Second Quarter 2008 Earnings Comments
Second Quarter 2008 Summary………...page 2 Wholesale Banking………………………. page 3 Community Banking……………………… page 5 Mortgage Banking………………………... page 7 Credit Quality………………………………page 9 Capital/Balance Sheet Management.......page 12 Summary…………………………………...page 13
Hello, this is Bob Strickland. Thank you for calling into the Wells Fargo second quarter 2008 earnings review prerecorded call. Before we discuss our second quarter results, we need to make the standard securities law disclosure. In this call we will make forward-looking statements about specific income statement and balance sheet items and other measures of future results of operations and financial conditions, including statements about future credit quality and losses generally and, specifically, that we expect higher losses in the home equity portfolio until home prices stabilize, that we believe we can mitigate losses by working with customers who are experiencing financial stress and that based on the current interest rate environment most of our adjustable-rate mortgages at Wells Fargo Financial scheduled to reset during the remainder of 2008 will reset at or below their current rate. Forward-looking statements give our expectations about the future. They are not guarantees, and results may differ from expectations. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date. For a discussion of some of the factors that may cause actual results to differ from expectations refer to our SEC filings including the 8-K filed today, which includes the press release announcing our second quarter results, and to our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and to the information incorporated into those documents. Now I will turn the review over to our Chief Financial Officer, Howard Atkins. Thanks Bob. Second Quarter Summary Wells Fargo earned a $1.8 billion profit or 53 cents a share in the second quarter. Our credit related expenses, including a $1.5 billion credit reserve build, were $3 billion in the quarter, up $2.3 billion from a year ago – but nevertheless we continued to grow our company profitably at a time when many of our peers are losing money and shrinking, we continued to shift our asset portfolio toward lower risk, higher risk-adjusted return business, and even with 15 percent annualized linked-quarter growth in earning assets, we increased our capital ratios. Here are some metrics that highlight the profitable growth we’ve achieved year over year and the further strengthening of our balance sheet this quarter: - pre-tax pre-provision income up 34 percent - total revenue up 16 percent - average earning assets up 20 percent - average loans up 18 percent, with consumer loans up 13 percent and commercial loans up 27 percent - fee income up 10 percent, reflecting continued growth in cross-sell - record retail cross-sell of 5.64 products and record commercial cross-sell of 6.3 products - net retail checking accounts up 5.5 percent - mortgage servicing of $1.5 trillion, up 7 percent
mortgage originations of $63 billion and new mortgage applications of $100 billion, almost entirely in agency conforming and government guaranteed mortgages WellsTrade® assets under management up 8 percent positive operating leverage with expenses up only 2 percent vs. 16 percent revenue growth, resulting in a 51 percent efficiency ratio net interest margin of 4.92 percent, up 23 basis points in the quarter net interest income up $1.8 billion year-to-date from the first half of 2007, largely offsetting the increase in net charge-offs for the same period, even after adjusting charge-offs for the impact of our National Home Equity Group’s new charge-off policy reserves to total loans of 1.88%, the highest this ratio has been in 5 years Tier I capital of 8.24 percent, up 32 basis points in the quarter and up 65 basis points since year end, reflecting our 14.6 percent rate of internal capital generation, among the highest in the industry, and two successful non-dilutive capital raises since year end 2007 Tier I capital plus allowance for loan loss equal to 9.7 percent of average earning assets, up 87 basis points from year end.
The growth, profitability and balance sheet strength reflects the benefits of our diversified business model as well as the unprecedented opportunities the credit crisis itself has created to add attractive assets at wide spreads, to add new customers and to add market/wallet share. In Wells Fargo’s case, the benefit of the credit crisis in terms of higher assets at higher spreads has so far largely offset the negative impact of higher charge-offs. We believe we are one of the few banks that have the capacity to take advantage of such opportunities. We announced today that the Wells Fargo Board of Directors increased the quarterly common stock dividend by 3 cents to 34 cents per share, an increase of 10 percent from the previous quarterly dividend. This is the 21st consecutive year that Wells Fargo has increased its common stock dividend. Let me now describe in more detail the business growth we achieved this quarter and I’ll end with a review of credit quality and capital management. First, the commercial business.
Wholesale Banking Our Wholesale and Commercial Banking Group, which serves primarily middle market customers and select niches in the large corporate market, had double-digit loan and deposit growth. Revenue grew $191 million, or 8 percent, from second quarter 2007. Businesses that generated strong revenue growth included lending businesses, deposit services, foreign exchange, institutional brokerage, financial products and insurance. Commercial real estate brokerage fees and capital markets revenue declined from an exceptionally high level a year ago. During these uncertain economic times, Wells Fargo is viewed as a consistent and reliable source for financial advice and products by our commercial customers. Our long-term focus on doing the right thing for our customers has
resulted in our ability to earn more of our customers’ business and add new customer relationships. This success was reflected in second quarter’s record cross-sell of 6.3 products per wholesale relationship and 7.8 products per middle market commercial banking relationship and we continued to grow fee income during the quarter. Wholesale Banking’s average loans increased 32 percent from second quarter 2007, as we gained more loan business from our customers, added more loan production offices in select cities around the country, and added new customers directly or through opportunistic, attractively priced acquisitions such as CIT Construction and a portfolio purchase by Foothill. Loan growth was broad based across many of our commercial businesses including double-digit growth in asset-based lending, middle market lending, international, commercial real estate and specialized financial services - which includes our capital markets activities and relationships with Fortune 500 companies. We saw an increase in loan spreads for new business across many of our commercial lending products. Within Wholesale Banking, the Commercial Real Estate Group had $29.5 billion of commercial real estate loans outstanding at quarter end, up 9 percent from first quarter. The disruption in the capital markets makes Wells Fargo a reliable source of funding for our existing and high quality new customers. This growth was diversified by property type, with the largest concentration in office buildings, 28 percent of new loans. This portfolio is geographically diverse with commercial real estate lending originated through offices nationwide. The commercial real estate loans we added to our portfolio were at better spreads, with stronger covenants and largely with customers we have done business with over many years and many cycles. Wholesale’s average core deposits were up $8 billion, or 14 percent, from second quarter 2007. The growth came primarily from our relationships with large corporate, middle market, and correspondent banking customers. Our Asset-Based Lending business continued to grow during these challenging economic times. We have been in this business almost four decades and we’re one of the nation’s largest asset-based lenders. This is a business that’s been successful through a variety of business cycles. Loans grew $5.4 billion, up 34 percent, and revenue grew 21 percent from a year ago. During the quarter Wells Fargo Foothill acquired 80 loans with approximately $1 billion outstanding from a national competitor. Foothill had an existing lending relationship with 59 of these customers, a great example of how we’ve been able to grow quality assets with both new and existing customers in this environment. Our International Group also had double-digit revenue growth. Foreign Exchange revenue was up 28 percent from second quarter 2007 and quarterly sales were up 32 percent from a year ago. This increase in foreign exchange sales is due to the fact that many of our middle-market commercial customers require currency transactions as a result of their increased exports and increased hedging needs as well as the increased demand by our customers for international investments as an alternative asset class. Foreign Exchange revenue growth through our International Teller sites located in our banking stores increased 44 percent from a year ago. Despite a weak dollar, Wells Fargo customers
continue to travel overseas, with banknote revenue up 53 percent from second quarter 2007. The Insurance Services group had another quarter of double-digit revenue growth. Our consumer and small business insurance group grew revenue by 12 percent from second quarter 2007 driven by sales of identity theft protection, debt cancellation and crop insurance products. Crop insurance continued to benefit from high commodity prices. Our analysis of the recent Midwest flooding currently indicates that the damage was not as widespread as it first appeared nor was it concentrated in counties and states where we had significant exposure. Therefore, no special provisioning was required in the second quarter; however, we will continue to monitor crop conditions throughout the growing season. It is important to remember that the vast majority of our risk is borne by third parties including re-insurers and government agencies. Our middle-market commercial insurance company achieved 27 percent revenue growth, adding thirteen new insurance brokerage businesses across the country over the past year. Wells Fargo Financial Products Group helps our customers manage their exposure to commodity prices, equities, credit, interest rates and currencies and creates customized commodity, interest rates, equity, credit and currency solutions for customers who want to add tailored investment alternatives to their portfolio. The continued volatility in interest rates and credit and equity markets in the second quarter created opportunities for our Financial Products Group to expand customer sales and earn higher spreads, more than doubling revenue from a year ago. While equity capital gains declined from a year ago, equity and commodity trading areas and customer derivative sales were all very strong this quarter. Our institutional brokerage company produced record sales of fixed income products. Wholesale Banking continues to invest in better distribution to meet our customers’ needs. We’re the only provider of browser-based mobile banking for commercial customers and we’ve added wire transfer services and image positive pay functionality to the CEO MobileSM service. CEO Mobile is a streamlined, mobile-optimized version of the Commercial Electronic Office® portal. We added this functionality because our customers told us they wanted to handle wires and check exceptions without being at their desks. During the past year Wholesale Banking added 26 offices across 16 states. Acquisitions over the past year included CIT Construction, ABD Insurance as part of the Greater Bay Bancorp transaction, insurance premium finance company Flatiron Credit Company and Transcap Associates, Inc, a factoring and trade finance business. These acquisitions expanded our capabilities and give us further opportunities to better serve our customers. Community Banking The Community Banking Group – including regional banking, wealth management, home equity, mortgage banking and retail internet – had double-digit revenue growth, up 22 percent from second quarter 2007, driven by 17 percent earning asset growth and 16 percent fee income growth in retail banking and mortgage. Net income declined $268 million from a year ago, reflecting a pre-tax credit reserve build of $1.1 billion.
Core product sales, what we call solutions, were 5.7 million in the second quarter, up 18 percent from second quarter 2007. California continued to be one of our fastest growing states with a 21 percent increase in core product sales from a year ago. Sales growth continued to be driven by improved customer service, higher sales force productivity and new product development. We continued to add more sales people, with platform banker FTE up 8 percent from a year ago, while sales grew at more than twice that rate. In the second quarter core sales per platform banker FTE – a key measure of our productivity – were 5.24 per day up from 4.78 per day a year ago, a 10 percent increase. Once again, Regional Banking achieved record cross-sell. Our average retail bank household had 5.64 products with Wells Fargo, up from 5.4 products a year ago and up from around 3 products 10 years ago. Twenty-three percent of our retail bank households had over 8 products with us, our long-term goal, nearly double the amount of households who bought 8 products five years ago. In our top region, 32 percent of our retail bank households had over 8 products with us. We have had strong growth and better customer penetration across many product lines including Wells Fargo Packages®, which include a checking account and at least three other products such as a debit card, credit card or savings account. Package sales were up 33 percent from second quarter 2007, purchased by 72 percent of new checking account customers, and up from 66 percent a year ago. Total card fees, including credit and debit cards, were up 14 percent from second quarter 2007 as we earned more of our customers’ business. Thirty-eight percent of our retail bank consumer households had a Wells Fargo credit card, up from 36 percent a year ago and up from 27 percent 5 years ago. Purchase volume on consumer credit cards was up 13 percent from second quarter 2007. Ninety-one percent of our consumer checking account customers had a debit card, up from 86 percent 5 years ago. Debit card purchase volume growth slowed in the second quarter, up 3 percent. Consumer checking accounts were up a net 5.5 percent, the highest growth in over 3 years, and small business checking accounts up a net 2.4 percent from last year. California continued to be one of our fastest growing markets, with consumer checking accounts up a net 6.7 percent. This was the twelfth consecutive quarter where net new accounts in California exceeded the average across our 23 community banking states. Texas also had strong growth with consumer checking accounts up a net 6.0 percent. While deposit pricing in many of our markets remained competitive, we continued to be disciplined in deposit pricing with the average rate on our interest-bearing core deposits declining 86 basis points from first quarter. Our short-term CD rates in particular have been less aggressive than many of our peers. On the other hand, the steepened yield curve has allowed us to attract longer-term deposits from retail customers at attractive rates. Our highest yielding CDs are at maturities greater than 12 months for the first time in eight quarters.
Average retail core deposits, which exclude wholesale banking and mortgage escrow deposits, were up 5 percent from a year ago and 4 percent annualized on a linked-quarter basis. We continued to increase the number of small business customers we serve and to better serve our existing customers with store-based business solutions up 18 percent from second quarter 2007. Sales of Wells Fargo Business Services® packages, which include a business checking account and at least three other business products such as a business debit card, credit card, or business loan or line of credit, were up 31 percent from second quarter 2007 and were purchased by 48 percent of new business checking account customers. Loans to small businesses, loans primarily less than $100,000 on our business direct platform, grew 10 percent from second quarter 2007. Business banking household cross-sell was 3.6 products, up from 3.5 a year ago on a comparable basis. Our Wealth Management Group achieved record results with revenue up 13 percent and net income up 29 percent from second quarter 2007. These strong results were driven by double-digit loan and deposit growth. Private Banking, servicing our highest net worth customers, was the Group’s fastest growing segment. Private banking revenue increased over 50 percent from a year ago and net income grew 85 percent driven by very strong deposit and loan growth. This shows we’re seen as a premier provider of financial services, enabling us to gain more of our customers business and attract new high net worth customers. WellsTrade®, our on-line brokerage service, had double-digit revenue and net income growth and continued to attract and retain customers with account levels up 14 percent. WellsTrade assets under management grew 8 percent from second quarter 2007, strong growth considering the S&P 500 dropped 15 percent during the first half of 2008. Internet sales are an important channel for overall sales growth with core consumer product sales up 16 percent from second quarter 2007. We had 11 million active online consumers, up 14 percent from a year age. Sixty-seven percent of all Wells Fargo consumer checking accounts are online. We now have over 1 million active online small business customers, up 20 percent from a year ago. Core small business product sales were up 44 percent from a year ago, driven by strong growth in deposit products. We opened 19 banking stores during the second quarter and we’re now serving our retail customers through our 3,330 stores in 23 states. We welcomed the customers and team members from United Bancorporation of Wyoming, a banking acquisition we completed on July 1. We are now the largest bank in Wyoming. Through acquisitions and internal growth we added a total of 350,000 net new retail bank households from a year ago, with 219,000 added since December 31, 2007. We also added 26 webATM ® machines, bringing our network total to 6,950, and converted 24 to Envelope-Free SM webATM machines. Mortgage Banking The housing market slowdown and home price depreciation continued to significantly affect many mortgage companies in the second quarter - but our mortgage business continued to benefit from its premier reputation and leadership position in the industry resulting in a high level of originations of high quality products at improved margins.
Mortgage banking noninterest income was $1.2 billion in the second quarter, up $566 million from first quarter and up $508 million from a year ago. While total retail mortgage originations were basically flat from a year ago at $31 billion, our origination of conventional conforming and government guaranteed mortgages increased 40 percent from a year ago and represented 95 percent of our total Home Mortgage originations, up from 60 percent of originations a year ago. Total originations including both retail and third party channels of $63 billion were down 22 percent as we intentionally pulled back our third party mortgage and home equity originations over the past year. The fact that originations have remained relatively strong from a year ago, while we’ve continued to tighten our pricing and underwriting standards, demonstrates the opportunity we’re realizing in the market place to add high quality business and top producers during a period when many mortgage companies have decreased their capacity or exited the business entirely. Mortgage applications were down from last quarter and a year ago, but still a very high $100 billion. 44 percent of these applications were for refinancing, down from 62 percent in the first quarter. The volume in purchase applications increased to $56 billion in the second quarter, up from $50 billion in first quarter but down from $68 billion in second quarter of 2007. We ended second quarter with an unclosed pipeline of $47 billion. The $566 million linked-quarter increase in mortgage non-interest income reflected a $609 million increase in net gains on mortgage loan originations/sales activities and a $52 million decline in servicing income. The $609 million net gain on originations/sales activities reflected wider margins, lower levels of additions to the repurchase reserve, lower write-downs of repurchased mortgage loans, an increase in the value of commercial mortgages held for sale, and an increase in the servicing value of the mortgage warehouse/pipeline. These improvements were largely driven by higher interest rates and more stable liquidity in the mortgage market. The decline in servicing income reflected a loss of $65 million that consisted of a just over $4.1 billion increase in the fair value of MSRs offset by a corresponding $4.2 billion loss in the value of the economic hedge. The increase in the fair value of MSRs and the decline in value of hedges was influenced by a 50 bps increase in mortgage market rates and the resulting deceleration in prepayment speeds and the movement of a large portion of the servicing portfolio to being out-of-the money for refinancing. This was partially reflected in the drop in refinancing activity in our mortgage applications this quarter. At the end of the quarter, the ratio of capitalized MSRs to total mortgages loans serviced for others was 1.37 percent compared with 1.42 percent a year ago and 1.08 percent at the end of first quarter. Some of the increase in this ratio is mix related, since our servicing portfolio now has a lower percentage of ARMs, more FHA mortgages and less jumbo mortgages. Our owned servicing portfolio grew 7 percent from a year ago. That’s somewhat slower growth than prior periods as we continued to reduce third party originations and purchased substantially less subprime and Alt-A servicing rights. Over 90 percent of the mortgage loans we service are for prime customers. Reflecting the continued stress on the housing market, the foreclosure rate continued to increase, to 1.06 percent at quarter end, which we believe was still better than the industry average. We continued to work closely with our customers to keep them in their homes.
We have invested significant resources into proactively contacting and working with borrowers on case-by-case solutions that align with their individual needs and that respect the important role investors play in the process. The homeowner’s willingness to work with us is crucial to our success in keeping people in their homes. We conducted a study of servicing customers who were up to 60-or-more-days past due on their loans and not in foreclosure or bankruptcy and found that of every 10 of these borrowers: 7 worked with Wells Fargo and reached a solution, 2 declined our help, and the remainder were either unreachable or a solution could not be found.
Credit Quality Overall credit quality deteriorated in the second quarter. Net charge-offs in the second quarter were $1.5 billion, or 1.55 percent of average loans annualized. As previously disclosed, beginning in the second quarter we changed our home equity charge-off policy from 120 days to no more than 180 days, consistent with FFIEC guidelines. The impact of this change deferred approximately $265 million in home equity charge-offs from second quarter, although the change in policy did not reduce second quarter provision expense which included the deferred charge-offs. To illustrate the performance of the different parts of the $399 billion loan portfolio let me review the segments in detail. The deterioration in the overall loan portfolio largely occurred in the second lien home equity portfolio, which represented about 19 percent of the total $399 billion loans outstanding. At quarter-end, we had approximately $84 billion in home equity loans managed by our National Home Equity Group, of which about $12 billion were in the first lien position. Second quarter losses in the total home equity portfolio were $342 million which, as indicated, was approximately $265 million lower than it would have been because of the change we made in our home equity charge off policy. Of the $342 million in loss, $97 million was in the liquidating home equity portfolio, loans primarily sourced through third parties. The remaining loss of $245 million was in the core home equity portfolio about 98 percent of which was sourced directly through our retail system. Loans originated through our retail system have performed significantly better than the loans originated through third parties. In terms of financial risk, the principal distinction between the liquidating and the core portfolios is that, due to the continued decline in home prices, 71 percent of the smaller liquidating portfolio had a combined-loan-to-value of greater than 90 percent at quarter end based predominately on estimated home values from March 2008 automated valuation models and May 2008 home price indices whereas 38 percent of the core portfolio had updated combined-loan-to-values above 90 percent. Until home prices stabilize we expect higher losses in the home equity portfolio. It is important to remember that most of our home equity borrowers are current with their loans. Only about 2 percent of the accounts are 2 or more payments past due at quarter-end. We are working diligently, but aggressively, with our customers to avoid problems and mitigate loss. The change in home equity charge-off policy this quarter was made to provide additional time to work with those customers who may be experiencing financial stress but have the potential to resolve their difficulty. During the second quarter that change in policy benefited nearly 900 customers with approximately $90 million in
balances. By working with these customers and finding solutions to their financial difficulties, we believe we will end up keeping more customers in their homes and mitigating loss. In addition to exiting most indirect home equity origination channels last year, we have been managing accounts to reduce risk while at the same time remaining open for business for creditworthy retail customers. As a result of our active account management and tightening of credit for new originations, total home equity outstandings were flat this quarter; the liquidating home equity portfolio was down about $800 million, or 7 percent, from year-end. The $75 billion first mortgage portfolio experienced slight deterioration but losses remained relatively low. Second quarter annualized charge-offs were 0.53 percent, with $97 million in total losses, up slightly from $75 million in the first quarter. The relatively low loss rate in our total first mortgage portfolio largely reflected the fact that we never offered option ARMs or negative amortizing products as well as the conservative underwriting in the mortgage products we have traditionally held in portfolio. Our first mortgage portfolio consisted of $25 billion of real estate secured loans held at Wells Fargo Financial, $12 billion of home equity loans in the first mortgage position (mostly retail originated), and $38 billion of mostly prime customer, relationship-based first mortgages held at Wells Fargo Home Mortgage, regional banking, and our Wealth Management Group. As we continued to tighten our underwriting standards in the second quarter, the growth in this portfolio slowed, up only 2 percent from the first quarter. We continued to adjust our maximum LTVs based on local market conditions, enhanced our income documentation standards and further adjusted our risk-based pricing as we continued to strengthen our new origination requirements and loan quality. Within the first mortgage portfolio, Wells Fargo Financial had a total of $25 billion of debt consolidation loans originated through Financial’s U.S. retail stores at quarter end. Because of the decline in real estate values and active account management, debt consolidation loan growth has continued to slow with the portfolio up only two percent from first quarter compared with a 15 percent increase from second quarter 2007. Ninety-six percent of the $25 billion debt consolidation portfolio was in a first lien position. Wells Fargo Financial team members who originate these loans underwrite to the customer first and the collateral second. This portfolio does not include interest-only, stated income, option ARM or negative amortizing loans. New real estate customers primarily come from outbound calling to customers with a Wells Fargo relationship where we can clearly demonstrate a tangible benefit for our customers by improving their financial situations through debt consolidation. We conservatively underwrite these loans with full documentation and require income verification. Sixty-two percent of this portfolio had a FICO score above 620. The average LTV was 78 percent. The average loan size was $132,000. Approximately 53 percent of the portfolio was fixed rate loans. The remaining loans were ‘3/27’ adjustable rate mortgages with a fixed payment for the first three years of the loan. These loans were underwritten to the fully indexed rate and do not contain teaser rates. Based on the current interest rate environment, starting in the second quarter most of our adjustable-rate mortgages that reset throughout the rest of 2008 will reset at the same rate or below their current rate, which will actually reduce customer monthly payments. Like other real estate secured portfolios, delinquencies and charge-offs have increased due to the weak housing market. Second quarter losses were $48 million or a 0.76 percent annualized loss rate. The credit performance for this portfolio has continued
to perform significantly better than published industry rates for non-prime mortgage portfolios. The size of the Wells Fargo Financial’s $27 billion auto portfolio declined 14 percent annualized from last quarter and 12 percent from last year reflecting a tightening of account acquisition strategies to reduce loan volume in higher risk tiers and tiers with unacceptable returns. Credit losses declined $47 million from first quarter, in part seasonal, and increased only $23 million over second quarter 2007. Losses in this portfolio were $242 million or about 16 percent of Wells Fargo’s quarterly losses. Total delinquencies increased 16 percent and 90 days past due and still accruing increased 22 percent on a linked-quarter basis due to the weakness in the overall economy and seasoning of the portfolio. Delinquencies were flat and 90 days past due were up 11 percent from second quarter 2007. Approximately 50 percent of the portfolio was for cars/vans with the other 50 percent for trucks/SUVs and just under one-third was for the purchase of a new vehicles. Almost 75 percent of the auto portfolio had a FICO above 620. We are pleased with the improved performance in the auto portfolio under a new management team, new collections and underwriting systems installed a year ago, and tighter underwriting and pricing. We announced this month that we are exiting the auto leasing business. About 10 percent of the auto portfolio and about 6 percent of year-todate originations were from the lease business. Our $13 billion Community Banking credit card portfolio is a relationship product primarily offered to our Wells Fargo customers within our banking states. Credit losses have increased from historically low levels as a result of higher bankruptcy rates, seasoning of the portfolio, and continuing economic pressure on consumers, but they remained within our profit model expectations and historical industry norms. We continued to tighten our underwriting standards, which reduced new account growth, but increased the quality of our new customers. We proactively manage our existing accounts including placing accounts in non expansion queues, lowering and in some cases closing credit lines, and for a small percentage of accounts repricing them consistent with the customer’s current risk profile. Since the vast majority of our bank card customers have other relationships with Wells Fargo, we monitor customer behavior using both internal and external measurements. Wells Fargo Financial has a $7.4 billion credit card portfolio, flat from first quarter. These cards are primarily sold to Wells Fargo Financial customers and through retailers and manufacturers with large dealer networks, not through mass mailing campaigns. Financial’s card portfolio consisted of three different portfolios: $2.7 billion in standard credit cards sold to Wells Fargo customers; $2.8 billion in our retailer portfolio which is private label cards, similar to sales finance; and $1.4 billion in cash on demand which looks like a credit card, but can only be used at an ATM, not at a merchant. Losses in Wells Fargo Financial’s card portfolio increased $18 million from the first quarter, however we’ve made significant investments in default management, continue to tighten underwriting standards, and appropriately price for risk. The net interest spread on total credit card loans is positive even with the higher loss rate, so growth in this portfolio added to earnings even as dollar losses increased. Within our $168 billion commercial and commercial real estate loan portfolio, we have an $11.8 billion business direct portfolio consisting primarily of unsecured small loans and lines of credit to small business owners nationwide with an average balance of less than
$20,000. Business Direct’s losses, which were up about $30 million linked quarter, showed signs of stabilizing near the end of the second quarter as a result of almost 18 months of tightened underwriting and account management activities targeted at reducing exposure to the highest risk accounts. However, losses in this portfolio, as in all of our loan portfolios, will obviously be impacted by how the overall economy performs. Our remaining commercial and commercial real estate portfolios continued to produce good credit performance. While losses have increased from historical lows, they were still below historical averages. Losses in commercial lending are lumpy by nature, but we continued to benefit from our focus on deep and long-term relationships. At the end of second quarter, we had approximately $6 billion in residential 1-4 family construction and land development loans, which was only 1.5 percent of total loans. While losses in this portfolio increased due to the decline in the residential real estate market, losses remained acceptable because of the quality and experience of our people and our customers - and we continue to maintain a high level of discipline in our credit underwriting standards across our commercial and residential real estate businesses. Total nonperforming assets were $5.2 billion, or 1.31 percent, of loans in the second quarter compared with $4.5 billion, or 1.16 percent, of loans in the first quarter. The majority of the increase in nonperforming assets was concentrated in portfolios affected by residential real estate. The nonperforming loan increase was affected by our strategies to reduce losses at Home Mortgage, Home Equity and Wells Fargo Financial. We work hard at keeping our customers in their homes, and have increased the number of loan modifications. Accounting rules require us to classify these restructured loans as nonperforming until the customer demonstrates the ability to make payments under the revised terms. We require six monthly payments before returning the loan to accrual status. The Home Equity charge off policy change also contributed to the increase in nonperforming loans as fewer loans were charged off this quarter. Due to market conditions, we continued to hold more foreclosed properties than we have historically. Loans 90 days or more past due and still accruing, excluding insured and guaranteed GNMA and similar loan balances, increased by $150 million from the first quarter. The increase this quarter in Real Estate Construction was due to matured loans to a few home builders with whom we’re working on restructuring. With the additional $1.5 billion of loan loss provision above charge-offs this quarter, our allowance for credit losses was $7.5 billion, nearly double the $4 billion allowance a year ago. At quarter-end our allowance as a percent of total loans was 1.88 percent. We believe this allowance was adequate for losses inherent in the loan portfolio at June 30, 2008. Let me conclude with a comment on our balance sheet management and capital. Capital and Balance Sheet Management Over the past year we added approximately $20 billion in our available for sale securities portfolio. The $91 billion portfolio, at quarter end, was largely comprised of agency MBS, private CMOs (mostly AAA rated), and a smaller amount of hybrid preferreds and other securities. The securities that have been purchased over the last year were purchased, and are being held, for their attractive long-term yields.
Stockholders’ equity was $48 billion at June 30, up $757 million from a year ago even though we provided $3.4 billion in excess of net charge-offs over the last three quarters. Our leverage, tier I capital, and total capital ratios were 7.35 percent, 8.24 percent, and 11.23 percent respectively, all up from year-end and first quarter levels even with our very strong asset growth. During the second quarter we issued a $2.5 billion tax deductible hybrid capital security. The security had the lowest coupon for a Fed Tier I eligible capital security issued in 2008 and was nearly four times oversubscribed, reflecting continued strong demand for Wells Fargo securities in the capital markets. Unlike many large bank peers, we have additional capacity to issue non-dilutive capital. Summary In summary, second quarter results demonstrate the diversity and strength of Wells Fargo’s business model and our ability to continue to grow and invest in our franchise. While we continued to tighten our underwriting standards and price for risk, the asset and customer growth we achieved this quarter demonstrates that Wells Fargo continues to be viewed by our existing and new customers as a strong and reliable provider of financial services. While the credit crisis has resulted in higher charge offs, the impact of these charge offs have largely been offset by the benefit of higher asset growth at wider spreads. Thank you for listening. If you have any questions, please call Bob Strickland, Director of Investor Relations, at 415-396-0523.