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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Wells Fargo Bonds Date: 4/29/2009 1:42 PM
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I am looking at Wells Fargo Bonds for my fixed income portfolio. The
following bonds are offered at Zions Direct.


Issue CUSIP Coupon Maturity Yield to Mat Moody/S&P
Wells Fargo & Co New Listed 949746CL3 5.125 9/1/12 5.2 A2/ AA-
Wells Fargo & Co New Listed 949746NW7 5.25 10/23/12 5.091 A1/ AA
Wells Fargo & Co New Listed 949746NW7 5.25 10/23/12 5.153 A1/ AA
Wells Fargo & Co New Listed 949746NW7 5.25 10/23/12 5.207 A1/ AA
Wells Fargo & Co New Listed 949746NW7 5.25 10/23/12 5.235 A1/ AA
Wells Fargo & Co New Listed 949746NY3 4.375 1/31/13 5.395 A1/ AA
Wells Fargo & Co New Listed 949746NY3 4.375 1/31/13 5.355 A1/ AA
Wells Fargo & Co New Listed 949746NY3 4.375 1/31/13 5.285 A1/ AA
Wells Fargo & Co New Listed 949746NY3 4.375 1/31/13 5.337 A1/ AA
Wells Fargo & Co Listed 949746CR0 5 11/15/14 6.87 A2/ AA-
Wells Fargo & Co Listed 949746CR0 5 11/15/14 6.812 A2/ AA-
Wells Fargo & Co Listed 949746CR0 5 11/15/14 6.668 A2/ AA-
Wells Fargo Bk Natl Assn 94980VAA6 4.75 2/9/15 7.717 Aa3/ AA
Wells Fargo Bk Natl Assn 94980VAA6 4.75 2/9/15 7.719 Aa3/ AA
Wells Fargo Bk Natl Assn 94980VAA6 4.75 2/9/15 7.689 Aa3/ AA
Wells Fargo & Co New Listed 949746JE2 5.125 9/15/16 7.741 A2/ AA-
Wells Fargo & Co New Listed 949746JE2 5.125 9/15/16 6.915 A2/ AA-
Wells Fargo & Co New Listed 949746NX5 5.625 12/11/17 6.483 A1/ AA
Wells Fargo & Co New Listed 949746NX5 5.625 12/11/17 6.309 A1/ AA



My sole concern is whether Wells Fargo will default on these bonds.
I don't care about stock price movements, only the bonds.
I am concerned that WFC will cut the dividend, as so many other banks have.

Why are some of these bond ratings AA, and others AA-?
Since the bond raters are no longer to be trusted, do you fellow Fools
believe that WFC's AA rating is merited?

Why does there appear to be a peak in the yield curve around 2014?

From WFC's latest 8-K:



UNITED STATES

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 8-K
CURRENT REPORT, 4/22/09

...<big snip>...

Record Wells Fargo net income of $3.05 billion...

Net interest margin of 4.16 percent, highest among large bank peers...

Strengthened capital position

Tangible common equity (TCE) of $41.1 billion at quarter end, an increase of $4.5 billion to TCE during the quarter ...

TCE ratio of 3.28 percent, up from 2.86 percent at December 31, 2008 ...

TCE of 3.83 percent of estimated risk-weighted assets ...

Tier 1 capital of $88.9 billion, Tier 1 capital ratio of 8.28 percent, up from 7.84 percent at December 31, 2008 ...

The $40 billion of SOP 03-3 nonaccretable difference (credit write-downs) from the Wachovia acquisition is the equivalent of approximately 190 basis points of additional TCE...


Balance sheet well-positioned for economic environment.

Allowance for credit losses of $22.8 billion; at March 31, 2009, allowance adequate to cover expected consumer losses for at least the next 12 months and to provide approximately 24 months of anticipated commercial loss coverage.

Allowance for credit losses covers 2.7 percent of total loans, 2.9 percent of non-SOP 03-3 loans, and 2.2 times nonperforming loans.

Reduced risk in balance sheet and future earnings stream through write-downs already taken at December 31, 2008, on Wachovia's higher-risk loan and securities portfolios; combined nonperforming loans were 1.25 percent of total loans at March 31, 2009, lowest ratio among large bank peers.

Securities portfolio written down by $516 million of other-than-temporary impairment.

Reduced the ratio of capitalized mortgage servicing rights (MSRs) to owned servicing to 74 basis points; lowest ratio since 2003.

Higher-risk loan portfolios reduced by $4.5 billion (indirect home equity, Pick-a-Pay and indirect auto at legacy Wells Fargo) and Trading Assets reduced by $8.4 billion...

Wells Fargo & Company (NYSE:WFC) reported diluted earnings per common share of $0.56 for first quarter 2009. Wells Fargo net income was a record $3.05 billion...



FIVE QUARTER NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,

(in millions) 2009 2008 6/30/05 2008 2008

Commercial and commercial real estate:
Commercial 191,711 202,469 104,281 99,188 92,589

Other real estate mortgage 104,934 103,108 44,741 41,753 38,415

Real estate construction 33,912 34,676 19,681 19,528 18,885

Lease financing 14,792 15,829 7,271 7,160 6,885

Total commercial and commercial real estate 345,349 356,082 175,974 167,629 156,774



Consumer:

Real estate 1-4 family first mortgage 242,947 247,894 77,870 74,829 73,321
Real estate 1-4 family junior lien mortgage 109,748 110,164 75,617 75,261 74,840
Credit card 22,815 23,555 20,358 19,429 18,677
Other revolving credit and installment 91,252 93,253 54,327 54,575 55,505
Total consumer 466,762 474,866 228,172 224,094 222,343

Foreign 31,468 33,882 6,903 7,514 7,216

Total loans (net of unearned income) 843,579 864,830 411,049 399,237 386,333

Total nonaccrual loans and other 12,612 9,009 6,291 5,227 4,495

nonperforming assets

As a percentage of total loans 1.50% 1.04% 1.53% 1.31% 1.16%
[end quote]

What concerns me is that WFC's Allowance for loan losses as a

percentage of Total loans is only 2.64%. I could see this going higher, especially in commercial real estate and second-lien loans.

So, let's do a stress test. What if 15% of WFC's commercial and second-lien loans defaulted (10 times the current expected level)? That would be a loss of $68 billion.

Wells Fargo net quarterly income was $3.05 billion.

WFC's Tier One capital is about $90 billion, Tier 1 capital ratio of 8.28 percent, which would be considered well-capitalized by Federal standards.

Tangible common equity (TCE) is $41.1 billion, about 3% of of estimated risk-weighted assets.

Looking at earnings:


Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
INTEREST EXPENSE 2009 2008 2008 2008 2008

Deposits 999 845 1,019 1,063 1,594

Short-term borrowings 123 204 492 357 425

Long-term debt 1,779 955 882 849 1,070

Other interest expense 36 -- -- -- --

Total interest expense 2,937 2,004 2,393 2,269 3,089

NET INTEREST INCOME 11,376 6,724 6,381 6,278 5,760

Provision for credit losses 4,558 8,444 2,495 3,012 2,028

Net interest income after provision for credit losses 6,818 -1,720 3,886 3,266 3,732
WELLS FARGO NET INCOME (LOSS) 3,045 -2,734 1,637 1,753 1,999


It appears that WFC is covering both short and long term interest and
non-interest expenses from current earnings and showing a profit.

I conclude that WFC appears to deserve its AA rating, at least for the next couple of years. If I buy WFC bonds that mature in 2012, they should be safe.

I hope that others will help refine this thought process.

Wendy (cross-posted to Wells Fargo board)
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