared and a sum sufficient for the payment thereof set aside.  To the extent the Corporation declares dividends on the Series R Preferred Stock and on any Parity Stock but cannot make full payment of those declared dividends, the Corporation will allocate the dividend payments on a proportional basis among the holders of shares of Series R Preferred Stock and the holders of any Parity Stock then outstanding where the terms of such Parity Stock provide similar dividend rights. 

            Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may be declared and paid on the Common Stock and any other stock that is Parity Stock or Junior Stock, from time to time out of any assets legally available for such payment, and the shares of Series R Preferred Stock shall not be entitled to participate in any such dividends.

Section 5.        Liquidation Rights.

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series R Preferred Stock shall be entitled to receive in full out of assets available for distribution to its stockholders before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of the Common Stock or any other Junior Stock, and subject to the rights of the holders of Parity Stock or any stock of the Corporation ranking senior to the Series R Preferred Stock as to such distribution, a liquidating distribution in the amount of $25,000 per share, plus an amount equal to any dividends which have been declared but not yet paid, without accumulation of any undeclared dividends, to the date of liquidation (the “ Liquidation Preference ”).  The holders of Series R Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b)       Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the Liquidation Preference to all holders of Series R Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of Series R Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preference of Series R Preferred Stock and all such Parity Stock. 

(c)        Residual Distributions .  If the Liquidation Preference has been paid in full to all holders of Series R Preferred Stock and all other amounts payable upon liquidation, dissolution or winding up of the Corporation have been paid in full to all holders of any Parity Stock, the holders of Common Stock and any

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other Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)       Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.        Redemption.

(a)        Optional Redemption .  The Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may redeem, subject to the prior approval of the Federal Reserve Board, out of funds legally available therefor, in whole or in part, the shares of Series R Preferred Stock at the time outstanding, at any time on any Dividend Payment Date on or after March 15, 2024, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series R Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid up to the redemption date without accumulation of any undeclared dividends.

Notwithstanding the foregoing, within 90 days of the Corporation’s good faith determination that a Regulatory Capital Treatment Event has occurred, the Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may, subject to the approval of the appropriate federal banking agency, redeem out of funds legally available therefor, in whole, but not in part, the shares of Series R Preferred Stock at the time outstanding, prior to March 15, 2024, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series R Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid, without accumulation of any undeclared dividends.

(b)       Notice of Redemption .  Notice of every redemption of shares of Series R Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of such shares to be redeemed at their respective last addresses appearing on the stock register of the Corporation.  Such mailing shall be at least 40 days and not more than 70 days before the date fixed for redemption.  Any notice mailed as provided in this Section 6(b) shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series R Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series R Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series R Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, if applicable, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where the certificates for those shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date.  Notwithstanding the foregoing, if the Series R Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC. 

(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series R Preferred Stock at the time outstanding, the shares of Series R Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series R Preferred Stock in proportion to the number of Series R Preferred Stock held by such holders or in such other manner consistent with the rules and policies of the New York Stock Exchange as the Board of Directors of the Corporation or any duly authorized committee of the Board of

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Directors of the Corporation may determine to be fair and equitable.  Subject to the provisions of this Section 6, the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series R Preferred Stock shall be redeemed from time to time.

(d)       Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been irrevocably set aside by the Corporation, separate and apart from its other assets, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors (the “ Depositary Company ”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders  thereof to receive the amount payable on such redemption from the Depository Company at any time after the redemption date from the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any such interest.  Any funds so deposited and unclaimed at the end of two years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

Section 7.        Voting Rights.

(a)        General.  The holders of Series R Preferred Stock shall not be entitled to vote on any matter except as set forth in paragraph 7(b) below or as required by applicable law.

(b)       Right To Elect Two Directors Upon Nonpayment Events.  Whenever dividends payable on any shares of Series R Preferred Stock or any class or series of Voting Parity Stock have not been declared and paid in an aggregate amount equal to, as to any class or series, at least six quarterly Dividend Periods or their equivalent, whether or not for consecutive Dividend Periods (a “ Nonpayment Event ”), the holders of the outstanding Series R Preferred Stock, voting together as a class with holders of Voting Parity Stock whose voting rights are exercisable, will be entitled to vote for the election of two additional directors of the Corporation’s Board of Directors at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders (the “ Preferred Stock Directors ”) by a plurality of the votes cast; provided that the Board of Directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board of Directors shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of the outstanding Series R Preferred Stock (together with the holders of shares of any one or more other series of Voting Parity Stock).  At elections for such directors, each holder of the Series R Preferred Stock shall be entitled to 25 votes for each share held (the holders of shares of any other series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock as may be granted to them).  The right of the holders of the Series R Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Voting Parity Stock) to elect Preferred Stock Directors shall continue until such time as the Corporation has paid in full dividends for the equivalent of at least four quarterly Dividend Periods or their equivalent, at which time such right with respect to the Series R Preferred Stock shall terminate, except as provided by law, and subject to revesting in the event of each and every subsequent default of the character described in this Section 7(b).

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Upon any termination of the right of the holders of all shares of Series R Preferred Stock and Voting Parity Stock to vote for Preferred Stock Directors, the term of office of all Preferred Stock Directors then in office elected by only those holders voting as a class shall terminate immediately.  Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series R Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a class). In case any vacancy shall occur among the Preferred Stock Directors, a successor may be elected by a plurality of the votes cast by the holders of Series R Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a class, unless the vacancy has already been filled. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the Board of Directors for a vote.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this Section 7(b) shall have expired, the number of directors shall be such number as may be provided for in the By-Laws irrespective of any increase made pursuant to this Section 7(b).

(c)     Other Voting Rights .  In addition to any other vote required by law or the Restated Certificate of Incorporation, so long as any shares of the Series R Preferred Stock remain outstanding, the vote or consent of the holders of the outstanding shares of Series R Preferred Stock and outstanding shares of all other series of Voting Parity Stock entitled to vote on the matter, by a vote of at least 66 2/3% in voting power of all such outstanding Series R Preferred Stock and such Voting Parity Stock, voting together as a class, given in person or by proxy, either in writing without a meeting or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following actions, whether or not such approval is required by Delaware law: (i) the issuance of any class or series of Preferred Stock or Preference Stock ranking senior to the Series R Preferred Stock in the payment of dividends or the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; (ii) any amendment, alteration or repeal of any provision of the Restated Certificate of Incorporation, including the Certificate of Designation, or the Bylaws that would adversely affect the rights, preferences, privileges or voting powers of the Series R Preferred Stock; (iii) any amendment or alteration of the Restated Certificate of Incorporation, including the Certificate of Designation, or Bylaws to authorize, create, or increase the authorized amount of, any shares of, or any securities convertible into shares of, any class or series of the Corporation’s capital stock ranking senior to the Series R Preferred Stock with respect to either the payment of dividends or in the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; or (iv) any consummation of a reclassification involving the Series R Preferred Stock or a merger or consolidation with another corporation or other entity, except holders of the Series R Preferred Stock will have no right to vote under this section 7(c)(iv) if in each case (a) the shares of Series R Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (b) such shares of Series R Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series R Preferred Stock, taken as a whole; provided, however , that any authorization, creation or increase in the authorized amount of or issuance of the Series R Preferred Stock or any Parity Stock or Junior Stock or any securities convertible into any class or series of Parity Stock (whether dividends payable in respect of such Parity Stock are cumulative or non-cumulative) or Junior Stock will be deemed not to adversely affect the rights, preferences, privileges or voting powers of the Series R Preferred Stock, and holders of the Series R Preferred Stock shall have no right to vote thereon.

If any amendment, alteration, repeal, reclassification, merger or consolidation specified in this Section 7(c) would adversely affect one or more but not all series of voting Preferred Stock (including the Series R Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a class (in lieu of all other series of Preferred Stock).

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Each holder of the Series R Preferred Stock will have 25 votes per share on any matter on which holders of the Series R Preferred Stock are entitled to vote, whether separately or together with any other series of stock of the Corporation (the holders of any shares of any other series of stock being entitled to such number of votes, if any, for each share of stock as may be granted to them), pursuant to Delaware law or otherwise, including by written consent.

(d)       Changes after Provision for Redemption .  No vote or consent of the holders of Series R Preferred Stock shall be required pursuant to Section 7(b) or (c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding Series R Preferred Stock shall have been redeemed, or notice of redemption has been given and sufficient funds shall have been irrevocably deposited in trust to effect such redemption.

(e)        Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Series R Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Restated Certificate of Incorporation, the Bylaws, applicable law and any national securities exchange or other trading facility in which the Series R Preferred Stock is listed or traded at the time.

Section 8.        Preemption and Conversion .  The holders of Series R Preferred Stock shall not have any rights of preemption or rights to convert such Series R Preferred Stock into shares of any other class of capital stock of the Corporation.

Section 9.        Reacquired Shares .  Shares of Series R Preferred Stock which have been issued and redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 10.      No Sinking Fund .  Shares of Series R Preferred Stock are not subject to the operation of a sinking fund.

Section 11.      Additional Classes or Series of Stock .  Notwithstanding anything set forth in the Restated Certificate of Incorporation or this Certificate of Designation to the contrary, the Board of Directors of the Corporation, or any authorized committee of the Board of Directors of the Corporation, (i) without the vote of the holders of the Series R Preferred Stock, may authorize and issue additional shares of Junior Stock and Parity Stock and (ii) with the requisite vote of the holders of the Series R Preferred Stock and Parity Stock entitled to vote thereon, may authorize and issue any additional class or series of Preferred Stock or Preference Stock senior to the Series R Preferred Stock as to the payment of dividends and/or the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

dms.us.53285252.04

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                        In Witness Whereof, Wells Fargo & Company has caused this Certificate of Designation to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Jeannine E. Zahn, its Assistant Secretary, this 17 th day of December, 2013.

 

Wells Fargo & Company

By:

/s/ Barbara S. Brett

 

Barbara S. Brett, Senior Vice President and Assistant Treasurer

 

 

/s/ Jeannine E. Zahn                                                   
Jeannine E. Zahn, Assistant Secretary

 

[As filed with the Delaware Secretary of State on December 17, 2013.]

 

 

WELLS FARGO & COMPANY

___________________________________

 

CERTIFICATE OF DESIGNATION

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

___________________________________

 

2014 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Without Par Value)

___________________________________

 

 

            WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “Company”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the “Board”) by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorize the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the “Preferred Stock”), and pursuant to authority conferred upon the ESOP Preferred Stock Committee I of the Board (the “ESOP Committee”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “General Corporation Law”) and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at meetings of the Board duly held on January 25, 2000, January 27, 2009, and February 24, 2009, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on January 7, 2014, in accordance with Section 141(f) of the General Corporation Law:

 

            1.         On January 25, 2000, the Board adopted the following resolution (the “ESOP Board Resolutions”) appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of

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Preferred Stock (“ESOP Preferred Stock”) to the trustee on behalf of the Company’s 401(k) Plan hereinafter referred to:

 

RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee I (the “First Committee”), which shall have and may exercise the full powers of the Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1 2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the First Committee in its discretion shall approve, and to take any and all actions as the First Committee shall deem necessary or appropriate.

 

            2.         On January 27, 2009, the Board adopted the following resolutions (the “January 2009 Resolutions”) amending the ESOP Board Resolutions to allow the ESOP Committee to establish the voting rights of any series of ESOP Preferred Stock:

 

RESOLVED that the resolution set forth in the [ESOP Board Resolutions] under the caption “Voting Rights of ESOP Preferred Stock” is hereby deleted in its entirety.

 

RESOLVED that the [ESOP Board Resolutions] are hereby further amended to delete “Appendix A – Voting Rights” in its entirety.

 

3.         Pursuant to resolutions adopted on February 24, 2009, the Board designated John G. Stumpf as the sole member of the ESOP Committee, effective April 29, 2009.

 

4.         On January 7, 2014, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions as amended by the January 2009 Resolutions, the ESOP Committee adopted the following resolution by written consent in accordance with Section 141(f) of the General Corporation Law:

 

            RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows:

 

2014 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK

 

            1.   Designation and Number of Shares; Restricted Issue

 

                        (a) The designation of the series of Preferred Stock, without par value, provided for herein shall be “2014 ESOP Cumulative Convertible Preferred Stock” (hereinafter referred to as the “2014 ESOP Preferred Stock”) and the number of authorized shares constituting the 2014 ESOP Preferred Stock is 1,217,000, based on an offering price for the 2014 ESOP Preferred Stock of $1,089.00 per share.  Each share of 2014 ESOP Preferred Stock shall have a stated value of $1,000.00 per share.  The number of authorized shares of 2014 ESOP Preferred Stock may be reduced by further resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2014 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2014 ESOP Preferred Stock shall not be increased.  All shares of the 2014 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred

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Stock, without designation as to series, and may thereafter be issued, but not as shares of 2014 ESOP Preferred Stock.

 

                        (b)  Shares of 2014 ESOP Preferred Stock shall be issued only to a trustee (the “Trustee”) acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the “Plan”).  All references to the holder of shares of 2014 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan.  In the event of any transfer of record ownership of shares of 2014 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2014 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the “Common Stock”) on the terms otherwise provided for the conversion of the shares of 2014 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2014 ESOP Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of 2014 ESOP Preferred Stock shall be so converted.  In the event of such a conversion, the transferee of the shares of 2014 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of 2014 ESOP Preferred Stock have been automatically converted as of the date of such transfer.  Shares of 2014 ESOP Preferred Stock may be certificated or uncertificated, at the Company’s option.  Certificates representing shares of 2014 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions.  In the case of uncertificated 2014 ESOP Preferred Stock, the transfer agent for the 2014 ESOP Preferred Stock shall note the foregoing provisions on each 2014 ESOP Preferred Stock book entry account.  The Company may require that, as a condition to transferring record ownership of any uncertificated 2014 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2014 ESOP Preferred Stock are subject to the foregoing provisions.  Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2014 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof.

            2.   Voting Rights .  No shares of 2014 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows:

 

                        (a)  Whenever, at any time or times, dividends payable on shares of 2014 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2014 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more series of Voting Parity Stock, as defined in paragraph (e) of this Section 2,whose voting rights are exercisable, to elect two directors of the Company’s Board at the Company’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders (the “Preferred Stock Directors”) by a plurality of the votes cast; provided that the Board of Directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).  At elections for such directors, each holder of the shares of 2014 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any series of Voting Parity Stock being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2014 ESOP Preferred Stock (together with the holders of shares of any one or more series of Voting Parity Stock whose voting rights are exercisable) as herein set forth.  The right of such holders of such shares of 2014 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or

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more series of Voting Parity Stock whose voting rights are exercisable) to elect Preferred Stock Directors as aforesaid shall continue until such time as all dividends accumulated on such shares of 2014 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2014 ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned.

 

                        (b)  Upon any termination of the right of the holders of all shares of 2014 ESOP Preferred Stock and Voting Parity Stock entitled to vote for Preferred Stock Directors, the term of office of all Preferred Stock Directors then in office elected by such holders voting as a class shall terminate immediately.  Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of 2014 ESOP Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a class). In case any vacancy shall occur among the Preferred Stock Directors, a successor may be elected by a plurality of the votes cast by the holders of 2014 ESOP Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a class, unless the vacancy has already been filled. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the Board of Directors for a vote.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this Section 2(b).

 

                        (c)  In addition to any other vote required by law or the Restated Certificate of Incorporation, so long as any shares of 2014 ESOP Preferred Stock remain outstanding, the vote or consent of the holders of the outstanding shares of 2014 ESOP Preferred Stock and outstanding shares of all series of Voting Parity Stock entitled to vote on the matter, by a vote of at least two-thirds in voting power of all such outstanding shares of 2014 ESOP Preferred Stock and such series of Voting Parity Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following whether or not such approval is required by Delaware law:

 

                                    (i)  the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2014 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on the Company’s voluntary or involuntary liquidation, dissolution or winding up, or

 

                                    (ii)  the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designation designating shares of 2014 ESOP Preferred Stock and the preferences, powers and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2014 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2014 ESOP Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

 

                        (d)  The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2014 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been irrevocably deposited in trust to effect such redemption.

 

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                        (e)  As used in this Section 2, “Voting Parity Stock” means any other class or series of stock of the Company now existing or hereafter authorized that ranks on par with the 2014 ESOP Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company and having similar voting rights as the 2014 ESOP Preferred Stock.

 

            3.         Dividends .  (a)(i)  Holders of shares of 2014 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $87.00 (the “Base Dividend”) per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3.

 

                                    (ii)  The Base Dividend shall be adjusted, effective on December 1, 2015 and on each December 1 thereafter until December 1, 2022, as follows: 

 

                                                (1)  If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2014 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $92.00 per share (the “First Adjusted Dividend”). 

 

                                                (2)  If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2014 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $97.00 per share (the “Second Adjusted Dividend”).

 

                                                (3)  If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2014 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend.

 

Dividend Adjustment Table

 

Closing Price on 11/30

First Target Price

Second Target Price

 

 

 

 

 

 

2015

$50.366

$53.676

2016

$54.396

$60.117

2017

$58.747

$67.331

2018

$63.447

$75.411

2019

$68.523

$84.461

2020

$74.005

$94.596

2021

$79.925

$105.947

2022

$86.319

$118.661

 

 

 

 

                                                (4)  As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2015, the Current Market Price of one share of Common Stock is $51.00,

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then the cash dividend payable for the immediately following twelve month period per share of 2014 ESOP Preferred Stock would equal $92.00, with the first quarterly payment of such $92.00 dividend to be made on March 1, 2016.  If on November 30, 2016, the Current Market Price of one share of Common Stock is $61.00, then the cash dividend payable for the immediately following twelve month period per share of 2014 ESOP Preferred Stock would equal $97.00, with the first quarterly payment of such $97.00 dividend to be made on March 1, 2017.  If on November 30, 2017, the Current Market Price of one share of Common Stock is $55.00, then the cash dividend payable for the immediately following twelve month period per share of 2014 ESOP Preferred Stock would equal $87.00, with the first quarterly payment of such $87.00 dividend to be made on March 1, 2018.

 

                                                (5)  For purposes of this Section 3, the terms “First Adjusted Dividend” and “Second Adjusted Dividend” are sometimes referred to as an “Adjusted Dividend;” the term “Current Market Price” shall have the meaning given to it in Section 4(c)(iv); and the term “Trading Day” shall have the meaning given to it in Section 4(c)(vi).

 

                                    (iii)  If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted.

 

                                    (iv)  Dividends payable on shares of the 2014 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 of each year, commencing March 1, 2014.  Dividends on shares of the 2014 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2014 ESOP Preferred Stock.  Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof.  The amount of dividends payable per share for each dividend period shall be computed by dividing by four the Base Dividend or the Adjusted Dividend, whichever is then applicable.  The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months.

 

                        (b)(i)  No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2014 ESOP Preferred Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2014 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends.  When dividends are not paid in full, as aforesaid, upon the shares of 2014 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2014 ESOP Preferred Stock, all dividends declared upon shares of 2014 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2014 ESOP Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on 2014 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2014 ESOP Preferred Stock and such other series of Preferred Stock bear to each other.  Holders of shares of 2014 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2014 ESOP Preferred Stock.  No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2014 ESOP Preferred Stock which may be in arrears.

 

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                                    (ii)  So long as any shares of 2014 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common Stock or any other stock ranking junior to 2014 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2014 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2014 ESOP Preferred Stock as to dividends or upon liquidation, dissolution or winding up be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to 2014 ESOP Preferred Stock as to dividends or upon liquidation, dissolution or winding up), unless, in each case, the full cumulative dividends on all outstanding shares of 2014 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods.

 

            4.   Conversion .  Shares of 2014 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2014 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows:

 

                        (a)  Each share of 2014 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the “Release Date”), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2014 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (b)  Subject to and upon compliance with the provisions of this Section 4, a holder of 2014 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2014 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2014 ESOP Preferred Stock provided for in paragraph (c) of this Section 4.

 

                        (c)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

 

                                    (i)  The “Average Current Market Price” per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the “Purchase Offer” is made (as that term is defined in Section 6(d) hereof).

 

                                    (ii)  A “Business Day” means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open.

 

                                    (iii)  (A)  For purposes of a mandatory conversion of shares of 2014 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the “Conversion Price” for such shares of 2014 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date.

 

                                                (B)  For purposes of an optional conversion of shares of 2014 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the

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“Conversion Price” for such shares of 2014 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2014 ESOP Preferred Stock or by any agent for conversion of the 2014 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4.

 

                                                (C)  For purposes of a conversion of shares of 2014 ESOP Preferred Stock into shares of Common Stock in connection with a “Purchase Offer” (as defined in Section 6(d) hereof), the “Conversion Price” for such shares of 2014 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock.

 

Each share of 2014 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2014 ESOP Preferred Stock will be converted. 

 

                                    (iv)  The “Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange only or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof.

                                    (v)  “Common Stock” shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designation or as such stock may be constituted from time to time.

 

                                    (vi)  “Trading Day” with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day.

                        (d)  In connection with any conversion of 2014 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the “Conversion Notice”) shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2014 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2014 ESOP Preferred Stock by the Company or the transfer agent for the 2014 ESOP Preferred Stock, which Conversion Notice shall be accompanied by (a) in the case of certificated 2014 ESOP Preferred Stock, the certificate or certificates representing the shares of 2014 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) and (b) in the case of uncertificated 2014 ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2014 ESOP Preferred Stock being converted pursuant to this Section 4.  Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2014 ESOP Preferred Stock released from

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the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2014 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2014 ESOP Preferred Stock, for any shares of 2014 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request.

 

                        (e)  Upon delivery to the Company or the transfer agent for the 2014 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4,  the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder’s designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion.  If there shall have been surrendered a certificate or certificates representing shares of 2014 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder’s designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2014 ESOP Preferred Stock which shall not have been converted.

                        (f)  The issuance by the Company of shares of Common Stock upon a conversion of shares of 2014 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2014 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder’s designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2014 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4.  On and after the effective date of a conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date.  The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2014 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares.

                        (g)  The Company shall not be obligated to deliver to holders of 2014 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2014 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law.

                        (h)  The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2014 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2014 ESOP Preferred Stock then outstanding.

                        (i)  The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2014 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

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                        (j)  The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2014 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2014 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

                        5.   Redemption At the Option of the Company .  (a)  The 2014 ESOP Preferred Stock shall be redeemable out of assets legally available therefor, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2014 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2014 ESOP Preferred Stock on the date fixed for redemption.  Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5.  From and after the date fixed for redemption, dividends on shares of 2014 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price.  Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1.  If the full cumulative dividends have not been paid, or contemporaneously declared and set aside for payment, on all outstanding shares of 2014 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2014 ESOP Preferred Stock pursuant to this Section 5.

                        (b)  Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2014 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the 2014 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date.  Each such notice shall state:  (i) the redemption date; (ii) the total number of shares of the 2014 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2014 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable upon conversion of a share of 2014 ESOP Preferred Stock will be determined.  The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2014 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state).

                        (c)  The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2014 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2014 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2014 ESOP Preferred Stock then being redeemed.

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                        (d)  For purposes of these resolutions, the following terms shall have the meanings set forth below:

                                    (i)  “Adjustment Period” shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined.

                                    (ii)  “Fair Market Value” shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period.  The “Fair Market Value” of any security which is not publicly traded (other than the 2014 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof.  The “Fair Market Value” of the 2014 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2014 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section).  For purposes of determining the Fair Market Value of the 2014 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2014 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2014 ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2014 ESOP Cumulative Convertible Preferred Stock Note Agreement dated on or about January 10, 2014 between the Company and the Plan (including any amendments or modifications thereto).

            6.   Consolidation, Merger, etc.   (a)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes “qualifying employer securities” with respect to a holder of 2014 ESOP Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2014 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2014 ESOP Preferred Stock had immediately prior to such transaction, subject to the following:

                        (1)  After such transaction each share of the 2014 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2014 ESOP Preferred Stock could have been converted immediately prior to such transaction.

                        (2)  The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2014 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid.

                        (b)  If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed,

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reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2014 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2014 ESOP Preferred Stock could have been converted at such time so that each share of 2014 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2014 ESOP Preferred Stock could have been converted immediately prior to such transaction.  However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2014 ESOP Preferred Stock, then the shares of 2014 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2014 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction.  If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares.

                        (c)  In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a “Business Combination”), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2014 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2014 ESOP Preferred Stock, a cash payment per share of 2014 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2014 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is consummated.  No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction.

 

                        (d)  In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2014 ESOP Preferred Stock shall have the right to convert shares of 2014 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the “Purchase Offer Conversion Period”), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period.

 

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                        For purposes of this paragraph (d), the following terms shall have the meanings set forth below:

 

                                    (i)  “Beneficial Ownership” shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and “person” shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.

 

                                    (ii)  A “Purchase Offer” shall have been made when any person (other than the Company or any affiliate of the Company) shall have “commenced” (as such term is defined in Rule 14d-2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company.

 

            7.   Liquidation Rights .  (a)  Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2014 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on or set aside for the Common Stock or any other class of stock ranking junior to 2014 ESOP Preferred Stock and subject to the rights of the holders of the shares of any series or class or classes of stock ranking on parity with or senior to the 2014 ESOP Preferred Stock, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.

 

                        (b)  Neither the sale of all or substantially all the property and assets of the Company, nor the merger, consolidation or other business combination of the Company into or with any other corporation, nor the merger, consolidation or other business combination of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7.

 

                        (c)  After the payment to the holders of the shares of 2014 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2014 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company.

 

                        (d)  In the event the assets of the Company available for distribution to the holders of shares of 2014 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2014 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2014 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up.

 

(e)  Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on parity with or prior to the shares of 2014 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2014 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2014 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2014 ESOP Preferred Stock shall not be entitled to share therein.

 

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            8.   Ranking .  For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank:

 

                        (a)  prior to the shares of 2014 ESOP Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2014 ESOP Preferred Stock;

 

                        (b)  on a parity with shares of 2014 ESOP Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2014 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2014 ESOP Preferred Stock; and

 

                        (c)  junior to shares of 2014 ESOP Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, if such class shall be Common Stock or if the holders of shares of 2014 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes.

 

            9.   Priority of 2014 ESOP Preferred Stock .  The shares of 2014 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company’s 2005 ESOP Cumulative Convertible Preferred Stock, its 2006 ESOP Cumulative Convertible Preferred Stock, its 2007 ESOP Cumulative Convertible Preferred Stock, its 2008 ESOP Cumulative Convertible Preferred Stock, its 2010 ESOP Cumulative Convertible Preferred Stock, its 2011 ESOP Cumulative Convertible Preferred Stock, its 2012 ESOP Cumulative Convertible Preferred Stock, and its 2013 ESOP Cumulative Convertible Preferred Stock. 

 

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IN WITNESS WHEREOF, the Company has caused this Certificate of Designation to be signed by John G. Stumpf, its Chairman, President and Chief Executive Officer, and attested by Jeannine E. Zahn, its Assistant Secretary, on this 8th day of January, 2014.

 

 

WELLS FARGO & COMPANY

 

 

 

By         /s/ John G. Stumpf                          

John G. Stumpf

Chairman, President and

Chief Executive Officer

 

 

Attest:

 

/s/ Jeannine E. Zahn                                       

Jeannine E. Zahn

Assistant Secretary

 

 

[As filed with the Delaware Secretary of State on January 8, 2014.]

 

 

 

WELLS FARGO & COMPANY

_____________________

CERTIFICATE OF DESIGNATION
Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware
_____________________

5.90% FIXED-TO-FLOATING RATE NON-CUMULATIVE PERPETUAL
CLASS A PREFERRED STOCK, SERIES S
(Without Par Value)

_____________________

                        WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “ Board of Directors ”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorize the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “ Committee ”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “ General Corporation Law ”), the following resolutions were duly adopted by the Committee pursuant to the unanimous written consent of the Committee duly adopted on April 17, 2014, in accordance with Section 141(f) of the General Corporation Law:

 

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                        Resolved, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated January 27, 2009, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation, and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

 

RIGHTS AND PREFERENCES

 

            Section 1.        Designation .  The shares of such series of Preferred Stock shall be designated 5.90% Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series S, with no par value and a liquidation preference amount of $25,000 per share (the “ Series S Preferred Stock ”).  Each share of Series S Preferred Stock shall be identical in all respects to every other share of Series S Preferred Stock except with respect to the date from which dividends may accrue. Series S Preferred Stock will rank equally with Parity Stock with respect to the payment of dividends and distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation and will rank senior to Junior Stock with respect to the payment of dividends and/or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

 

            Section 2.        Number of Shares .  The number of authorized shares of Series S Preferred Stock shall be 80,000.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series S Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation and by the filing of a certificate pursuant to the provisions of the General Corporation Law stating that such increase or decrease, as the case may be, has been so authorized.  The Corporation shall have the authority to issue fractional shares of Series S Preferred Stock.

Section 3.        Definitions .  As used herein with respect to Series S Preferred Stock:

Business Day ” means for dividends payable for the Fixed Rate Period (as defined below) any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in New York, New York, and for dividends payable for the Floating Rate Period (as defined below), it means any date that would be considered a Business Day during the Fixed Rate Period that is also a London Banking Day (as defined below).

Calculation Agent ”  means Wells Fargo Securities, LLC or any other successor appointed by the Corporation, acting as Calculation Agent.

Certificate of Designation ” means this Certificate of Designation relating to the Series S Preferred Stock, as it may be amended from time to time.

“Common Stock” means the common stock of the Corporation, par value $1⅔ per share, as the same exists at the date of this Certificate of Designation or as such stock may be constituted from time to time.

Depositary Company ” has the meaning set forth in Section 6(d) hereof.

Designated LIBOR Page” means the display on Reuters, or any successor service, on page LIBOR01, or any other page as may replace that page on that service, for the purpose of displaying the London interbank rates for U.S. dollars.

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            “ Dividend Payment Date ” has the meaning set forth in Section 4(a) hereof.

Dividend Period ” has the meaning set forth in Section 4(a) hereof.

DTC ” means The Depository Trust Company, together with its successors and assigns.

Fixed Rate Period ” has the meaning set forth in Section 4(a) hereof.

Floating Rate Period ” has the meaning set forth in Section 4(a) hereof.

“Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation now existing or hereafter authorized over which the Series S Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

LIBOR Determination Date ” means the second London Banking Day immediately preceding the first day of the relevant Dividend Period.

Liquidation Preference ” has the meaning set forth in Section 5(a) hereof.

London Banking Day ” means any day on which commercial banks and foreign exchange markets settle payments in London.

Nonpayment Event ” shall have the meaning set forth in Section 7(b).

Parity Stock ” means any other class or series of stock of the Corporation now existing or hereafter authorized that ranks on par with the Series S Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Preference Stock ” means any and all series of preference stock, having no par value, of the Corporation. 

Preferred Stock ” means any and all series of preferred stock, having no par value, of the Corporation, including the Series S Preferred Stock.

Preferred Stock Directors ” shall have the meaning set forth in Section 7(b).

Regulatory Capital Treatment Event ” means the Corporation’s reasonable determination that as a result of any (i) amendment to, clarification of, or change (including any announced prospective change) in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective on or after April 14, 2014; (ii) proposed change in those laws or regulations that is announced or becomes effective on or after April 14, 2014; or (iii) official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced on or after April 14, 2014, there is more than an insubstantial risk that the Corporation will not be entitled to treat the full liquidation preference amount of all shares of Series S Preferred Stock then outstanding as Tier 1 capital (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the appropriate federal banking agency, as then in effect and applicable, for as long as any share of Series S Preferred Stock is outstanding.

Series S Preferred Stock ” has the meaning set forth in Section 1 hereof.

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Three-month LIBOR ” means, for any LIBOR Determination Date, the arithmetic mean of the offered rates for deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that LIBOR Determination Date that appear on the Designated LIBOR Page as of 11:00 a.m., London time, on that LIBOR Determination Date, if at least two offered rates appear on the Designated LIBOR Page, provided that if the specified Designated LIBOR Page by its terms provides only for a single rate, that single rate will be used.  If (i) fewer than two offered rates appear or (ii) no rate appears and the Designated LIBOR Page by its terms provides only for a single rate, then the Calculation Agent will request the principal London offices of each of four major banks in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered quotation for deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that LIBOR Determination Date to prime banks in the London interbank market at approximately 11:00 a.m., London time, on that LIBOR Determination Date and in a principal amount that is representative of a single transaction in U.S. dollars in that market at that time.  If at least two quotations are provided, Three-month LIBOR determined on that LIBOR Determination Date will be the arithmetic mean of those quotations.  If fewer than two quotations are provided, Three-month LIBOR will be the arithmetic mean of the rates quoted at approximately 11:00 a.m., New York City time, on that LIBOR Determination Date by three major banks in New York City selected by the Calculation Agent for loans in U.S. dollars to leading European banks for a three-month period and in a principal amount that is representative of a single transaction in U.S. dollars in that market at that time.  If the banks so selected by the Calculation Agent are not quoting as set forth above, Three-month LIBOR for that LIBOR Determination Date will remain Three-month LIBOR for the immediately preceding Dividend Period or, in the case of the Dividend Period beginning June 15, 2024, 5.90%.  All percentages used in or resulting from any calculation of Three-month LIBOR will be rounded, if necessary, to the nearest one hundred-thousandth of a percentages point, with .000005% rounded up to .00001%.  The determination of Three-month LIBOR for each relevant Dividend Period by the Calculation Agent will (in the absence of manifest error) be final and binding.

Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series S Preferred Stock.

            Section 4.        Dividends.

(a)        Rate .  Dividends on the Series S Preferred Stock will not be mandatory.  Holders of Series S Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation, but only out of assets legally available therefor, non-cumulative cash dividends on the liquidation preference amount of $25,000 per share of the Series S Preferred Stock, payable (i) from April 22, 2014 to, but excluding, June 15, 2024 (the “ Fixed Rate Period ”), semi-annually in arrears on the 15 th day of each June and December, commencing December 15, 2014 at an annual rate of 5.90%, and (ii) from, and including, June 15, 2024 (the “ Floating Rate Period ”), quarterly in arrears on the 15 th day of each March, June, September and December, commencing September 15, 2024, at an annual rate equal to Three-month LIBOR plus 3.11%.  Notwithstanding the foregoing, if any date on or prior to June 15, 2024 on which dividends otherwise would be payable is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding day that is a Business Day, without any interest or other payment in respect of such delay, and if any date after June 15, 2024 on which dividends otherwise would be payable is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding Business Day unless that day falls in the next calendar month, in which case payment of any dividend otherwise payable on that date will be the immediately preceding Business Day, and dividends will accrue to the actual payment date (each such day on which dividends are payable a “ Dividend Payment Date ”).  A “ Dividend Period ” means the period from, and including, a Dividend Payment Date to, but excluding, the next succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, April 22, 2014 to, but excluding, December 15, 2014.  The record date for payment of dividends on the Series S Preferred Stock shall be the last

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Business Day of the calendar month immediately preceding the month during which the Dividend Payment Date falls or such other date as determined by the Corporation’s Board of Directors.  The amount of dividends payable for the Fixed Rate Period shall be computed on the basis of a 360-day year of twelve 30-day months.  The amount of dividends payable for the Floating Rate Period shall be computed on the basis of a 360-day year and the actual number of days elapsed.  Dollar amounts resulting from that calculation will be rounded to the nearest cent, with one-half cent being rounded upward.  The Calculation Agent’s determination of any dividend rate, and its calculation of the amount of dividends payable for the Floating Rate Period, will be maintained on file at the Calculation Agent’s principal offices.

(b)       Non-Cumulative Dividends .  Dividends on shares of Series S Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series S Preferred Stock on any Dividend Payment Date are not declared prior to such Dividend Payment Date, then such dividends shall not cumulate and shall cease to accrue and be payable, and the Corporation shall have no obligation to pay, and the holders of Series S Preferred Stock shall have no right to receive, dividends accrued for such Dividend Period on the Dividend Payment Date for such Dividend Period or at any time in the future or interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Series S Preferred Stock or any other series of authorized Preferred Stock, Preference Stock, or Common Stock of the Corporation.

(c)        Priority of Dividends .  So long as any shares of Series S Preferred Stock remain outstanding,

(1) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Common Stock, and no shares of Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Common Stock by the Corporation (other than (i) a dividend payable in Common Stock or (ii) the acquisition of shares of Common Stock in exchange for, or through application of proceeds of the sale of, shares of Common Stock);

(2) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Junior Stock other than Common Stock, and no shares of Junior Stock other than Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Junior Stock other than Common Stock by the Corporation (other than (i) a dividend payable solely in shares of Junior Stock, (ii) any dividend in connection with the implementation of a stockholder rights plan, or the redemption or repurchase of any rights under any such plan, (iii) any dividend in the form of stock, warrants, options or other rights where the dividend stock or stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks equally with or junior to such stock, (iv) as a result of a reclassification of Junior Stock other than Common Stock for or into other Junior Stock, (v) the exchange or conversion of one share of Junior Stock other than Common Stock for or into another share of Junior Stock, (vi) through the use of proceeds of a substantially contemporaneous sale of other shares of Junior Stock, (vii) any purchase, redemption or other acquisition of Junior Stock other than Common Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after April 14, 2014, (viii) any purchase of fractional interests in shares of Junior Stock other than Common Stock pursuant to the conversion or exchange provisions of such Junior Stock other than Common Stock or the securities being converted or exchanged, (ix) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (x) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business); and

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(3) no shares of Parity Stock will be repurchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series S Preferred Stock and such Parity Stock during a Dividend Period (other than (i) as a result of a reclassification of Parity Stock for or into other Parity Stock or Junior Stock, (ii) the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or Junior Stock, (iii) through the use of proceeds of a substantially contemporaneous sale of other shares of Parity Stock or Junior Stock, (iv) any purchase, redemption or other acquisition of Parity Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after April 14, 2014, (v) any purchase of fractional interests in shares of Parity Stock pursuant to the conversion or exchange provisions of such Parity Stock or the securities being converted or exchanged, (vi) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (vii) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business),

unless, in each case, the full dividends for the then-current Dividend Period on all outstanding shares of the Series S Preferred Stock have been declared and paid or declared and a sum sufficient for the payment of those dividends has been set aside.

  Subject to the succeeding sentence, for so long as any shares of Series S Preferred Stock remain outstanding, no dividends shall be declared, paid, or set aside for payment on any Parity Stock for any period unless full dividends on all outstanding shares of Series S Preferred Stock for the then-current Dividend Period have been paid in full or declared and a sum sufficient for the payment thereof set aside.  To the extent the Corporation declares dividends on the Series S Preferred Stock and on any Parity Stock but cannot make full payment of those declared dividends, the Corporation will allocate the dividend payments on a proportional basis among the holders of shares of Series S Preferred Stock and the holders of any Parity Stock then outstanding where the terms of such Parity Stock provide similar dividend rights. 

            Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may be declared and paid on the Common Stock and any other stock that is Parity Stock or Junior Stock, from time to time out of any assets legally available for such payment, and the shares of Series S Preferred Stock shall not be entitled to participate in any such dividends.

Section 5.        Liquidation Rights.

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series S Preferred Stock shall be entitled to receive in full out of assets available for distribution to its stockholders before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of the Common Stock or any other Junior Stock, and subject to the rights of the holders of Parity Stock or any stock of the Corporation ranking senior to the Series S Preferred Stock as to such distribution, a liquidating distribution in the amount of $25,000 per share, plus an amount equal to any dividends which have been declared but not yet paid, without accumulation of any undeclared dividends, to the date of liquidation (the “ Liquidation Preference ”).  The holders of Series S Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b)       Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the Liquidation Preference to all holders of Series S Preferred Stock and all holders of any Parity Stock, the amounts paid to the

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holders of Series S Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preference of Series S Preferred Stock and all such Parity Stock. 

(c)        Residual Distributions .  If the Liquidation Preference has been paid in full to all holders of Series S Preferred Stock and all other amounts payable upon liquidation, dissolution or winding up of the Corporation have been paid in full to all holders of any Parity Stock, the holders of Common Stock and any other Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)       Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.        Redemption.

(a)        Optional Redemption .  The Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may redeem, subject to the prior approval of the Federal Reserve Board, out of funds legally available therefor, in whole or in part, the shares of Series S Preferred Stock at the time outstanding, at any time on any Dividend Payment Date on or after June 15, 2024, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series S Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid up to the redemption date without accumulation of any undeclared dividends.

Notwithstanding the foregoing, within 90 days of the Corporation’s good faith determination that a Regulatory Capital Treatment Event has occurred, the Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may, subject to the approval of the appropriate federal banking agency, redeem out of funds legally available therefor, in whole, but not in part, the shares of Series S Preferred Stock at the time outstanding, prior to June 15, 2024, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series S Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid, without accumulation of any undeclared dividends.

(b)       Notice of Redemption .  Notice of every redemption of shares of Series S Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of such shares to be redeemed at their respective last addresses appearing on the stock register of the Corporation.  Such mailing shall be at least 40 days and not more than 70 days before the date fixed for redemption.  Any notice mailed as provided in this Section 6(b) shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series S Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series S Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series S Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, if applicable, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where the certificates for those shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date.  Notwithstanding the foregoing, if the Series S Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC. 

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(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series S Preferred Stock at the time outstanding, the shares of Series S Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series S Preferred Stock in proportion to the number of Series S Preferred Stock held by such holders as the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may determine to be fair and equitable.  Subject to the provisions of this Section 6, the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series S Preferred Stock shall be redeemed from time to time.

(d)       Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been irrevocably set aside by the Corporation, separate and apart from its other assets, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors (the “ Depositary Company ”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders  thereof to receive the amount payable on such redemption from the Depository Company at any time after the redemption date from the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any such interest.  Any funds so deposited and unclaimed at the end of two years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

Section 7.        Voting Rights.

(a)        General.  The holders of Series S Preferred Stock shall not be entitled to vote on any matter except as set forth in paragraph 7(b) below or as required by applicable law.

(b)       Right To Elect Two Directors Upon Nonpayment Events.  Whenever dividends payable on any shares of Series S Preferred Stock or any class or series of Voting Parity Stock have not been declared and paid in an aggregate amount equal to, as to any class or series, at least three semi-annual Dividend Periods or their equivalent, whether or not for consecutive Dividend Periods (a “ Nonpayment Event ”), the holders of the outstanding Series S Preferred Stock, voting together as a class with holders of Voting Parity Stock whose voting rights are exercisable, will be entitled to vote for the election of two additional directors of the Corporation’s Board of Directors at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders (the “ Preferred Stock Directors ”) by a plurality of the votes cast; provided that the Board of Directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board of Directors shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of the outstanding Series S Preferred Stock (together with the holders of shares of any one or more other series of Voting Parity Stock).  At elections for such directors, each holder of the Series S Preferred Stock shall be entitled to 25 votes for each share held (the holders of shares of any other series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock as may be granted to them).  The right of the holders of the Series S Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Voting Parity Stock) to elect Preferred Stock Directors shall continue until such time as the Corporation has paid in full dividends for

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the equivalent of at least two semi-annual Dividend Periods or their equivalent, at which time such right with respect to the Series S Preferred Stock shall terminate, except as provided by law, and subject to revesting in the event of each and every subsequent default of the character described in this Section 7(b).

Upon any termination of the right of the holders of all shares of Series S Preferred Stock and Voting Parity Stock to vote for Preferred Stock Directors, the term of office of all Preferred Stock Directors then in office elected by only those holders voting as a class shall terminate immediately.  Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series S Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a class). In case any vacancy shall occur among the Preferred Stock Directors, a successor may be elected by a plurality of the votes cast by the holders of Series S Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a class, unless the vacancy has already been filled. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the Board of Directors for a vote.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this Section 7(b) shall have expired, the number of directors shall be such number as may be provided for in the By-Laws irrespective of any increase made pursuant to this Section 7(b).

(c)     Other Voting Rights .  In addition to any other vote required by law or the Restated Certificate of Incorporation, so long as any shares of the Series S Preferred Stock remain outstanding, the vote or consent of the holders of the outstanding shares of Series S Preferred Stock and outstanding shares of all other series of Voting Parity Stock entitled to vote on the matter, by a vote of at least 66 2/3% in voting power of all such outstanding Series S Preferred Stock and such Voting Parity Stock, voting together as a class, given in person or by proxy, either in writing without a meeting or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following actions, whether or not such approval is required by Delaware law: (i) the issuance of any class or series of Preferred Stock or Preference Stock ranking senior to the Series S Preferred Stock in the payment of dividends or the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; (ii) any amendment, alteration or repeal of any provision of the Restated Certificate of Incorporation, including the Certificate of Designation, or the Bylaws that would adversely affect the rights, preferences, privileges or voting powers of the Series S Preferred Stock; (iii) any amendment or alteration of the Restated Certificate of Incorporation, including the Certificate of Designation, or Bylaws to authorize, create, or increase the authorized amount of, any shares of, or any securities convertible into shares of, any class or series of the Corporation’s capital stock ranking senior to the Series S Preferred Stock with respect to either the payment of dividends or in the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; or (iv) any consummation of a reclassification involving the Series S Preferred Stock or a merger or consolidation with another corporation or other entity, except holders of the Series S Preferred Stock will have no right to vote under this section 7(c)(iv) if in each case (a) the shares of Series S Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (b) such shares of Series S Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series S Preferred Stock, taken as a whole; provided, however , that any authorization, creation or increase in the authorized amount of or issuance of the Series S Preferred Stock or any Parity Stock or Junior Stock or any securities convertible into any class or series of Parity Stock (whether dividends payable in respect of such Parity Stock are cumulative or non-cumulative) or Junior Stock will be deemed not to adversely affect the rights, preferences, privileges or voting powers of the Series S Preferred Stock, and holders of the Series S Preferred Stock shall have no right to vote thereon.

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If any amendment, alteration, repeal, reclassification, merger or consolidation specified in this Section 7(c) would adversely affect one or more but not all series of voting Preferred Stock (including the Series S Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a class (in lieu of all other series of Preferred Stock).

Each holder of the Series S Preferred Stock will have 25 votes per share on any matter on which holders of the Series S Preferred Stock are entitled to vote, whether separately or together with any other series of stock of the Corporation (the holders of any shares of any other series of stock being entitled to such number of votes, if any, for each share of stock as may be granted to them), pursuant to Delaware law or otherwise, including by written consent.

(d)       Changes after Provision for Redemption .  No vote or consent of the holders of Series S Preferred Stock shall be required pursuant to Section 7(b) or (c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding Series S Preferred Stock shall have been redeemed, or notice of redemption has been given and sufficient funds shall have been irrevocably deposited in trust to effect such redemption.

(e)        Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Series S Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Restated Certificate of Incorporation, the Bylaws and applicable law.

Section 8.        Preemption and Conversion .  The holders of Series S Preferred Stock shall not have any rights of preemption or rights to convert such Series S Preferred Stock into shares of any other class of capital stock of the Corporation.

Section 9.        Reacquired Shares .  Shares of Series S Preferred Stock which have been issued and redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 10.      No Sinking Fund .  Shares of Series S Preferred Stock are not subject to the operation of a sinking fund.

Section 11.      Additional Classes or Series of Stock .  Notwithstanding anything set forth in the Restated Certificate of Incorporation or this Certificate of Designation to the contrary, the Board of Directors of the Corporation, or any authorized committee of the Board of Directors of the Corporation, (i) without the vote of the holders of the Series S Preferred Stock, may authorize and issue additional shares of Junior Stock and Parity Stock and (ii) with the requisite vote of the holders of the Series S Preferred Stock and Parity Stock entitled to vote thereon, may authorize and issue any additional class or series of Preferred Stock or Preference Stock senior to the Series S Preferred Stock as to the payment of dividends and/or the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

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            In Witness Whereof, Wells Fargo & Company has caused this Certificate of Designation to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Jeannine E. Zahn, its Assistant Secretary, this 17 th day of April, 2014.

 

Wells Fargo & Company

By:

/s/ Barbara S. Brett

 

Barbara S. Brett, Senior Vice President and Assistant Treasurer

 

 

/s/ Jeannine E. Zahn                           
Jeannine E. Zahn, Assistant Secretary

 

 

 

[As filed with the Delaware Secretary of State on April 21, 2014.]

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WELLS FARGO & COMPANY

_____________________

CERTIFICATE OF DESIGNATION
Pursuant to Section 151(g) of the
General Corporation Law
of the State of Delaware
_____________________

NON-CUMULATIVE PERPETUAL CLASS A PREFERRED STOCK, SERIES T
(Without Par Value)

_____________________

                        WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Corporation (the “ Board of Directors ”) by the provisions of the Restated Certificate of Incorporation of the Corporation, as amended, which authorize the issuance of not more than 20,000,000 shares of Preferred Stock, without par value, and pursuant to authority conferred upon the Securities Committee of the Board of Directors (the “ Committee ”) in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the “ General Corporation Law ”), the following resolutions were duly adopted by the Committee pursuant to the unanimous written consent of the Committee duly adopted on July 18, 2014, in accordance with Section 141(f) of the General Corporation Law:

 

                        Resolved, that pursuant to the authority vested in the Committee and in accordance with the resolutions of the Board of Directors dated April 29, 2014, the provisions of the Restated Certificate of Incorporation, the By-laws of the Corporation, and applicable law, a series of Preferred Stock, no par value, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

 

RIGHTS AND PREFERENCES

 

            Section 1.        Designation .  The shares of such series of Preferred Stock shall be designated Non-Cumulative Perpetual Class A Preferred Stock, Series T, with no par value and a liquidation preference amount of $25,000 per share  (the “ Series T Preferred Stock ”).  Each share of Series T Preferred Stock shall be identical in all respects to every other share of Series T Preferred Stock except with respect to the date from which dividends may accrue. Series T Preferred Stock will rank equally with Parity Stock with respect to the payment of dividends and distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation and will rank senior to Junior Stock with respect to the payment of dividends and/or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

 

            Section 2.        Number of Shares .  The number of authorized shares of Series T Preferred Stock shall be 32,200.  Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series T Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation and by the filing of a certificate pursuant to the provisions of the General Corporation Law stating that such increase or decrease, as the case may be, has been so authorized.  The Corporation shall have the authority to issue fractional shares of Series T Preferred Stock.

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Section 3.        Definitions .  As used herein with respect to Series T Preferred Stock:

Business Day ” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in New York, New York.

Certificate of Designation ” means this Certificate of Designation relating to the Series T Preferred Stock, as it may be amended from time to time.

“Common Stock” means the common stock of the Corporation, par value $1⅔ per share, as the same exists at the date of this Certificate of Designation or as such stock may be constituted from time to time.

Depositary Company ” has the meaning set forth in Section 6(d) hereof.

            “ Dividend Payment Date ” has the meaning set forth in Section 4(a) hereof.

Dividend Period ” has the meaning set forth in Section 4(a) hereof.

DTC ” means The Depository Trust Company, together with its successors and assigns.

 “Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation now existing or hereafter authorized over which the Series T Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Liquidation Preference ” has the meaning set forth in Section 5(a) hereof.

Nonpayment Event ” shall have the meaning set forth in Section 7(b).

Parity Stock ” means any other class or series of stock of the Corporation now existing or hereafter authorized that ranks on par with the Series T Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) or in the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Preference Stock ” means any and all series of preference stock, having no par value, of the Corporation. 

Preferred Stock ” means any and all series of preferred stock, having no par value, of the Corporation, including the Series T Preferred Stock.

Preferred Stock Directors ” shall have the meaning set forth in Section 7(b).

Regulatory Capital Treatment Event ” means the Corporation’s reasonable determination that as a result of any (i) amendment to, clarification of, or change (including any announced prospective change) in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective on or after July 14, 2014; (ii) proposed change in those laws or regulations that is announced or becomes effective on or after July 14, 2014; or (iii) official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced on or after July 14, 2014, there is more than an insubstantial risk that the Corporation will not be entitled to treat the full liquidation preference amount of all shares of Series T Preferred Stock then outstanding as Tier 1 capital (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the

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appropriate federal banking agency, as then in effect and applicable, for as long as any share of Series T Preferred Stock is outstanding.

Series T Preferred Stock ” has the meaning set forth in Section 1 hereof.

Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series T Preferred Stock.

            Section 4.        Dividends.

(a)        Rate .  Dividends on the Series T Preferred Stock will not be mandatory.  Holders of Series T Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation, but only out of assets legally available therefor, non-cumulative cash dividends on the liquidation preference amount of $25,000 per share of the Series T Preferred Stock, payable quarterly in arrears on the 15th day of March, June, September and December of each year (commencing on September 15, 2014); provided , however , if any such day is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding day that is a Business Day, without any interest or other payment in respect of such delay (each such day on which dividends are payable a “ Dividend Payment Date ”).  A “ Dividend Period ” means the period from, and including, a Dividend Payment Date to, but excluding, the next succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, July 21, 2014 to, but excluding, September 15, 2014.  Dividends on each share of Series T Preferred Stock will accrue at a rate per annum equal to 6.00%.  The record date for payment of dividends on the Series T Preferred Stock shall be the last Business Day of the calendar month immediately preceding the month during which the Dividend Payment Date falls or such other date as determined by the Corporation’s Board of Directors.  The amount of dividends payable shall be computed on the basis of a 360-day year of twelve 30-day months.  Dollar amounts resulting from that calculation will be rounded to the nearest cent, with one-half cent being rounded upward.

(b)       Non-Cumulative Dividends .  Dividends on shares of Series T Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the shares of Series T Preferred Stock on any Dividend Payment Date are not declared prior to such Dividend Payment Date, then such dividends shall not cumulate and shall cease to accrue and be payable, and the Corporation shall have no obligation to pay, and the holders of Series T Preferred Stock shall have no right to receive, dividends accrued for such Dividend Period on the Dividend Payment Date for such Dividend Period or at any time in the future or interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Series T Preferred Stock or any other series of authorized Preferred Stock, Preference Stock, or Common Stock of the Corporation.

(c)        Priority of Dividends .  So long as any shares of Series T Preferred Stock remain outstanding,

(1) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Common Stock, and no shares of Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Common Stock by the Corporation (other than (i) a dividend payable in Common Stock or (ii) the acquisition of shares of Common Stock in exchange for, or through application of proceeds of the sale of, shares of Common Stock);

(2) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Junior Stock other than Common Stock, and no shares of Junior Stock other than Common Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly, nor shall any monies be paid to or made available for a sinking fund for the

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redemption of any such Junior Stock other than Common Stock by the Corporation (other than (i) a dividend payable solely in shares of Junior Stock, (ii) any dividend in connection with the implementation of a stockholder rights plan, or the redemption or repurchase of any rights under any such plan, (iii) any dividend in the form of stock, warrants, options or other rights where the dividend stock or stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks equally with or junior to such stock, (iv) as a result of a reclassification of Junior Stock other than Common Stock for or into other Junior Stock, (v) the exchange or conversion of one share of Junior Stock other than Common Stock for or into another share of Junior Stock, (vi) through the use of proceeds of a substantially contemporaneous sale of other shares of Junior Stock, (vii) any purchase, redemption or other acquisition of Junior Stock other than Common Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after July 14, 2014, (viii) any purchase of fractional interests in shares of Junior Stock other than Common Stock pursuant to the conversion or exchange provisions of such Junior Stock other than Common Stock or the securities being converted or exchanged, (ix) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (x) the purchase of Junior Stock other than Common Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business); and

(3) no shares of Parity Stock will be repurchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series T Preferred Stock and such Parity Stock during a Dividend Period (other than (i) as a result of a reclassification of Parity Stock for or into other Parity Stock or Junior Stock, (ii) the exchange or conversion of one share of Parity Stock for or into another share of Parity Stock or Junior Stock, (iii) through the use of proceeds of a substantially contemporaneous sale of other shares of Parity Stock or Junior Stock, (iv) any purchase, redemption or other acquisition of Parity Stock pursuant to any of the Corporation’s or any of its subsidiaries’ employee, consultant or director incentive or benefit plans or arrangements (including any employment, severance or consulting arrangements) adopted before or after July 14, 2014, (v) any purchase of fractional interests in shares of Parity Stock pursuant to the conversion or exchange provisions of such Parity Stock or the securities being converted or exchanged, (vi) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with the distribution thereof or (vii) the purchase of Parity Stock by Wells Fargo Securities, LLC, or any other affiliate of the Corporation, in connection with market-making or other secondary market activities in the ordinary course of business), unless, in each case, the full dividends for the then-current Dividend Period on all outstanding shares of the Series T Preferred Stock have been declared and paid or declared and a sum sufficient for the payment of those dividends has been set aside.

  Subject to the succeeding sentence, for so long as any shares of Series T Preferred Stock remain outstanding, no dividends shall be declared, paid, or set aside for payment on any Parity Stock for any period unless full dividends on all outstanding shares of Series T Preferred Stock for the then-current Dividend Period have been paid in full or declared and a sum sufficient for the payment thereof set aside.  To the extent the Corporation declares dividends on the Series T Preferred Stock and on any Parity Stock but cannot make full payment of those declared dividends, the Corporation will allocate the dividend payments on a proportional basis among the holders of shares of Series T Preferred Stock and the holders of any Parity Stock then outstanding where the terms of such Parity Stock provide similar dividend rights. 

            Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may be declared and paid on the Common Stock and any other stock that is Parity Stock or Junior Stock, from time to time out of any assets legally available for such payment, and the shares of Series T Preferred Stock shall not be entitled to participate in any such dividends.

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Section 5.        Liquidation Rights.

(a)        Liquidation .  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Series T Preferred Stock shall be entitled to receive in full out of assets available for distribution to its stockholders before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of the Common Stock or any other Junior Stock, and subject to the rights of the holders of Parity Stock or any stock of the Corporation ranking senior to the Series T Preferred Stock as to such distribution, a liquidating distribution in the amount of $25,000 per share, plus an amount equal to any dividends which have been declared but not yet paid, without accumulation of any undeclared dividends, to the date of liquidation (the “ Liquidation Preference ”).  The holders of Series T Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b)       Partial Payment .  If the assets of the Corporation are not sufficient to pay in full the Liquidation Preference to all holders of Series T Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of Series T Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preference of Series T Preferred Stock and all such Parity Stock. 

(c)        Residual Distributions .  If the Liquidation Preference has been paid in full to all holders of Series T Preferred Stock and all other amounts payable upon liquidation, dissolution or winding up of the Corporation have been paid in full to all holders of any Parity Stock, the holders of Common Stock and any other Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)       Merger, Consolidation and Sale of Assets Not Liquidation .  For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6.        Redemption.

(a)        Optional Redemption .  The Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may redeem, subject to the prior approval of the Federal Reserve Board, out of funds legally available therefor, in whole or in part, the shares of Series T Preferred Stock at the time outstanding, at any time on any Dividend Payment Date on or after September 15, 2019, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series T Preferred Stock shall be $25,000 per share plus an amount equal to any dividends that have been declared but not paid up to the redemption date without accumulation of any undeclared dividends.

Notwithstanding the foregoing, within 90 days of the Corporation’s good faith determination that a Regulatory Capital Treatment Event has occurred, the Corporation, at the option of its Board of Directors or any duly authorized committee of the Board of Directors of the Corporation, may, subject to the approval of the appropriate federal banking agency, redeem out of funds legally available therefor, in whole, but not in part, the shares of Series T Preferred Stock at the time outstanding, prior to September 15, 2019, upon notice given as provided in Section 6(b) below.  The redemption price for shares of Series T Preferred Stock shall be $25,000

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per share plus an amount equal to any dividends that have been declared but not paid, without accumulation of any undeclared dividends.

(b)       Notice of Redemption .  Notice of every redemption of shares of Series T Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of such shares to be redeemed at their respective last addresses appearing on the stock register of the Corporation.  Such mailing shall be at least 40 days and not more than 70 days before the date fixed for redemption.  Any notice mailed as provided in this Section 6(b) shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series T Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series T Preferred Stock.  Each notice shall state (i) the redemption date; (ii) the number of shares of Series T Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, if applicable, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where the certificates for those shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date.  Notwithstanding the foregoing, if the Series T Preferred Stock is held in book-entry form through DTC, the Corporation may give such notice in any manner permitted by DTC. 

(c)        Partial Redemption .  In case of any redemption of only part of the shares of Series T Preferred Stock at the time outstanding, the shares of Series T Preferred Stock to be redeemed shall be selected either pro rata from the holders of record of Series T Preferred Stock in proportion to the number of Series T Preferred Stock held by such holders or in such other manner consistent with the rules and policies of the New York Stock Exchange as the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors of the Corporation may determine to be fair and equitable.  Subject to the provisions of this Section 6, the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors shall have full power and authority to prescribe the terms and conditions upon which shares of Series T Preferred Stock shall be redeemed from time to time.

(d)       Effectiveness of Redemption .  If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been irrevocably set aside by the Corporation, separate and apart from its other assets, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, or deposited by the Corporation with a bank or trust company selected by the Board of Directors of the Corporation or any duly authorized committee of the Board of Directors (the “ Depositary Company ”) in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date all shares so called for redemption shall cease to be outstanding, all dividends with respect to such shares shall cease to accrue after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders  thereof to receive the amount payable on such redemption from the Depository Company at any time after the redemption date from the funds so deposited, without interest.  The Corporation shall be entitled to receive, from time to time, from the Depositary Company any interest accrued on such funds, and the holders of any shares called for redemption shall have no claim to any such interest.  Any funds so deposited and unclaimed at the end of two years from the redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

Section 7.        Voting Rights.

(a)        General.  The holders of Series T Preferred Stock shall not be entitled to vote on any matter except as set forth in paragraph 7(b) below or as required by applicable law.

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(b)       Right To Elect Two Directors Upon Nonpayment Events.  Whenever dividends payable on any shares of Series T Preferred Stock or any class or series of Voting Parity Stock have not been declared and paid in an aggregate amount equal to, as to any class or series, at least six quarterly Dividend Periods or their equivalent, whether or not for consecutive Dividend Periods (a “ Nonpayment Event ”), the holders of the outstanding Series T Preferred Stock, voting together as a class with holders of Voting Parity Stock whose voting rights are exercisable, will be entitled to vote for the election of two additional directors of the Corporation’s Board of Directors at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders (the “ Preferred Stock Directors ”) by a plurality of the votes cast; provided that the Board of Directors shall at no time include more than two Preferred Stock Directors (including, for purposes of this limitation, all directors that the holders of any series of Voting Parity Stock are entitled to elect pursuant to like voting rights).  Upon the vesting of such right of such holders, the maximum authorized number of members of the Board of Directors shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of the outstanding Series T Preferred Stock (together with the holders of shares of any one or more other series of Voting Parity Stock).  At elections for such directors, each holder of the Series T Preferred Stock shall be entitled to 25 votes for each share held (the holders of shares of any other series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock as may be granted to them).  The right of the holders of the Series T Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Voting Parity Stock) to elect Preferred Stock Directors shall continue until such time as the Corporation has paid in full dividends for the equivalent of at least four quarterly Dividend Periods or their equivalent, at which time such right with respect to the Series T Preferred Stock shall terminate, except as provided by law, and subject to revesting in the event of each and every subsequent default of the character described in this Section 7(b).

Upon any termination of the right of the holders of all shares of Series T Preferred Stock and Voting Parity Stock to vote for Preferred Stock Directors, the term of office of all Preferred Stock Directors then in office elected by only those holders voting as a class shall terminate immediately.  Any Preferred Stock Director may be removed at any time without cause by the holders of a majority of the outstanding shares of Series T Preferred Stock and Voting Parity Stock, when they have the voting rights described above (voting together as a class). In case any vacancy shall occur among the Preferred Stock Directors, a successor may be elected by a plurality of the votes cast by the holders of Series T Preferred Stock and Voting Parity Stock having the voting rights described above, voting together as a class, unless the vacancy has already been filled. The Preferred Stock Directors shall each be entitled to one vote per director on any matter that shall come before the Board of Directors for a vote.  Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this Section 7(b) shall have expired, the number of directors shall be such number as may be provided for in the By-Laws irrespective of any increase made pursuant to this Section 7(b).

(c)     Other Voting Rights .  In addition to any other vote required by law or the Restated Certificate of Incorporation, so long as any shares of the Series T Preferred Stock remain outstanding, the vote or consent of the holders of the outstanding shares of Series T Preferred Stock and outstanding shares of all other series of Voting Parity Stock entitled to vote on the matter, by a vote of at least 66 2/3% in voting power of all such outstanding Series T Preferred Stock and such Voting Parity Stock, voting together as a class, given in person or by proxy, either in writing without a meeting or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following actions, whether or not such approval is required by Delaware law: (i) the issuance of any class or series of Preferred Stock or Preference Stock ranking senior to the Series T Preferred Stock in the payment of dividends or the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; (ii) any amendment, alteration or repeal of any provision of the Restated Certificate of Incorporation, including the Certificate of Designation, or the Bylaws that would adversely affect the rights, preferences, privileges or voting powers of the Series T Preferred Stock; (iii) any amendment or alteration of the Restated Certificate of Incorporation, including the Certificate of Designation, or Bylaws to authorize, create, or increase the authorized amount of, any shares of,

401

 


 

 

or any securities convertible into shares of, any class or series of the Corporation’s capital stock ranking senior to the Series T Preferred Stock with respect to either the payment of dividends or in the distribution of assets in the event of the Corporation’s voluntary or involuntary liquidation, dissolution or winding up; or (iv) any consummation of a reclassification involving the Series T Preferred Stock or a merger or consolidation with another corporation or other entity, except holders of the Series T Preferred Stock will have no right to vote under this section 7(c)(iv) if in each case (a) the shares of Series T Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (b) such shares of Series T Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series T Preferred Stock, taken as a whole; provided, however , that any authorization, creation or increase in the authorized amount of or issuance of the Series T Preferred Stock or any Parity Stock or Junior Stock or any securities convertible into any class or series of Parity Stock (whether dividends payable in respect of such Parity Stock are cumulative or non-cumulative) or Junior Stock will be deemed not to adversely affect the rights, preferences, privileges or voting powers of the Series T Preferred Stock, and holders of the Series T Preferred Stock shall have no right to vote thereon.

If any amendment, alteration, repeal, reclassification, merger or consolidation specified in this Section 7(c) would adversely affect one or more but not all series of voting Preferred Stock (including the Series T Preferred Stock), then only those series affected by and entitled to vote on the matter shall vote on the matter together as a class (in lieu of all other series of Preferred Stock).

Each holder of the Series T Preferred Stock will have 25 votes per share on any matter on which holders of the Series T Preferred Stock are entitled to vote, whether separately or together with any other series of stock of the Corporation (the holders of any shares of any other series of stock being entitled to such number of votes, if any, for each share of stock as may be granted to them), pursuant to Delaware law or otherwise, including by written consent.

(d)       Changes after Provision for Redemption .  No vote or consent of the holders of Series T Preferred Stock shall be required pursuant to Section 7(b) or (c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding Series T Preferred Stock shall have been redeemed, or notice of redemption has been given and sufficient funds shall have been irrevocably deposited in trust to effect such redemption.

(e)        Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Series T Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Restated Certificate of Incorporation, the Bylaws, applicable law and any national securities exchange or other trading facility in which the Series T Preferred Stock is listed or traded at the time.

Section 8.        Preemption and Conversion .  The holders of Series T Preferred Stock shall not have any rights of preemption or rights to convert such Series T Preferred Stock into shares of any other class of capital stock of the Corporation.

Section 9.        Reacquired Shares .  Shares of Series T Preferred Stock which have been issued and redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

402

 


 

      

Section 10.      No Sinking Fund .  Shares of Series T Preferred Stock are not subject to the operation of a sinking fund.

Section 11.      Additional Classes or Series of Stock .  Notwithstanding anything set forth in the Restated Certificate of Incorporation or this Certificate of Designation to the contrary, the Board of Directors of the Corporation, or any authorized committee of the Board of Directors of the Corporation, (i) without the vote of the holders of the Series T Preferred Stock, may authorize and issue additional shares of Junior Stock and Parity Stock and (ii) with the requisite vote of the holders of the Series T Preferred Stock and Parity Stock entitled to vote thereon, may authorize and issue any additional class or series of Preferred Stock or Preference Stock senior to the Series T Preferred Stock as to the payment of dividends and/or the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

US.54547103.01

 

 

                        In Witness Whereof, Wells Fargo & Company has caused this Certificate of Designation to be signed by Barbara S. Brett, its Senior Vice President and Assistant Treasurer, and Jeannine E. Zahn, its Assistant Secretary, this 18th day of July, 2014.

 

Wells Fargo & Company

By:

/s/ Barbara S. Brett

 

Barbara S. Brett, Senior Vice President and Assistant Treasurer

 

 

/s/ Jeannine E. Zahn                           
Jeannine E. Zahn, Assistant Secretary

 

 

 

[As filed with the Delaware Secretary of State on July 18, 2014.]

 

 

403

 


 
 

      

 

Exhibit 10(a)

 

Amendment to the

Wells Fargo & Company Deferred Compensation Plan

(As Amended and Restated Effective as of January 1, 2008)

 

Effective January 1, 2015, Section 2(F) of the Wells Fargo & Company Deferred Compensation Plan is amended in its entirety to read in full as follows:

 

 

2. (F)    Compensation .  Base salary, bonuses, incentives and commissions earned by an Eligible Employee during the Deferral Year for services rendered to the Company or its Affiliates as determined by the Plan Administrator for that Deferral Year and payable (if not deferred) no later than March 15 of the Plan Year following the Deferral Year; provided, however, that Compensation shall not include:

 

(1)    any award under the Company’s Long-Term Incentive Compensation Plan, or any successor to the plan;

(2)    any amount if the right to receive that amount is conditioned on the Eligible Employee’s Separation from Service;

(3)    compensation paid during a period of salary continuation leave;

(4)    any amount paid after the pay period in which the Eligible Employee’s Separation from Service occurs except with respect to bonuses that are subject to Section 2(F)(5) below; and

(5)    bonus amounts payable after March 1 of the Plan Year following the Deferral Year in which the Employee’s Separation from Service occurs, unless the Eligible Employee elected payment in annual installments and Section 9(I) does not apply.  

 

403

 


 
 

 

 

Exhibit 10(b)

AMENDMENT TO

WELLS FARGO & COMPANY SUPPLEMENTAL 401(k) PLAN

(As Amended and Restated Effective January 1, 2008)

 

            Pursuant to the authority delegated by the Board of Directors of Wells Fargo & Company at its June 24, 2014 meeting, the undersigned hereby amends the Wells Fargo & Company Supplemental 401(k) Plan (As Amended and Restated Effective January 1, 2008) (the “Plan”) effective January 1, 2015 as follows:

 

 

I.

 

            Section 9 of the Plan is amended in its entirety to read in full as follows:

 

Sec. 9  Investment of Accounts.   All participants’ Accounts are allocated solely to the Wells Fargo & Company Stock Investment Fund except for credits allocated to the CD Investment Fund pursuant to Section 10 of this Plan to reflect dividends paid on Company common stock on or after January 1, 2015.  The CD Investment Fund is based on a certificate of deposit in such denomination and for such duration as is determined from time to time by the Plan Administrator.  No other Investment Funds are available under the Plan.  Amounts allocated to the Wells Fargo & Company Stock Investment Fund or the CD Investment Fund, as the case may be, including dividend credits allocated pursuant to Section 10 of this Plan, may not subsequently be allocated to a different Investment Fund. 

 

 

II.

 

            Section 10 of the Plan is amended in its entirety to read in full as follows:

 

            Sec. 10  Adjustment and Funding of Accounts   Credits to a participant’s Plan Account shall be subject to the following:

 

(a)                 Credits to the Wells Fargo & Company Stock Investment Fund shall be stated in the form of shares of Company common stock, the number of which shall be determined by dividing the amount of the credits made pursuant to Sections 7 or 8 of this Plan for a Plan Year by the New York Stock Exchange only closing price per share of Company common stock as of December 31 of that Plan Year.  If December 31 is not a trading date, the closing price per share of Company common stock reported on the trading date immediately preceding that December 31shall be used.  Adjustments to the participant’s Plan Account shall be made to reflect dividends paid on Company common stock as provided in subsection (c) below.  If the Company chooses to fund the credits to the Wells Fargo & Company Stock Investment Fund and/or the CD Investment Fund, the Company shall make contributions in cash or in Company common stock to the trust described in Section 21.  Any cash contribution that is to be allocated to the Wells Fargo & Company Stock Investment Fund shall be used by the trustee to purchase shares of Company common stock within 10 business days after such deposit.  Purchase of such shares may be made by the trustee in brokerage transactions or by private purchase, including purchase from the Company.  All shares held by the trust shall be held in the name of the trustee.

 

(b)                All Plan Account credits shall consist solely of bookkeeping entries.

404

 


 

      

 

(c)                 For dividends paid on Company common stock prior to January 1, 2015, the participant shall receive a credit to the Wells Fargo & Company Stock Investment Fund in his or her Plan Account.  For dividends paid on Company common stock on or after January 1, 2015, the participant shall receive a credit to the CD Investment Fund unless the participant has elected at least ten (10) days prior to the payment date for the dividend to have the dividend credit allocated to the Wells Fargo & Company Stock Investment Fund.  The amount of the dividend credit to the Wells Fargo & Company Stock Investment Fund shall be the number of shares of Company common stock determined by multiplying the dividend amount per share by the number of shares credited to a participant’s Wells Fargo & Company Stock Investment Fund as of the record date for the dividend and dividing the product by the New York Stock Exchange only closing price per share of Company common stock as of the trading date immediately preceding the dividend payment date.  The amount of the dividend credit to the CD Investment Fund shall be the dividend amount per share multiplied by the number of shares credited to a participant’s Wells Fargo & Company Stock Investment Fund as of the record date for the dividend.   

 

 

III.

 

The first paragraph of Section 12 of the Plan is amended to read in full as follows:

 

Sec. 12 Number of Shares under the Plan/Adjustments for Certain Changes in Capitalization .    As of December 31, 2003, 2,742,974 shares of Company common stock were credited to Plan Accounts (as adjusted for the August 11, 2006 two-for-one stock split).  On and after January 1, 2004, no more than an additional 4,000,000 shares of Company common stock (as adjusted for the August 11, 2006 two-for-one stock split) may be credited to Plan Accounts, except that any share credits to a Plan Account which are forfeited pursuant to Section 15 may again be credited under the Plan, and provided that an additional 2,000,000 shares of Company common stock shall be available for, but limited to, credits to participants’ Wells Fargo & Company Stock Investment Fund pursuant to Section 10(c) to reflect dividends paid on Company common stock on or after January 1, 2015.   

 

 

                                                           IV.

 

 

            The opening sentence of Section 15 is amended to read in full as follows:

 

Upon Separation from Service, a participant shall be entitled to a benefit equal to the number of shares of Company common stock and cash credited to the participant’s Plan Account, calculated as of the end of the calendar year immediately prior to the date benefits are distributed pursuant to Sections 16 and 17 (except as provided in subsection (c) of this Section 15), multiplied by the vested percentage determined under Sec. 9.1, Sec. 9.2 or Sec. 9.3 of the 401(k) Plan that would be applicable to the participant at the time the Separation from Service occurs.

 

 

V.

 

Subsection (c) of Section 16 of the Plan is amended to read in full as follows:

 

405

 


 

 

(c)     Payment to the participant of the portion of the participant’s Account that is allocated to the Wells Fargo & Company Stock Investment Fund will be in the form of whole shares of common stock with cash for any fractional share, net of any required withholding taxes. Payment to the participant of the portion of the participant’s Account that is allocated to the CD Investment Fund will be in cash, net of any required withholding taxes.  If the participant is to receive payment in installments, the amount of each installment will be equal to the total amount of the participant’s vested Plan Account at the time the installment is to be paid divided by the number of installments remaining to be made, including the current installment, and the whole number of shares of Company common stock and cash to be distributed shall be deducted from the total amount of the participant’s vested Plan Account.  Any required withholding will be satisfied first from the participant’s Account allocated to cash and then any remaining withholding will be satisfied from the participant’s Account allocated to the Wells Fargo & Company Stock Investment Fund.

 

406

 


 

      

 

VI.

 

            The last sentence of Section 17 of the Plan is amended to read in full as follows:

 

Payment to the Beneficiary of the portion of the participant’s Account that is allocated to the Wells Fargo & Company Stock Investment Fund will be in the form of whole shares of common stock with cash for any fractional share, net of any required withholding taxes and payment of the portion of the participant’s Account that is allocated to the CD Investment Fund will be in cash, net of any required withholding taxes.

   

 

Dated:  July 28, 2014                          WELLS FARGO & COMPANY

 

 

 

 

                                                                                    By: /s/ Hope A. Hardison

                                                                                          Hope A. Hardison

                                                                                          Director of Human Resources

 

407

 


 
 

      

 

EXHIBIT 12(a)

WELLS FARGO & COMPANY AND SUBSIDIARIES

COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

($ in millions)

  

2014 

  

2013 

  

2014 

  

2013 

  

  

  

  

  

  

  

  

  

  

Earnings including interest on deposits (1):

  

  

  

  

  

  

  

  

  

Income before income tax expense

$

 8,655 

  

 8,471 

  

 17,007 

  

 16,111 

  

Less: Net income from noncontrolling interests

  

 60 

  

 89 

  

 242 

  

 138 

  

Income before income tax expense and after noncontrolling interests

  

 8,595 

  

 8,382 

  

 16,765 

  

 15,973 

  

Fixed charges

  

 1,100 

  

 1,172 

  

 2,194 

  

 2,420 

  

  

  

 9,695 

  

 9,554 

  

 18,959 

  

 18,393 

  

  

  

  

  

  

  

  

  

  

Fixed charges (1):

  

  

  

  

  

  

  

  

  

Interest expense

  

 1,002 

  

 1,077 

  

 1,999 

  

 2,228 

  

Estimated interest component of net rental expense

  

 98 

  

 95 

  

 195 

  

 192 

  

  

$

 1,100 

  

 1,172 

  

 2,194 

  

 2,420 

  

  

  

  

  

  

  

  

  

  

Ratio of earnings to fixed charges (2)

  

 8.81 

  

 8.15 

  

 8.64 

  

 7.60 

  

  

  

  

  

  

  

  

  

  

Earnings excluding interest on deposits:

  

  

  

  

  

  

  

  

  

Income before income tax expense and after noncontrolling interests

$

 8,595 

  

 8,382 

  

 16,765 

  

 15,973 

  

Fixed charges

  

 825 

  

 819 

  

 1,640 

  

 1,698 

  

  

  

 9,420 

  

 9,201 

  

 18,405 

  

 17,671 

  

  

  

  

  

  

  

  

  

  

Fixed charges:

  

  

  

  

  

  

  

  

  

Interest expense

  

 1,002 

  

 1,077 

  

 1,999 

  

 2,228 

  

Less: Interest on deposits

  

 275 

  

 353 

  

 554 

  

 722 

  

Estimated interest component of net rental expense

  

 98 

  

 95 

  

 195 

  

 192 

  

  

$

 825 

  

 819 

  

 1,640 

  

 1,698 

  

  

  

  

  

  

  

  

  

  

Ratio of earnings to fixed charges (2)

  

 11.42 

  

 11.23 

  

 11.22 

  

 10.41 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

As defined in Item 503(d) of Regulation S-K.

(2)

These computations are included herein in compliance with Securities and Exchange Commission regulations.  However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates.

 

407

 


 
 

 

 

EXHIBIT 12(b)

WELLS FARGO & COMPANY AND SUBSIDIARIES

COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

AND PREFERRED DIVIDENDS

  

  

  

Quarter ended June 30,

  

Six months ended June 30,

(in millions)

  

2014

  

2013 

  

2014

  

2013 

  

  

  

  

  

  

  

  

  

  

Earnings including interest on deposits (1): 

  

  

  

  

  

  

  

  

  

Income before income tax expense

$

 8,655 

  

 8,471 

  

 17,007 

  

 16,111 

  

Less: Net income from noncontrolling interests

  

 60 

  

 89 

  

 242 

  

 138 

  

Income before income tax expense and after noncontrolling interests

  

 8,595 

  

 8,382 

  

 16,765 

  

 15,973 

  

Fixed charges

  

 1,100 

  

 1,172 

  

 2,194 

  

 2,420 

  

  

  

 9,695 

  

 9,554 

  

 18,959 

  

 18,393 

  

  

  

  

  

  

  

  

  

  

Preferred dividend requirement

  

 453 

  

 375 

  

 847 

  

 728 

Tax factor (based on effective tax rate)  

  

1.50 

  

1.52 

  

1.44 

  

1.49 

  

  

  

  

  

  

  

  

  

  

Preferred dividends (2)

$

 453 

  

 375 

  

 847 

  

 728 

Fixed charges (1):

  

  

  

  

  

  

  

  

  

Interest expense

  

 1,002 

  

 1,077 

  

 1,999 

  

 2,228 

  

Estimated interest component of net rental expense

  

 98 

  

 95 

  

 195 

  

 192 

  

  

  

 1,100 

  

 1,172 

  

 2,194 

  

 2,420 

  

Fixed charges and preferred dividends

  

 1,553 

  

 1,547 

  

 3,041 

  

 3,148 

  

  

  

  

  

  

  

  

  

  

Ratio of earnings to fixed charges and preferred dividends (3)

  

6.24 

  

6.18 

  

6.23 

  

5.84 

  

  

  

  

  

  

  

  

  

  

Earnings excluding interest on deposits:

  

  

  

  

  

  

  

  

  

Income before income tax expense and after noncontrolling interests

$

 8,595 

  

 8,382 

  

 16,765 

  

 15,973 

  

Fixed charges

  

 825 

  

 819 

  

 1,640 

  

 1,698 

  

  

  

 9,420 

  

 9,201 

  

 18,405 

  

 17,671 

  

  

  

  

  

  

  

  

  

  

Preferred dividends (2)

  

 453 

  

 375 

  

 847 

  

 728 

Fixed charges:

  

  

  

  

  

  

  

  

  

Interest expense

  

 1,002 

  

 1,077 

  

 1,999 

  

 2,228 

  

Less: Interest on deposits

  

 275 

  

 353 

  

 554 

  

 722 

  

Estimated interest component of net rental expense

  

 98 

  

 95 

  

 195 

  

 192 

  

  

  

 825 

  

 819 

  

 1,640 

  

 1,698 

  

Fixed charges and preferred dividends

$

 1,278 

  

 1,194 

  

 2,487 

  

 2,426 

  

  

  

  

  

  

  

  

  

  

Ratio of earnings to fixed charges and preferred dividends (3)

  

7.37 

  

7.71 

  

7.40 

  

7.28 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

As defined in Item 503(d) of Regulation S-K.

  

  

  

  

  

  

  

  

(2)

The preferred dividends, including accretion, were increased to amounts representing the pretax earnings that would be required to cover such dividend and accretion requirements.

(3)

These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates.

 

408

 


 
 

      

Exhibit 31(a)

 

CERTIFICATION

 

I, John G. Stumpf, certify that:

 

1.        I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, of Wells Fargo & Company;

2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.        The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.        The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 6, 2014

/s/ JOHN G. STUMPF                                       

John G. Stumpf

Chief Executive Officer

 

409

 


 
 

 

Exhibit 31(b)

 

CERTIFICATION

 

I, John R. Shrewsberry, certify that:

 

1.        I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, of Wells Fargo & Company;

2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.        The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;  

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.        The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 6, 2014

/s/ JOHN R. SHREWSBERRY                       

John R. Shrewsberry  

Chief Financial Officer

 

410

 


 
 

      

Exhibit 32(a)

 

 

Certifications Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002  

  

In connection with the Quarterly Report on Form 10-Q of Wells Fargo & Company (the “Company”) for the quarterly period ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John G. Stumpf, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

/ s / JOHN G. STUMPF                                           

John G. Stumpf

Chief Executive Officer

Wells Fargo & Company

August 6, 2014

 

411

 


 
 

 

Exhibit 32(b)

 

 

Certifications Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

  

In connection with the Quarterly Report on Form 10-Q of Wells Fargo & Company (the “Company”) for the quarterly period ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John R. Shrewsberry, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

/s/ JOHN R. SHREWSBERRY                           

John R. Shrewsberry  

Chief Financial Officer

Wells Fargo & Company

August 6, 2014

 

412