Wells Clashed with Its Examiners Over Size of Provision, Sources Say

SAN FRANCISCO -- Wells Fargo & Co.'s stunning decision to add $350 million to its loan-loss reserves this quarter was forced by regulators over the company's vehement objections, sources close to Wells said Wednesday.

The special provision, as well as a 28% boost in nonperforming assets, followed a sharp clash between Wells and federal examiners over the quality of its commercial loans, especially credits financing highly leveraged transactions, the sources said.

The action shocked investors and cast a pall over Wells, which has been viewed as one of the banking industry's premiere credit underwriters. The company's stock fell $3.50 on Wednesday, closing at $70.50. Wells' shares have fallen $17.375, or 20%, in the past three days.

Following the completion of an annual review of loans that Wells participates in with other banks, its examiners insisted on additions to reserves that company officials considered excessive, the sources said.

Wells also objected to classifying loans that are up to date on interest payments as nonperforming, they said. The company's announcement Tuesday noted that $400 million of the $450 million in new nonperforming loans are current on payments.

Regulators Take Long View

A spokeswoman for the Office of the Comptroller of the Currency, the company's primary regulator, declined to comment on the examination. Wells has declined to characterize the review in any way.

Examiners were said to have based their decisions on borrowers' prospects two or more years in the future, an approach Wells protested. The company also disagreed with examiner demands that loans still paying interest be written off entirely, rather than in part.

Wells argued that it had already identified problem credits and had taken sufficient steps to protect against credit losses, the sources said.

Of the $450 million increase in nonperforming assets, some $400 million are related to business loans. Half of those are HLT loans, or credits financing highly leveraged transactions.

Dearth of Information Cited

The company added to Wall Street's anxiety by refusing to provide outsiders with additional information on loan quality or with reassurances that there will be no further big writedowns. A nationwide conference call with bank analysts Tuesday was "totally uninformative," one participant said.

Speaking to reporters, Wells Fargo chief financial officer Rodney L. Jacobs said Tuesday that the writedowns and added reserves "prudently reflect the current status of the loan portfolio." He said commercial real estate loans were not "a material contributor" to the company's actions. He declined to forecast future credit quality trends.

Earlier Exams Were a Breeze

Since Wells' announcement, analysts have speculated that examiners had come down hard on the company's leveraged loan portfolio.

Wells' relations with examiners have generally been excellent. The company passed an examination of its real estate portfolio with flying colors late last year, and no major reserves or writedowns were required.

But the real estate exam was supervised by Wells' resident examiner from the Comptroller's office. By contrast, an outside, interagency team carried out the shared credit review, a spokeswoman from the Comptroller's office said.

Outsiders Say Hand Was Forced

In a statement, Wells said only that the moves reflect its "own ongoing examination process and the recent Shared National Credit Regulatory Examination."

Analysts who took part in Wells' conference call said, that while the company answered no questions about the examination, they were convinced regulators had forced the bank's hand.

"I think they were pushed," said Thomas H. Hanley, an analyst with Salomon Brothers Inc.

Conflicts between Wells and its examiners raise an obvious question: Was the interagency team overzealous or was Wells less than prudent in managing highly leveraged and other commercial loans?

Analysts said it was too early to judge which side was right.

"History shows that the Wells people are capable lenders. But they are heavily concentrated in high-risk lending areas," said Donald K. Crowley, an analyst with Keefe, Bruyette & Woods Inc. "It remains to be seen whether these downgrades are warranted."

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