Wells Fargo & Company Annual Report 2013
The right people. The right markets. The right model.
Serving customers in the real economy.
3 To Our Owners
29 2013 Financial Report
267 Stock Performance
10 Relationships, Not Transactions
22 Educating Communities
in New Ways
27 Board of Directors, Senior Leaders
• Financial Review
• Controls and Procedures
• Financial Statements
• Report of Independent Registered
Public Accounting Firm
Serving customers
in the real economy.
What is the real economy? It’s the first-time homebuyer looking
to buy a home. It’s the bookkeeper who needs to make a deposit
quickly. It’s the veterinarian who sees her business growing. And
it’s large companies, too — like a family business that is one of the
largest growers and suppliers of produce in the U.S.
Wells Fargo’s Mindi Weber, who has a background in agriculture,
works side by side with customers like Fowler Packing Co.
every day on products and services, from its line of credit to
treasury management. Co-owner Dennis Parnagian — whose father
founded Fowler Packing in 1950 — said, “Wells Fargo ‘gets it.’
They understand our world and our specific needs and challenges.
Wells Fargo has shown me it is committed to agriculture and
has the personnel and capabilities to do the job right.” To Weber,
and all Wells Fargo team members, that means developing deep
relationships, understanding and serving customers’ needs,
and helping them succeed financially.
Wells Fargo’s Mindi Weber with the Parnagian brothers, Randy, Philip, Dennis, and Kenny | Fresno, California
1
John G. Stumpf
Chairman, President and
Chief Executive Officer,
Wells Fargo & Company
2
To Our Owners,
2013 was another great year
thanks to the dedication of our
more than 264,000 team members
working together toward our
common vision: To satisfy all our
customers’ financial needs and
help them succeed financially.
Our focus on serving customers
drove outstanding results.
In 2013, Wells Fargo generated
record earnings for the fifth
consecutive year — in fact, we
were the most profitable U.S.
bank — and ranked as the world’s
most valuable bank by market
capitalization.
Accomplishments like these are no accident. They are
a result of:
• Having the right people — team members who work
together to fulfill our customers’ financial needs.
• Doing business in the right markets — both domestically
and internationally.
• Operating the right business model — businesses
diversified by opportunity, size, and geography that
can perform well across a variety of economic and
interest rate environments.
We also understand and embrace the critical role we
play in our customers’ lives and communities. Although
the U.S. economy is rebounding, it has been a slow and
uneven recovery with many people continuing to struggle
to find jobs, start businesses, or save for the future.
We believe banking — and Wells Fargo — is at its best
when supporting the “real economy” by creating new jobs,
helping businesses grow, and promoting the financial
well-being of individuals. For us, this means keeping
deposits safe, lending responsibly and fairly, helping
students pay for college and customers plan for their
financial futures, supplying needed capital to businesses
of all sizes, and investing in communities. It also
means instilling confidence in our customers as their
financial partner — from providing checking accounts
and automobile loans to treasury management and
investment banking services.
As we have grown over the years, we have never
lost our focus on the basics of banking — providing
our customers products and services when, where, and
how they need them — and we’ve never lost touch with
our roots as a “Main Street” financial provider, even as
we’ve developed a global reach to support our business
customers. These roots and our vision provide the
foundation for Wells Fargo’s continued success.
Financial results
In 2013, we enjoyed another strong year. Our net income
for the year was $21.9 billion, up 16 percent from 2012.
Diluted earnings per common share rose 16 percent to
$3.89. Our 2013 revenue of $83.8 billion was balanced
between net interest income and noninterest income,
reflecting the strength of our diversified business model.
Each primary business segment grew net income year
over year: Community Banking by 21 percent, Wholesale
Banking by 5 percent, and Wealth, Brokerage and
Retirement by 29 percent.
We increased loans and deposits, a good sign
for the overall economy. Total loans finished 2013 at
$825.8 billion, up 3 percent from 2012. Loan growth
occurred across multiple portfolios, including commercial
loans, mortgages, credit cards, and automobile lending.
Total deposits reached a record $1.1 trillion, up 8 percent
from the prior year.
Credit quality continued to improve as 2013 credit
losses fell to $4.5 billion, a 50 percent improvement over
$9.0 billion in 2012. Net charge-offs dropped to their
lowest levels in recent history — 0.47 percent of average
loans in fourth quarter 2013, compared with 1.05 percent
in fourth quarter 2012.
3
Our capital also grew and remained well above
regulatory minimum levels. Our Tier 1 common equity
at the end of 2013 was $123.5 billion, up 13 percent
from 2012, resulting in a Tier 1 common equity ratio
of 10.82 percent under Basel I. Under Basel III capital
rules, our estimated Common Equity Tier 1 ratio was
9.76 percent.1
We also increased returns for our shareholders. Our
full-year return on assets rose to 1.51 percent, up 10 basis
points from 2012, and our full-year return on equity was
13.87 percent, up 92 basis points from 2012. In 2013, we
returned $11.4 billion to shareholders through dividends
and share repurchases. We increased our regular
quarterly dividend by 36 percent, to 30 cents per share,
and purchased 124 million shares of our common stock
in 2013. We are further pleased that the market rewarded
our shareholders, as our common stock price increased
33 percent in 2013.
We are proud of what we accomplished in 2013
because the results reflect how we are helping our
customers. And we know the road ahead will continue to
require a strong commitment to our customers and the
communities we serve.
Helping individuals and businesses
in the real economy
We recognize the struggles many are experiencing in this
economy and remain committed to doing all that we can to
help individuals and businesses prosper and succeed. We
support the real economy in many ways, including enabling
people to buy new homes, providing needed capital for
business investment and expansion, and helping consumers
plan for retirement.
Creating new homeowners and helping keep people
in their homes
Housing is a cornerstone of the economy, and
homeownership is the foundation of neighborhoods
large and small. For most people, their home is their
largest and most important asset. We are proud to be the
nation’s largest home lender, and every day get to see
the difference that a home can make in people’s lives and
in their communities.
In 2013, we provided financing to 1.5 million consumers
to purchase homes or refinance existing mortgages.
Buying a home typically fuels additional spending —
new furniture, appliances, or renovations — that benefits
local businesses and creates jobs. Because of this
multiplier effect, a housing recovery has led every
economic recovery in recent history.
Just as important, we are helping people stay in their
homes. Wells Fargo is a leader in preventing foreclosures —
since 2009, we have completed more than 904,000 home
loan modifications and provided $7.7 billion in principal
1 For more information regarding our regulatory capital and related ratios determined
under Basel I and Basel III, please see the “Financial Review – Capital Management”
section in this Report.
4
forgiveness. We also have participated in nearly 1,200
home preservation events, including hosting 107 of our
own workshops where we have met one-on-one with
nearly 45,000 customers facing financial hardships.
In addition, through Wells Fargo LIFT programs, we
offer down payment assistance and education to potential
homeowners in communities most deeply impacted by
the recession. We have committed $190 million to our
LIFT programs, and since early 2012, we have provided
down payment assistance to help more than 5,000 people
buy homes in 24 markets. In 2013, we expanded our
assistance through UrbanLIFT,SM a program that awarded
$11.4 million in grants to local nonprofits to accelerate
economic recovery and neighborhood improvement
projects in 25 communities across the U.S.
Meeting the needs of businesses – small and large
We know for our economy to fully recover, we need
businesses to grow and add jobs. Small businesses are
the growth engines in every community, and as the
nation’s largest lender to small businesses, we are helping
business owners every day get the capital and financial
services they need.
In 2013, Wells Fargo extended $18.9 billion in new loan
commitments to small businesses (primarily those with
annual revenues of less than $20 million), up 18 percent
from 2012. We were the nation’s largest provider of
Small Business Administration (SBA) loans based on
dollar volume for the fifth consecutive year. Wells Fargo
approved a record $1.47 billion in SBA 7(a) loans during
federal fiscal year 2013 (October 2012 – September 2013),
up 18 percent from the prior year.
We also fund mid-sized and large companies, helping
them grow both domestically and internationally.
In 2013, our average commercial and industrial loans
rose to $188 billion, up 8 percent from 2012. We work
side by side with these businesses through our extensive
network of commercial banking offices in all 50 states,
providing our commercial customers with financial
services like treasury management, insurance, capital
finance, asset-based lending, commercial real estate, and
foreign exchange. We also operate offices in international
locations — including Hong Kong, London, Sydney, and
Toronto — to meet the global needs of our corporate
customers and provide services to financial institutions
around the world.
Helping people plan and prepare for retirement
As a leading retirement services provider — we administer
about $341 billion in IRA assets and $298 billion in 401(k)
and institutional retirement plan assets — Wells Fargo
understands the importance of investing and saving for
the future.
About 10,000 people retire every day, and most are
expected to live longer in retirement than their parents and
grandparents. Yet study after study shows that too many
Americans are not adequately prepared for retirement and
$18.9
billion
face the possibility of outliving their savings, which could
severely impact our economy. In fact, the Wells Fargo
Middle Class Retirement Survey released last fall revealed
that nearly one-half of Americans are not confident they
will be able to save enough for a comfortable retirement.
One-third say they will have to work until at least age 80.
We believe the best way to fill that gap is with
planning. Wells Fargo is a leader in offering guidance and
individualized plans for all customers. Our research shows
that customers with written plans are more confident in
their ability to live comfortably in their retirement years.
That is why we continue to promote the benefits of planning
and offer free online services such as My Retirement Plan,®
which we introduced in late 2012.
We also help people understand the importance
of saving through financial education programs like
Hands on Banking® and workplace seminars at
companies for which we manage 401(k) and employee
retirement plans.
Road to economic recovery
While the economic recovery continues to move at a slow
pace, we believe there are many reasons to be bullish
in 2014. U.S. companies are known for their innovation —
a key driver of business competitiveness and long-term
economic growth — in everything from biotechnology
and medical devices to wireless technology, social
networking, and cloud computing.
The U.S. also has become a world leader in energy
production and the use of clean energy sources, which is
creating new jobs and decreasing our reliance on imports.
The manufacturing sector continues to improve and
show signs of sustainable growth. And let’s not forget
agriculture, which I hold close to my heart as one of 11
children who grew up on a small family farm in Minnesota.
In 2013, Wells Fargo extended
$18.9 billion in new loan
commitments to small businesses,
up 18 percent from 2012.
We are proud to be the nation’s largest agricultural
business lender. Agricultural production has rebounded
in America: Today, we export more food than we import,
and Americans enjoy an affordable and safe food supply.
The U.S. housing market also is better positioned
than it was a year ago. Though mortgage rates have
risen, they remain very low from a historical perspective.
Traditional buyers are coming back into the market,
which should allow for more trade-up activity. Demand
should improve further if labor markets continue to
stabilize. Demographic factors also should help, as retiring
baby boomers boost demand for homes in active adult
communities and retiree markets.
Full economic recovery will take time, but we can look
into the future with confidence and a deep appreciation
of the tremendous opportunities ahead of us.
Our strategic priorities
To meet the needs of our customers and help grow the
overall economy, we will continue to focus on our strategic
priorities, which create a shared sense of purpose across
our approximately 90 businesses. Guided by our common
vision and values, these priorities provide a clear path
for team members to collaborate across organizational
borders and focus on serving our customers as one team,
something we call One Wells Fargo.
The six priorities are:
• Putting customers first
• Growing revenue
• Managing expenses
• Living our vision and values
• Connecting with communities and stakeholders
• Managing risk
Putting customers first
At Wells Fargo we put customers first, in everything
that we do. Helping customers succeed financially by
serving all of their financial needs is the very foundation
of our success. We do that through building long-lasting
relationships, one customer at a time. That’s why I say
we are in the relationship business: We start with what
customers need, not with what we want to provide them.
We proudly serve the financial needs of more than
70 million customers and one in three U.S. households.
Each quarter, we provide about 357,000 new or refinanced
automobile loans to customers. Each month, we
provide financing to about 125,000 customers so they
can purchase homes or refinance existing mortgages.
5
Our Performance
$ in millions, except per share amounts
2013
2012
% Change
FOR THE YEAR
Wells Fargo net income
Wells Fargo net income applicable to common stock
Diluted earnings per common share
Profitability ratios:
Wells Fargo net income to average total assets (ROA)
Wells Fargo net income applicable to common stock to average
Wells Fargo common stockholders’ equity (ROE)
Efficiency ratio 1
Total revenue
Pre−tax pre−provision profit 2
Dividends declared per common share
Average common shares outstanding
Diluted average common shares outstanding
Average loans
Average assets
Average core deposits 3
Average retail core deposits 4
Net interest margin
AT YEAR−END
Investment securities
Loans
Allowance for loan losses
Goodwill
Assets
Core deposits 3
Wells Fargo stockholders’ equity
Total equity
Tier 1 capital 5
Total capital 5
Capital ratios:
Total equity to assets
Risk−based capital: 5
Tier 1 capital
Total capital
Tier 1 leverage 5
Tier 1 common equity 6
Common shares outstanding
Book value per common share
Team members (active, full−time equivalent)
$
21,878
20,889
3.89
$
1.51%
13.87
58.3
83,780
34,938
1.15
5,287.3
5,371.2
$ 804,992
1,448,305
942,120
669,657
3.39%
$ 264,353
825,799
14,502
25,637
1,527,015
980,063
170,142
171,008
140,735
176,177
18,897
17,999
3.36
1.41
12.95
58.5
86,086
35,688
0.88
5,287.6
5,351.5
775,224
1,341,635
893,937
629,320
3.76
235,199
799,574
17,060
25,637
1,422,968
945,749
157,554
158,911
126,607
157,588
11.20%
11.17
12.33
15.43
9.60
10.82
5,257.2
29.48
264,900
$
11.75
14.63
9.47
10.12
5,266.3
27.64
269,200
16
16
16
7
7
—
(3)
(2)
31
—
—
4
8
5
6
(10)
12
3
(15)
—
7
4
8
8
11
12
—
5
5
1
7
—
7
(2)
1 The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
2 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.
3 Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).
4 Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
5 See Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
6 See the “Financial Review – Capital Management” section in this Report for additional information.
6
Each week, we provide on average about $360 million
in new credit to small businesses so they can grow.
And each day, we make it possible for people to pay bills,
deposit checks, and get the cash they need. In getting
the essentials right, we earn more opportunities to
serve our customers.
We strive to deliver a consistent, value-added
experience every time a customer interacts with us —
in person, over the phone, at one of our more than
12,000 ATMs, online, or through a mobile device.
Increasingly, customers rely on these interconnected
channels and expect to conduct business with us in
multiple ways. For example, while mobile is our fastest-
growing channel with more than 12 million users, many
of these same customers also want the option of visiting
a retail bank store to open accounts, transact business,
or discuss financial matters.
We will continue to invest in each of our channels
to provide the most value to our customers. In 2013,
we added a text receipt option at our ATMs, becoming
the first bank to offer customers ATM receipts by text
and email, which is great for the environment. Our online
banking presence also improved with a new tablet-
friendly home page. And innovative tools in our stores
help bankers better serve the needs of our customers.
We also continue to expand our presence on social media
channels — Facebook, YouTube, Google+, LinkedIn,
and Twitter — to connect and communicate with
key stakeholders.
Regardless of the channel that a customer chooses,
our focus is on providing exceptional service every
time. We know excellent customer experiences lead to
more opportunities to increase customer loyalty and
grow referrals.
Growing revenue
Revenue is a key measure of how well we are serving
existing customers and gaining new ones. When we
serve customers well, the money we earn is the result.
We never put the stagecoach ahead of the horses. We view
ourselves as a growth company and generate revenue
across a diverse set of businesses — from traditional
banking to brokerage to capital markets — in controlled
and sustainable ways that reflect our risk tolerance.
We clearly benefited from our diversified business
model in 2013. While rising long-term interest rates
slowed refinance volume and impacted our mortgage
revenue, we experienced growth in other businesses
such as asset-backed finance, asset management, capital
markets, commercial real estate, corporate banking,
credit cards, retail brokerage, small business lending,
and treasury management.
Another key gauge of how we are satisfying the needs
of our customers is how many products they have with us.
In fourth quarter 2013, the average Retail Bank household
had 6.16 Wells Fargo products, up from 6.05 in fourth
quarter 2012, while our average Wholesale Banking
household had 7.1 products, and our average Wealth,
Brokerage and Retirement household had 10.42 products.
In 2014, we will continue to look for opportunities
to deepen relationships with customers and grow
revenue. Two areas of particular focus include earning
more business from our affluent customers (those with
$100,000 or more in deposits and/or investable assets)
and growing our credit card portfolio.
• About 6 million of our Retail Bank households
hold significant investments or deposits at other
companies. We are starting to serve more of these
customers’ financial needs through the Community
Bank and our brokerage business, Wells Fargo
Advisors, as we work together to expand affluent
customer relationships.
• We also continue to increase the portion of retail
households with a Wells Fargo credit card, which
was 37 percent at the end of 2013, up from 33 percent
in 2012. We have a number of credit card strategies
in place, including expanded rewards and innovative
partnerships with Visa and American Express.
Managing expenses
Managing expenses means that every dollar we spend is
aligned with our vision and priorities. This ensures we
are spending money on the right things, investing in the
right technologies and products, and focusing on our
customers. Managing expenses well allows us to realize
the full benefits of our size and scale without diminishing
customer experiences or increasing operational risk.
One measure we track closely is our efficiency ratio
(how much expense we incur for every dollar of revenue
we earn). In 2013, our efficiency ratio was 58.3 percent,
an improvement of 20 basis points from 2012 and within
our target range of 55 to 59 percent.
Some of the ways we managed expenses in 2013
included aligning personnel costs with demand in rate-
sensitive businesses like mortgage and making more
efficient use of our real estate. Since 2009, we have
reduced our total real estate space by 15 percent — from
112 million square feet to about 95 million square feet.
One example is in Chicago, where last year we
consolidated about 40 Wells Fargo businesses and 700
team members across several downtown buildings into
a new, state-of-the-art regional headquarters at the
Chicago Mercantile Center.
We also continue to make efficient use of our retail
bank store space without sacrificing personal service.
We love our network of approximately 6,200 retail bank
stores and the convenience and individual attention
they provide our customers. In 2013, we began to grow
the number of bank stores in supermarkets in the East,
joining about 460 such stores in our Western markets.
7
for lesbian, gay, bisexual, and transgender employees,
and by Essence magazine as one of the top places to work
for African American women.
We also focus on how we serve diverse markets. Last
year, we formed a Korean division in Wholesale Banking,
announced a goal to lend a cumulative $55 billion to
women-owned businesses by the year 2020, and produced
marketing that reflected the people and cultures we serve,
including a TV ad for the Asian market that was honored
by the Association of National Advertisers.
Connecting with communities and stakeholders
Our reputation will continue to be one of our most
important assets, influenced by what we do and how
we connect with our communities and stakeholders.
We appreciate that public sentiment toward the nation’s
largest financial institutions is still a challenge, and
we continue to work hard to rebuild trust. Across the
industry, mistakes clearly were made leading up to
the financial crisis of 2008, as some competitors put
profits before their customers’ interests.
While Wells Fargo didn’t do everything right, we did
do many things right. We avoided the risky practices
that hurt other banks during the financial crisis, and we
consistently focused on responsible, traditional banking
practices that customers and communities expect and
rely on. Over the past several years, a number of new
industry reforms and regulations have been put in place
to create a safer and stronger financial services industry,
and we are committed to the spirit and specifics of
these requirements.
Wells Fargo continues to actively support the
revitalization and growth of the economy, including
in our hardest-hit communities. In 2013, Wells Fargo
contributed $275.5 million to 18,500 nonprofits nationwide.
I was especially pleased that we ranked at the top of
The Chronicle of Philanthropy’s 2013 ranking of most
philanthropic companies (based on 2012 giving), even
though we are not the largest company (25th on the
Fortune 500 list of America’s largest companies).
Team members drive our connection with
communities and stakeholders. In 2013 alone, they
contributed a record $89 million to schools, charitable
organizations, and other nonprofit groups, up 13 percent
from 2012. Team members also volunteered 1.69 million
hours in 2013 — doing everything from helping children
learn to read in local schools to serving food at homeless
shelters — in their communities, up 13 percent from
2012. United Way Worldwide recognized Wells Fargo for
having the nation’s No. 1 United Way campaign for the
fifth consecutive year, based on 2013 giving.
In 2013, we recognized the 20th anniversary of the
Wells Fargo Housing Foundation, and we completed the
5,000th home built by team member volunteers — all in
support of affordable housing and community revitalization.
As part of our support to military veterans, we donated
86 homes in 2013 to wounded warriors.
Our vision and values set us
apart from our competitors.
They form the basis of our culture
and define who we are.
In addition, we began testing a new retail bank store
format that is about 1,000 square feet, roughly a third
of the size of a typical new store. In 2013, we opened
the first of these stores in the NoMa neighborhood in
Washington, D.C. These stores can be located in smaller
spaces while still providing personalized service and
technologies like wireless devices and large-screen ATMs.
We are evaluating this concept and will determine the
next steps as part of our overall retail bank store strategy.
Living our vision and values
Our vision and values set us apart from our competitors.
They form the basis of our culture and define who we
are. It’s through our vision and values that we operate as
one team. It’s not about I, me, and mine; it’s about we, us,
and ours. We say “team members” and not “employees”
because we view our team members as resources to be
invested in, not expenses to be managed. It’s why we train
our leaders to coach and inspire team members and work
together — as One Wells Fargo — to achieve our vision.
I keep my 41-page Vision & Values booklet close by,
and I know many of our team members do as well.
But it’s not the words in the document that are important.
It’s how we embody these words in all that we do —
for fellow team members, customers, communities,
and shareholders.
One core value is our commitment to diversity and
inclusion. We attract and retain diverse team members
and serve a diverse customer base, but we realize there
is always more that can be done.
As chair of our enterprise Diversity and Inclusion
Council, I am committed to our company’s efforts to
embrace and promote diversity in all aspects of our
business, at all levels of our company. That is why I was
pleased to see seven of our senior-most female leaders
recognized last year by American Banker in its annual
“Most Powerful Women in Banking” issue, and Wells Fargo
named by DiversityInc magazine as the top company
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In appreciation
In April 2013, Nicholas G. Moore retired from our board
of directors after seven years of service to our company.
Nick provided outstanding leadership as a member of the
board and chair of the Audit and Examination Committee.
Also in April 2013, Philip J. Quigley retired after
19 years on the board. Phil served on and chaired many
committees, and as lead director from 2009 to 2011, he
provided distinguished leadership and insight, which
were key to Wells Fargo’s success during a critical time.
We thank both Nick and Phil for their long-standing
service and contributions to Wells Fargo, and we wish
them all the best.
We also welcomed James H. Quigley to our board
in October 2013. Jim is CEO emeritus and a retired partner
of Deloitte, and we are fortunate to benefit from his
more than three decades of broad leadership experience
and extensive audit, financial reporting, and risk
management expertise.
I want to thank all of our stakeholders — board
members, team members, customers, communities, and
shareholders — for helping make 2013 an outstanding
year. I also want to recognize the five-year anniversary of
Wells Fargo’s merger with Wachovia, which we celebrated
at the end of 2013. I could not be more proud of where our
company is today and all of our wonderful team members
who live by our vision and values and work together to
help our customers achieve financial success.
As we look forward, we are confident in our abilities
to serve changing customer needs and contribute to
the economic recovery. We believe we have the right
people on our team, are in the right markets, and operate
the right business model — one that is diversified and
positioned to perform well across various economic
cycles. And we are optimistic about the future for our
customers, communities, and country.
John G. Stumpf
Chairman, President and Chief Executive Officer
Wells Fargo & Company
In addition, we are supporting environmental
efforts in our communities. Since 2012, we have provided
more than $12 billion toward green building and
development initiatives, wind and solar projects, and other
environmental opportunities as part of our commitment
to provide $30 billion of environmental financing by 2020.
We also continue to reduce the environmental impact of
our operations, increase our energy efficiency, and decrease
waste. Since 2009, customers have completed more than
1.1 billion paperless ATM transactions, saving an average of
475 printed ATM receipts per minute. That is enough paper
to circle the earth’s circumference nearly three times —
approximately 73,000 miles!
Managing risk
For more than 160 years, Wells Fargo has been in the risk
management business. Our risk management practices
enabled us to emerge from the 2008 financial crisis in far
better shape than many of our competitors.
We are increasing investments in our already strong
risk management practices and in other vital areas such
as cybersecurity. Our track record and risk management
focus allow customers to have confidence in our ethical
standards and our ability to make good decisions. Each day,
we work 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.
Although we have seen a lot of change over the
years, the fundamentals of our risk management culture
remain the same. We are guided by seven core risk
management principles:
•
•
•
Relationship focus. Take only as much risk as is
appropriate to efficiently, effectively, and prudently
serve our customers.
Understanding risk. Take only risks that we
clearly understand.
Reputation. Do not engage in activities or business
practices that could cause permanent or irreparable
damage to our reputation.
• Price for risk. Price our business to cover risk to
capital and retain risk only if priced for a sufficient
risk-adjusted return.
•
•
•
Conservatism. Strive to grow our company, but do so
only in a way that supports our long-term goals and
does not compromise our ability to manage our risk.
Operational excellence. Maintain the infrastructure,
systems, processes, and compliance programs that
support the financial success of our customers.
Clear accountability. Ensure our lines of business have
primary accountability for risk, while our Corporate
Risk group provides oversight at the enterprise
level. Our Corporate Audit group provides an
independent, objective view to evaluate and improve
the effectiveness of our risk management processes.
9
Relationships,
not transactions.
In Ames, Iowa, when residents need a Honda car or Nissan truck,
they think of Lithia Motors, Inc. The dealership’s general manager,
Mike Gougherty, is passionate about how his team serves customers
and also about receiving outstanding customer service from their
relationship with Wells Fargo Dealer Services.
Wells Fargo’s Robert Lyles manages the Regional Business Center
in Omaha, Nebraska, which is one of 54 across the U.S. They keep
Wells Fargo credit and loan decisions as close to car dealers and
customers as possible. Such local knowledge is why Lithia knows
it can count on Wells Fargo Dealer Services to provide a broad
spectrum of financing options during any economic cycle.
Gougherty said, “I like the fact that, if needed, we can talk about
the people behind a car deal, because it’s all about relationships,
not transactions.” He also knows Lithia can count on Wells Fargo
for cash management, real estate lending, and other services
that help the business operate more efficiently.
Wells Fargo Dealer Services helped finance transportation for
1.2 million Americans in 2013 and is the top used-car and overall
auto lender (excluding leases) in the U.S.
Wells Fargo’s Robert Lyles (left) with Mike Gougherty | Ames, Iowa
10
11
“Excellent service is what is
most important … and I get that
from Wells Fargo.”
No two days are alike at the Canal Road Animal Hospital
in Orange Beach, Alabama, where Julianna Taylor
tends to patients like Peanut the pig and a rescue cat
named Sebastian — all while running the business side
of things, too.
For those reasons and more, Taylor said she’s glad
to have the right bank behind her at work and at home —
the same bank that serves more than 1,500 small
businesses in her home county of Baldwin and millions
more across the U.S.
“I was unhappy with my previous bank, and Wells Fargo
offers all the financial services I need,” said Taylor, who
said being an animal doctor is the only thing she’s ever
wanted to do. “Excellent service is what is most important
for a bank to provide, and I get that from Wells Fargo,
whether it’s on my home mortgage or a loan to expand
my business.”
Wells Fargo District Manager Brian Murphy said,
“As a national bank, we’re able to provide a wide variety
of financial products to our customers, but we do that
with the decision making and service of a local bank.”
For example, Wells Fargo financed the purchase of new
equipment and technology that allows Taylor’s customers
to pay by credit or debit card.
Now Taylor is ready for the next step in the business
she founded in 2002 — building an addition on land
Wells Fargo helped her buy. “The extension to my
existing building will allow me to expand the services
I offer my clients and patients.”
Julianna Taylor | Orange Beach, Alabama
12
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“To have something that’s yours,
it makes a big difference.”
Buying your first home can be daunting, and connecting
with a lender that cares — and can help — makes all
the difference. Pamela Sanford found that connection
at Wells Fargo.
Sanford and her partner attended a first-time homebuyer
workshop organized by the Chicago Urban League
and supported by Wells Fargo. After the class, they
approached the Wells Fargo Home Lending team with
some questions. “We’d been working with someone else,”
she said, “but Wells Fargo seemed to have all the
information about down payment assistance programs.”
Once they chose to work with Wells Fargo, Sanford said,
“Any questions we had, they would have the answer
or find the answer.”
Now, several months and many conversations later, the
couple is living in their new home. “We needed to do this
for us. To have our own space, and to have something
that’s yours, it makes a big difference. We’re enjoying
every bit of it,” she said.
Wells Fargo continues to support homebuyer education
with the Chicago Urban League. “It’s really rewarding
to help people buy that first home,” said Peter de Jong,
branch manager for the mortgage team in Oak Lawn,
a community outside the city. “Our office and team
members serve many residents in the greater Chicago
area. We pride ourselves on being knowledgeable about
mortgage down payment assistance programs that help
residents achieve the dream of homeownership. But most
important, we enjoy helping inspire residents to make
the commitment to buy a home in their community!”
Andrea L. Zopp, president and CEO of the Chicago
Urban League, said, “Homeownership remains the
foundation of building wealth and strengthening
communities. We’re grateful to Wells Fargo for their
partnership and for supporting the league’s efforts
to guide people into homes they can afford.”
Pamela Sanford | Chicago, Illinois
15
“Wells Fargo helps us so we can
focus on our customers.”
Running a retail business requires perseverance —
and support you can count on. Wells Fargo has provided
that support for Urban Outfitters, Inc., for 25 years.
Urban Outfitters, Inc., which operates the brands
Anthropologie, Free People, Urban Outfitters, Terrain,
and BHLDN, is a specialty retailer headquartered in
Philadelphia that requires a variety of financial products
and services. Wells Fargo Relationship Manager Stephen
Dorosh said, “We support Urban Outfitters across their
brands, at their stores and corporate offices, and around
the globe. We provide a range of products and services,
including treasury management, a commercial card
program, depository accounts, a revolving line of credit,
and more.”
Wells Fargo also provides international banking services
in London and Canada while the Hong Kong office does
letter of credit processing. “Urban Outfitters has a unique
and laid-back culture,” Dorosh said. “We go where the
company goes, and we take the time to get to know their
business and their needs.”
One example is the commercial card program with
the CEO Mobile® service. Wells Fargo previewed the
service with the company, and now Urban Outfitters’
Anna DeMarco, card services administrator, uses the
CEO Mobile service to take care of critical transactions
that can’t always wait until she’s back at her desk.
“Wells Fargo helps us so we can focus on our customers,”
she said.
That kind of business support lets the company focus
where it needs to: on its people, its brand, and its customers.
“We have always appreciated Wells Fargo’s approach to
the relationship. Our success is based upon our ability to
understand our customers and connect with them on an
emotional level while delivering compelling and distinct
products,” said Frank Conforti, chief financial officer
for Urban Outfitters.
Joshua Benson, Urban Outfitters store associate | Philadelphia, Pennsylvania
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“I bank with Wells Fargo because
of the people. It’s high-tech with
the personal touch.”
Wells Fargo is putting technology to work to help
customers like Thiri Einsi, a bookkeeper in Seattle.
Einsi works for a restaurant in the bustling South Lake
Union neighborhood. And her local Wells Fargo store —
on the high-tech campus of Amazon.com — combines
old-fashioned service with new technology to provide
top customer experience.
The store has a largely paperless workflow and offers
customers three choices: self-service, assisted service,
or full service. That suits Einsi just fine. “I love all the
technology,” she said, “and I’ve used all three options.
But I bank with Wells Fargo because of the people.
It’s high-tech with the personal touch.”
For example, tellers have scanners to image checks.
So when Einsi is in a hurry and needs to deposit several
checks, the teller simply asks her to swipe her debit card
in the PIN pad and tap the screen.
Like all Wells Fargo stores, South Lake has smart
ATMs with shortcuts that remember customers’ frequent
transactions. But that’s not all. Customers at this store
can access Wells Fargo mobile, or any site on the internet,
through a complimentary Wi-Fi hotspot. And the bankers
here have secure wireless tablets.
Store Manager Michael Kleckner said, “Tablets help to
enhance the customer experience and really show how
we’re using technology to empower people.”
Clio Tarazi of Santa Rosa, California, agrees. While using
the Wells Fargo ATM in her neighborhood, Tarazi was
delighted to see a “Happy Anniversary” message noting her
39 years as a customer. The personal message on the ATM
screen “evoked memories of my father who helped me
open my first checking account before I went to college.
“It really showed how technology can humanize an
ATM experience,” she said.
Thiri Einsi with Wells Fargo’s Michael Kleckner | Seattle, Washington
Clio Tarazi | Santa Rosa, California
19
“Richard is like a brother to us,
and Wells Fargo has always
helped us succeed.”
Long-term relationships are a Wells Fargo hallmark.
And working together has paid off for Lord Daniel
Sportswear of Sunrise, Florida, which has thrived in
the competitive apparel business for 60 years — and
been a Wells Fargo customer for more than 50. In fact,
Wealth Management’s Richard Sanz has worked with
three generations of owners, starting with the late
Marcus (“Moe”) Stern, who founded the business, son
Steve Stern, and now grandson Brett Stern.
Steve said, “Richard is like a brother to us, and
Wells Fargo has always helped us succeed. We meet
with him regularly to discuss our financial needs.”
Wells Fargo provides commercial banking services
for Lord Daniel Sportswear, and the Sterns use
Wells Fargo for their personal banking needs.
Sanz said, “It’s a beautiful story of a hardworking family
who started a small business and built it to take care
of their family over the years. Moe took great pride in
watching the business grow along with his family.”
Lord Daniel Sportswear designs, manufactures,
and sells a range of apparel, most notably a line of
U.S. flag shirts that are sold online and at retail shops,
including the White House gift shop. It also makes
banded-bottom shirts sold at retailers such as Kohl’s,
J.C. Penney, and Sears.
Steve credits customer service as a key reason
for long-term business success. “Wells Fargo has
tremendous customer service, and we’re a customer
service company, too! We find it’s little things, like
speaking with customers after they place an order,
that set us apart.”
Steve Stern (left) with Wells Fargo’s Richard Sanz | Sunrise, Florida
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21
Educating communities
in new ways.
Wells Fargo wants every community we are in to be better because
of our presence there. And now, for the first time, we are collaborating
with an entire school district to use our Hands on Banking® financial
education program as part of the curriculum for students.
In conjunction with the Missouri Council on Economic Education,
the Hands on Banking curriculum for teens is being incorporated
into social studies classes at 13 St. Louis public middle schools.
“The information will fit in well with our economics curriculum,”
said John Swanston, a seventh-grade social studies teacher at Lyon
Academy. “I’m excited to see my students learn this.” Mike English,
CEO of the Missouri Council on Economic Education, said, “I think
this program could be a good fit for schools throughout the state.”
The Hands on Banking program is free and not affiliated with
any product. It is designed to teach money and credit basics to kids,
adults, entrepreneurs, seniors, and members of the military. The
handsonbanking.org site reaches thousands of users each year in
more than 190 countries.
John Swanston | St. Louis, Missouri
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“This will give our children a
place to run around and just
enjoy their new life.”
U.S. Navy veteran Deramichaelous Daniels and his
family have a new home in the Atlanta area, thanks in
part to a property donated by Wells Fargo. “Everything
lately has felt like such an uphill battle, and this is the
best news that we’ve had since I left the Navy,” he said.
Those who serve in uniform sometimes face challenges
upon returning home, including navigating the
complexities of managing credit. Efforts like the one
organized by SERKET Racing, Wells Fargo, and the
nonprofit Operation Homefront are helping.
“Too many of our veterans are struggling to make
ends meet,” said Mark Llano, who founded the SERKET
Racing team and is also the team’s driver. Llano’s
company, Source One Distributors, Inc., is a Wells Fargo
Capital Finance customer. SERKET Racing joined
with the military nonprofit Operation Homefront and
Wells Fargo in 2013 to award homes to veterans at
three race events.
“This will provide us with such an amazing opportunity
and will give our children a place to run around and just
enjoy their new life,” said Daniels. “We have discussed
owning a home since getting married.”
All told, Wells Fargo made 86 home donations to veterans
in 2013 through nonprofits like Operation Homefront.
It’s a model of success: Each veteran who receives a
home lives there for a trial period — paying no rent or
mortgage — but is required to attend financial education
courses. At the end of the trial period, the veteran
receives the deed to the home free and clear.
In 2012, Wells Fargo committed $35 million to military
service members and veterans, including $30 million in
real estate owned property donations committed over
three years to qualifying nonprofits that serve military
service members and veterans.
Deramichaelous and Mistie Daniels with children | Marietta, Georgia
Mark Llano | Atlanta, Georgia
25
Corporate Social Responsibility Highlights
We focus on investing our resources in the areas our team members, customers, and communities
tell us they care about most. Here are a few highlights from our five strategic areas, and
we invite you to read our 2013 Corporate Social Responsibility Report to learn more.
Community investment
We provide human and financial
resources to help build strong
communities.
Environmental sustainability
We focus on integrating
environmental mindfulness into our
products, services, and operations.
Product and service responsibility
We offer all customers responsible
financial advice and solutions for
now and the future.
Team member engagement
We support our team members
professionally, financially,
and personally.
Ethical business practices
We ensure all business functions
run responsibly and ethically.
Philanthropy
Invested $275.5 million in 18,500 nonprofits
Community development
loans & investments
Community
development: 31%
Education: 30%
Human services: 19%
Environment: 8%
Arts & culture: 6%
Civic: 6%
$5.97 billion in 2013
Environmental grants
Environmental loans & investments
$ 8.0 million in 2012
$21.8 million in 2013
More than
$12 billion
in environmental financing
in 2012 – 2013
Homeownership
Small business lending
5,000+ new homeowners helped with
$190 million
in down payment assistance,
program support, and local initiatives
through Wells Fargo LIFT programs
in 24 housing markets in 2012 – 2013
$18.9 billion
in new loan commitments to small
businesses across the U.S. in 2013
Team member giving
Volunteerism
$89 million
in donations pledged in 2013
Training
99.96%
of eligible team members completed
the Code of Ethics and Business
Conduct annual training in 2013
1.69 million hours in 2013
To learn more
Coming soon, our 2013 Corporate
Social Responsibility Report
www.wellsfargo.com/about/csr/reports/
Wells Fargo & Company Corporate Social Responsibility Report 2013
The right people. The right passion. The right focus.
Serving communities in the real economy.
26
Board of Directors
John D. Baker II 1, 2, 3
Executive Chairman
Patriot Transportation Holding, Inc.
Jacksonville, Florida
(Transportation, real estate
management)
Elaine L. Chao 3, 4
Former U.S. Secretary of Labor
Washington, D.C.
(U.S. government)
John S. Chen 6
Executive Chair, CEO
BlackBerry Limited
Waterloo, Ontario, Canada
(Wireless communications)
Lloyd H. Dean 2, 5, 6, 7
President, CEO
Dignity Health
San Francisco, California
(Healthcare)
Susan E. Engel 3, 4, 6
Retired Chief Executive Officer
Portero, Inc.
New York, New York
(Online luxury retailer)
Enrique Hernandez Jr. 1, 2, 4, 7
Chairman, CEO
Inter-Con Security Systems, Inc.
Pasadena, California
(Security services)
Donald M. James 4, 6
Chairman, CEO
Vulcan Materials Company
Birmingham, Alabama
(Construction materials)
Cynthia H. Milligan 2, 3, 5, 7
Dean Emeritus
College of Business Administration
University of Nebraska –
Lincoln, Nebraska
(Higher education)
Federico F. Peña 1, 2, 5
Senior Advisor
Vestar Capital Partners
Denver, Colorado
(Private equity)
James H. Quigley 1, 7
CEO Emeritus
Deloitte
New York, New York
(Audit, tax, financial advisory)
Judith M. Runstad 2, 3, 4, 7
Of Counsel
Foster Pepper PLLC
Seattle, Washington
(Law firm)
Stephen W. Sanger * 5, 6, 7
Retired Chairman, CEO
General Mills, Inc.
Minneapolis, Minnesota
(Packaged foods)
John G. Stumpf
Chairman, President, CEO
Wells Fargo & Company
Susan G. Swenson 1, 5
Retired President, CEO
Sage Software – North America
Irvine, California
(Business software and
services supply)
Standing Committees
1. Audit and Examination
2. Corporate Responsibility
3. Credit
4. Finance
5. Governance and Nominating
6. Human Resources
7. Risk
* Lead Director
Executive Officers, Corporate Staff
Wells Fargo Operating Committee
pictured (left to right):
James M. Strother, David A. Hoyt,
Carrie L. Tolstedt, Kevin A. Rhein,
Timothy J. Sloan, Avid Modjtabai,
John G. Stumpf, David M. Julian,
David M. Carroll, Michael J. Heid,
Patricia R. Callahan, and
Michael J. Loughlin
John G. Stumpf
Chairman, President
and CEO *
Paul R. Ackerman
Treasurer
Caryl J. Athanasiu
Chief Operational
Risk Officer
Anthony R. Augliera
Corporate Secretary
Karl E. Byers
Chief Enterprise Risk Officer
Patricia R. Callahan
Chief Administrative
Officer *
Jon R. Campbell
Government and
Community Relations
David M. Carroll
Wealth, Brokerage
and Retirement *
Christi Deakin
Corporate Strategy
Hope A. Hardison
Human Resources
Michael J. Heid
Home Lending *
Bruce E. Helsel
Corporate Development
Richard C. Henderson
Corporate Properties
David M. Julian
Chief Auditor
Richard D. Levy
Controller *
Michael J. Loughlin
Chief Risk Officer *
Avid Modjtabai
Consumer Lending *
Jamie Moldafsky
Chief Marketing Officer
Kevin D. Oden
Chief Market and
Institutional Risk Officer
Yvette R. Hollingsworth
Chief Compliance Officer
Kevin A. Rhein
Chief Information Officer *
David A. Hoyt
Wholesale Banking *
Joseph J. Rice
Chief Credit Officer
* “ Executive officers” according to Securities and Exchange Commission rules
James R. Richards
Bank Secrecy Act Officer and
Head of Financial Crimes
Charles D. Roberson
Enterprise Efficiency &
Global Services
James H. Rowe
Investor Relations
Eric D. Shand
Chief Loan Examiner
Timothy J. Sloan
Chief Financial Officer *
James M. Strother
General Counsel *
Oscar Suris
Corporate Communications
Carrie L. Tolstedt
Community Banking *
27
Senior Business Leaders
COMMUNITY BANKING
Group Head
Carrie L. Tolstedt
Business Banking Group
Hugh C. Long
David L. Pope, Business Banking Sales
and Service
Debra B. Rossi, Merchant Services
David J. Rader, SBA Lending
Deposit Products Group
Kenneth A. Zimmerman
Daniel I. Ayala, Global Remittance Services
Edward M. Kadletz,
Debit and Prepaid Products
Customer Connection
Diana L. Starcher
Digital Channels Group
James P. Smith
Regional Banking
Regional Presidents
Paul W. “Chip” Carlisle, Southwest
John T. Gavin, Dallas-Fort Worth
Glenn V. Godkin, Houston
Lisa J. Riley, New Mexico/Western Border
Jeffrey Schumacher, Central Texas
Kenneth A. Telg, Greater Texas
Don Kendrick, Business Banking
Gerrit van Huisstede, Western Mountain
Kirk V. Clausen, Nevada
Pamela M. Conboy, Arizona/Idaho
Don M. Melendez, Idaho
Joseph C. Everhart, Alaska
Greg A. Winegardner, Utah
Patrick G. Yalung, Washington
Dean Rennell, Business Banking
Laura A. Schulte, Eastern
Scott Coble, Florida
Joe A. Atkinson, South Florida
David Guzman, Greater Tampa Bay
Derek Jones, Greater Gulf Coast
Larisa F. Perry, Central Florida
Kelly A. Smith, North Florida
Darryl G. Harmon, Southeast
Leigh Vincent Collier, Mid-South
Michael S. Donnelly, Atlanta
Chadwick A. (Chad) Gregory,
Greater Georgia
Pete Jones, Mid-Atlantic
Andrew M. Bertamini, Maryland
Glen M. Kelley, Greater Virginia
Michael L. Golden,
Greater Washington, D.C.
Deborah E. O’Donnell, Western Virginia
Stanhope A. Kelly, Carolinas
Kendall K. Alley, Charlotte
Jack O. Clayton,
Triangle/Eastern North Carolina
Leslie L. Hayes,
Western/Triad North Carolina
Forrest R. (Rick) Redden III,
South Carolina
Michelle Y. Lee, Northeast
Frederick A. Bertoldo,
Northern New Jersey
Lucia Gibbons, Business Banking
Joseph F. Kirk,
New York and Connecticut
Gregory S. Redden,
Greater Philadelphia, Delaware
Brenda K. Ross-Dulan,
Southern New Jersey
Gregory S. White, Greater Pennsylvania
Shelley Freeman, Affluent Segment and
Customer Experience Executive
28
Lisa J. Stevens, Pacific Midwest
Michael F. Billeci, San Francisco Bay Area
Commercial Banking
Perry G. Pelos
John C. Adams, Northwest Region
Lisa J. Finer, Bay Area Division
Eric C. Houser, Technology Division
Mary A. Knell, Washington and
Western Canada Division
Tim M. Billerbeck, Business Development
Dave R. Golden, Mountain Division
Lisa N. Johnson, Midwest Division
Paul D. Kalsbeek, Southern Region
Samuel J. Belk, MidSouth Division
Jonathan C. Homeyer,
South Texas Division
Laura S. MacNeil, North Texas Division
Bradley S. Marcus, Georgia Division
Rich J. Kerbis, Commercial Banking Credit
John P. Manning,
Southern California Division
Laura S. Oberst, Central Division
Rob C. Yraceburu,
Food & Agribusiness Division
MaryLou Barreiro, Specialty Finance
Carlos E. Evans, Eastern Region
Michael J. Carlin,
Government Banking Credit
Jim E. Fitzgerald, Northeast Division
Stan F. Gibson, Carolinas Division
Howard M. Halle, Florida Division
Marybeth S. Howe, Great Lakes Division
Edmond O. Lelo, Mid-Atlantic Division
Susanne Svizeny, Pennsylvania, Delaware
and Eastern Canada Division
Commercial Real Estate
Mark L. Myers
William M. Cotter, Northeast Region
Christopher J. Jordan, Hospitality Finance
and Senior Housing
Michael F. Marino,
Southern California Region
Robin W. Michel, Southwest Region and
Homebuilding Banking
Jeff C. Reed, Portfolio Management
Rex E. Rudy, REIT Finance
William A. Vernon, Midwest, Southeast,
International Region and Real Estate
Merchant Banking
Cynthia Wilusz Lovell, Northwest Region
Corporate Banking Group
J. Michael Johnson
J. Nicholas Cole, Wells Fargo Restaurant
Finance; Gaming Division
James D. Heinz, U.S. Corporate Banking
Kyle G. Hranicky, Energy Group;
Power & Utilities Group
John R. Hukari, Equity Funds Group
Brian J. Van Elslander,
Financial Sponsors Group
Daniel P. Weiler,
Financial Institutions Group
Insurance Group
Laura L. Schupbach
Kevin M. Brogan, Property and Casualty
National Practice and Special Risk
Michael P. Day, Rural Community
Insurance Services, Inc.
Laurie B. Nordquist, Personal and
Small Business Insurance
Kevin T. Kenny, Insurance Brokerage
and Consulting
Tim Prichard, Employee Benefits
National Practice
H David Wood, Insurance Operations
Wendy L. Haller, Peninsula
Gregory L. Morgan, North Bay
Tracy Curtis, Oregon
James W. Foley, Greater Bay Area
Robert F. Ceglio, Mount Diablo
Jeff Rademan, Santa Clara Valley
Micky S. Randhawa, East Bay
David A. Galasso,
Northern and Central California
Reza Razzaghipour, Pacific Coast
David R. Kvamme, Great Lakes
Mary Bell, Indiana, Ohio
Frank Newman III, Rocky Mountain
Joy N. Ott, Montana, Wyoming
Donald J. Pearson, Great Plains
Kirk L. Kellner,
Kansas, Missouri, Nebraska
Daniel P. Murphy,
North Dakota, South Dakota
John K. Sotoodeh, Los Angeles Metro,
Orange County
Ben F. Alvarado, Orange County
Marla M. Clemow, Los Angeles Metro
David Dicristofaro, Greater Los Angeles
Kim M. Young, Southern California
Don Fracchia, Business Banking
Dana Reddington, Business Banking
Marc Bernstein, Enterprise
Small Business Segment
Todd Reimringer,
Business Payroll Services
CONSUMER LENDING
Group Head
Avid Modjtabai
Consumer Credit Solutions
Thomas A. Wolfe
Dan L. Abbott, Retail Services
Beverly J. Anderson,
Consumer Financial Services
Ruben O. Avilez,
Strategic Auto Investments
Jerry G. Bowen, Commercial Auto
Dawn Martin Harp, Dealer Services
John P. Rasmussen,
Education Financial Services
Home Lending
Michael J. Heid
Bradley W. Blackwell, Portfolio Lending
Franklin R. Codel, Mortgage Production
Mary C. Coffin, Customer Excellence
Michael J. DeVito, Home Lending Servicing
Peter R. Diliberti, Capital Markets
John P. Gibbons, Capital Markets
WEALTH, BROKERAGE
AND RETIREMENT
Group Head
David M. Carroll
Mary Mack, Wells Fargo Advisors
John M. Papadopulos, Retirement
James P. Steiner, Abbot Downing
Jay S. Welker, Wealth Management
WHOLESALE BANKING
Group Head
David A. Hoyt
Asset Management Group
Michael J. Niedermeyer
Kirk Hartman, Wells Capital Management
Karla M. Rabusch, Wells Fargo
Funds Management, LLC
International Group
Richard Yorke
Rajnish Bharadwaj,
Cross Border Governance
Peter P. Connolly,
Global Transaction Banking
James C. Johnston,
EMEA Regional President
Chris G. Lewis,
International Trade Services
John V. Rindlaub,
Asia Pacific Regional President
Sanjiv S. Sanghvi, Global Banking Group
Charles H. Silverman,
Global Financial Institutions
Dominic O’Hagan, Chief Credit Officer
International
Specialized Lending,
Servicing and Trust
J. Edward Blakey
Julie Caperton, Asset Backed Finance
Lesley A. Eckstein,
Community Lending and Investment
Alan Kronovet,
Commercial Mortgage Servicing
Douglas J. Mazer,
Real Estate Capital Markets
John M. McQueen,
Wells Fargo Equipment Finance
Alan Wiener, Multi-family Housing
Wells Fargo Capital Finance
Henry K. Jordan
Scott R. Diehl, Industries Group
Jim Dore, Commercial and Retail Finance
Guy K. Fuchs, Corporate Finance
Wells Fargo Securities
John R. Shrewsberry
Walter Dolhare and Tim Mullins,
Markets Division
Robert Engel and Jonathan Weiss,
Investment Banking and Capital Markets
Benjamin V. Lambert and Roy March,
Eastdil Secured, LLC
Diane Schumaker-Krieg,
Research and Economics
Phil D. Smith, Government and
Institutional Banking
George Wick, Principal Investments
Wholesale Risk
David J. Weber
Robert W. Belson, Wholesale Banking,
Deputy Chief Credit Officer
Adam B. Davis, Chief Credit Officer
Real Estate/Asset Backed Finance
Derek A. Flowers, Chief Credit and Market
Risk Officer, Wells Fargo Securities/
Corporate Banking
John G. McGowan, Wholesale Risk
Reporting and Analytics
Kevin J. Martin, Group Compliance and
Operational Risk Officer
William J. Mayer, Chief Credit Officer
Commercial Banking/Wells Fargo
Capital Finance/Equipment Finance/
Municipal Finance
Kenneth C. McCorkle, AgriBusiness
Barry Neal, Environmental Finance
Michael P. Sadilek, Loan Workout
Wholesale Services
Stephen M. Ellis
Peter Amendola, Wholesale Loan Servicing
Brady Cole, Wholesale Information
Management
Kevin Dabney, Wholesale Systems
Michele Kelsey, Wholesale Marketing
Daniel C. Peltz, Treasury
Management Group
Wells Fargo & Company
2013 Financial Report
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Financial Review
Overview
Earnings Performance
Balance Sheet Analysis
Off-Balance Sheet Arrangements
Risk Management
Capital Management
Regulatory Reform
Critical Accounting Policies
Current Accounting Developments
Forward-Looking Statements
Risk Factors
Controls and Procedures
Disclosure Controls and Procedures
Internal Control Over Financial Reporting
Management's Report on Internal Control over
Financial Reporting
Report of Independent Registered Public
Accounting Firm
Financial Statements
Consolidated Statement of Income
Consolidated Statement of Comprehensive
Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
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9
Cash, Loan and Dividend Restrictions
Federal Funds Sold, Securities Purchased under Resale
Agreements and Other Short-Term Investments
Investment Securities
Loans and Allowance for Credit Losses
Premises, Equipment, Lease Commitments and Other
Assets
Securitizations and Variable Interest Entities
Mortgage Banking Activities
10
Intangible Assets
11
12
13
14
Deposits
Short-Term Borrowings
Long-Term Debt
Guarantees, Pledged Assets and Collateral
15
Legal Actions
16
17
18
19
Derivatives
Fair Values of Assets and Liabilities
Preferred Stock
Common Stock and Stock Plans
20
Employee Benefits and Other Expenses
21
22
23
24
25
26
Income Taxes
Earnings Per Common Share
Other Comprehensive Income
Operating Segments
Parent-Only Financial Statements
Regulatory and Agency Capital Requirements
141
153
1
2
Notes to Financial Statements
Summary of Significant Accounting Policies
Business Combinations
263
264
266
Report of Independent Registered
Public Accounting Firm
Quarterly Financial Data
Glossary of Acronyms
29
This Annual 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” and “Risk Factors”
sections, and in the “Regulation and Supervision” section 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 at the end of this Report for terms used
throughout this Report.
Financial Review
Overview
Wells Fargo & Company is a nationwide, diversified,
community-based financial services company with $1.5 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, 12,000 ATMs and the Internet
(wellsfargo.com), and we have offices in 36 countries to support
our customers who conduct business in the global economy.
With more than 264,000 active, full-time equivalent team
members, we serve one in three households in the United States
and rank No. 25 on Fortune’s 2013 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
December 31, 2013.
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. Our primary 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 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.
Financial Performance
We produced another outstanding year of financial results in
2013 and ended the year as America’s most profitable bank. We
continued to demonstrate the benefit of our diversified business
model by generating record earnings, growing loans and
deposits, achieving significant improvement in credit quality and
rewarding our shareholders by increasing our dividend and
buying back more shares. Wells Fargo net income was
$21.9 billion in 2013, an increase of 16% compared with 2012,
with record diluted earnings per share (EPS) of $3.89, also up
16% from the prior year. We achieved 16 consecutive quarters of
EPS growth and 11 consecutive quarters of record EPS. The
drivers of our earnings growth during 2013 reflected the
30
changing economic and interest rate environment. Home
affordability remained str0ng, despite an increase in interest
rates and home prices. As interest rates rose during 2013,
mortgage refinance volume declined compared with 2012.
However, over the same period we had double-digit fee growth
in brokerage, investment banking, cards and mortgage servicing.
The economy maintained its pace of moderate growth with gains
in consumer spending, business investment and employment.
x
x
x
Noteworthy items included:
our loans increased $26.2 billion, up 3% even with the
planned runoff in our non-strategic/liquidating portfolios,
and our core loan portfolio grew by $39.9 billion, up 6%;
our deposit franchise continued to generate strong deposit
growth, with total deposits up $76.3 billion, or 8%;
our credit performance continued to be strong with total net
charge-offs down $4.5 billion, or 50%, from a year ago;
x we resolved many outstanding issues including the
Independent Foreclosure Review as well as repurchase
demands and mortgage-backed securities matters, primarily
involving pre-2009 mortgage loan originations, with
government-sponsored entities;
x we continued to focus on meeting our customers’ financial
needs and achieved record cross-sell across the Company;
our return on assets (ROA) increased by 10 basis points to
1.51%, and return on equity (ROE) increased by 92 basis
points to 13.87%;
x
x we continued to generate strong capital growth as our
estimated Common Equity Tier I ratio under Basel III
increased to 9.78%, above our internal target of 9%; and
our common stock price increased 33% and we returned
$11.4 billion in capital to our shareholders through an
increased common stock dividend and additional share
repurchases (up 33% from 2012).
x
Balance Sheet and Liquidity
Our balance sheet grew 7% in 2013 to $1.5 trillion, funded
largely by strong deposit growth. These deposits have diluted our
net interest margin (down to 3.39% in 2013 compared with
3.76% in 2012), but provide an opportunity to generate business
through cross-selling efforts in the future. We also have been
In addition to lower net charge-offs and provision expense,
nonperforming assets (NPAs) also improved and were down
$4.9 billion, or 20%, from 2012. Nonaccrual loans declined
$4.8 billion from the prior year while foreclosed assets were
down slightly from 2012.
Capital
We continued to strengthen our capital levels in 2013 even as we
returned more capital to our shareholders, increasing total
equity to $171.0 billion at December 31, 2013, up $12.1 billion
from the prior year. Our Tier 1 common equity ratio was 10.82%
of risk-weighted assets (RWA) under Basel I. Our estimated
Common Equity Tier 1 ratio under Basel III, using the advanced
approach method, increased to 9.76% in 2013, exceeding our
internal target of 9%, which includes a 100 basis point internal
capital buffer. The increase in the Basel III ratio was the result of
our strong underlying earnings performance and a reduction in
RWA, which was due to our improved credit profile and model
refinements for our commercial portfolios. We gained more
clarity regarding Basel III capital requirements in 2013 and took
a number of actions to further reduce RWA such as disposing of
an asset that had a punitive risk weighting and obtaining more
granular data related to the underlying investments of life
insurance assets.
For 2013 we paid a total dividend of $1.15 per share, an
increase of 31% from the prior year, and we purchased
124 million shares of common stock in the year. We also
executed a $500 million forward purchase contract that is
expected to settle in first quarter 2014 for approximately
11 million shares.
Our other regulatory capital ratios under Basel I remained
strong with a total risk-based capital ratio of 15.43%, Tier 1 risk-
based capital ratio of 12.33% and Tier 1 leverage ratio of 9.60%
at December 31, 2013, compared with 14.63%, 11.75% and 9.47%,
respectively, at December 31, 2012. In July 2013, U.S. banking
regulatory agencies issued a supplementary leverage ratio
proposal for Basel III. Based on our review, our current leverage
levels would exceed the applicable proposed requirements for
the holding company and each of our insured depository
institutions. See the “Capital Management” section in this
Report for more information regarding our capital, including the
calculation of common equity for regulatory purposes. We
remain committed to returning more capital to our shareholders.
able to grow our loans on a year-over-year basis for 10
consecutive quarters, and for the past seven quarters year-over-
year loan growth has been at least 3%, despite the planned
runoff from our non-strategic/liquidating portfolios. Our non-
strategic/liquidating loan portfolios decreased $13.7 billion
during the year (now less than 10% of total loans) and our core
loan portfolios increased $39.9 billion from the prior year. Our
federal funds sold, securities purchased under resale agreements
and other short-term investments (collectively referred to as
federal funds sold and other short-term investments elsewhere
in this Report) increased by $76.5 billion during the year on
continued strong growth in interest-earning deposits, and we
grew our investment securities portfolio by $29.2 billion in 2013.
While we believe our liquidity position was already strong
with increased regulatory expectations, we have been adding to
our position over the past year. We issued long-term debt and
term-deposits at very low interest rates and most of the proceeds
went into cash and federal funds sold and other short term
investments. Deposit growth remained strong with period-end
deposits up $76.3 billion from 2012. Average deposits have
grown while deposit costs (down 5 basis points from a year ago
to 11 basis points in fourth quarter 2013) have declined for
13 consecutive quarters. We grew our primary consumer
checking customers by a net 4.7% from a year ago
(November 2013 compared with November 2012). The growth in
these relationship-based customers should benefit our future
results as we remain focused on meeting more of our customers’
financial needs.
Credit Quality
Credit quality continued to improve in 2013, with solid
performance in several of our commercial and consumer loan
portfolios, reflecting our long-term risk focus and the benefit
from the improving housing market. Net charge-offs of
$4.5 billion were 0.56% of average loans, down 61 basis points
from a year ago. Net losses in our commercial portfolio were
only $206 million, or 6 basis points of average loans. Net
consumer losses declined to 98 basis points in 2013 from
184 basis points in 2012. We continued to have strong
improvement in our commercial and residential real estate
portfolios. Our commercial real estate portfolios were in a net
recovery position for each quarter of 2013 and losses on our
consumer real estate portfolios declined $3.5 billion from a year
ago, down 59%. 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
provision for credit losses in 2013 was $2.3 billion, which was
$4.9 billion less than a year ago. This provision reflected a
release of $2.2 billion from the allowance for credit losses,
compared with a release of $1.8 billion a year ago. Given current
favorable conditions, we continue to expect future allowance
releases, absent a significant deterioration in the economy.
31
Overview (continued)
Table 1: Six-Year Summary of Selected Financial Data (1)
(in millions, except per share amounts)
2013
2012
2011
2010
2009
2008
2012
rate
%
Five-year
Change
2013/
compound
growth
Income statement
Net interest income
Noninterest income
Revenue
Provision for credit losses
Noninterest expense
Net income before
noncontrolling interests
Less: Net income from
noncontrolling interests
Wells Fargo net income
Earnings per common share
Diluted earnings per common share
Dividends declared per common share
Balance sheet (at year end)
$
42,800
40,980
83,780
2,309
48,842
43,230
42,856
86,086
7,217
50,398
42,763
38,185
80,948
7,899
49,393
44,757
40,453
85,210
15,753
50,456
46,324
42,362
88,686
21,668
49,020
25,143
16,734
41,877
15,979
22,598
(1) %
(4)
(3)
(68)
(3)
22,224
19,368
16,211
12,663
12,667
2,698
15
346
471
342
301
392
43
(27)
21,878
3.95
3.89
1.15
18,897
3.40
3.36
0.88
15,869
2.85
2.82
0.48
12,362
2.23
2.21
0.20
12,275
1.76
1.75
0.49
2,655
0.70
0.70
1.30
16
16
16
31
Investment securities
$
264,353
235,199
222,613
172,654
172,710
151,569
12 %
Loans
Allowance for loan losses
Goodwill
Assets
Core deposits (2)
Long-term debt
825,799
799,574
769,631
757,267
782,770
864,830
14,502
25,637
17,060
25,637
19,372
25,115
23,022
24,770
24,516
24,812
21,013
22,627
1,527,015 1,422,968 1,313,867 1,258,128 1,243,646 1,309,639
745,432
980,063
798,192
872,629
780,737
945,749
152,998
127,379
125,354
156,983
203,861
267,158
Wells Fargo stockholders' equity
170,142
157,554
140,241
126,408
111,786
Noncontrolling interests
Total equity
866
1,357
1,446
1,481
2,573
171,008
158,911
141,687
127,889
114,359
102,316
99,084
3,232
3
(15)
-
7
4
20
8
(36)
8
11
20
15
(32)
17
52
52
52
41
41
(2)
12
(1)
(7)
3
3
6
(11)
11
(23)
11
(1) The Company acquired Wachovia Corporation (Wachovia) on December 31, 2008. Because the acquisition was completed on December 31, 2008, Wachovia's results are
included in the income statement, average balances and related metrics beginning in 2009. Wachovia's assets and liabilities are included in the consolidated balance sheet
beginning on December 31, 2008.
(2) Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits
(Eurodollar sweep balances).
32
Table 2: Ratios and Per Common Share Data
Profitability ratios
Wells Fargo net income to average assets (ROA)
Wells Fargo net income applicable to common stock to average
Wells Fargo common stockholders' equity (ROE)
Efficiency ratio (1)
Capital ratios
At year end:
Wells Fargo common stockholders' equity to assets
Total equity to assets
Risk-based capital (2)
Tier 1 capital
Total capital
Tier 1 leverage (2)
Tier 1 common equity (3)
Average balances:
Average Wells Fargo common stockholders' equity to average assets
Average total equity to average assets
Per common share data
Dividend payout (4)
Book value
Market price (5)
High
Low
Year end
Year ended December 31,
2013
2012
2011
1.51 %
1.41
1.25
13.87
58.3
12.95
58.5
11.93
61.0
10.15
11.20
12.33
15.43
9.60
10.82
10.40
11.39
29.6
$
29.48
45.64
34.43
45.40
10.23
11.17
11.75
14.63
9.47
10.12
10.36
11.27
26.2
27.64
36.60
27.94
34.18
9.87
10.78
11.33
14.76
9.03
9.46
9.91
10.80
17.0
24.64
34.25
22.58
27.56
(1) The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(2) See Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(3) See the "Capital Management" section in this Report for additional information.
(4) Dividends declared per common share as a percentage of diluted earnings per common share.
(5) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
33
Earnings Performance
Wells Fargo net income for 2013 was $21.9 billion ($3.89 diluted
earnings per common share), compared with $18.9 billion
($3.36 diluted per share) for 2012 and $15.9 billion
($2.82 diluted per share) for 2011. Our 2013 earnings reflected
strong execution of our business strategy as well as growth in
many of our businesses. Our financial performance in 2013 was
significantly affected by a reduced provision for credit losses,
reflecting strong underlying credit performance. We also
generated diversified sources of fee income across many of our
businesses and grew loans and deposits.
Revenue, the sum of net interest income and noninterest
income, was $83.8 billion in 2013, compared with $86.1 billion
in 2012 and $80.9 billion in 2011. The decrease in revenue for
2013 was predominantly due to a decrease in noninterest
income, reflecting declines in mortgage banking origination
volume as interest rates rose during 2013. In 2013, net interest
income of $42.8 billion represented 51% of revenue, compared
with $43.2 billion (50%) in 2012 and $42.8 billion (53%) in
2011.
Noninterest income was $41.0 billion in 2013, representing
49% of revenue, compared with $42.9 billion (50%) in 2012 and
$38.2 billion (47%) in 2011. The decrease in 2013 was driven
predominantly by a 25% decline in mortgage banking income
due to decreased net gains on mortgage loan origination/sales
activities, offset by higher servicing income. Mortgage loan
originations were $351 billion in 2013, down from $524 billion a
year ago.
Noninterest expense was $48.8 billion in 2013, compared
with $50.4 billion in 2012 and $49.4 billion in 2011. Noninterest
expense as a percentage of revenue (efficiency ratio) was 58.3%
in 2013, 58.5% in 2012 and 61.0% in 2011, reflecting our expense
management efforts. The decrease in 2013 compared with 2012
reflected lower operating losses, lower foreclosed assets expense,
and lower FDIC and other deposit assessments.
Table 3 presents the components of revenue and noninterest
expense as a percentage of revenue for year-over-year results.
34
Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
% of
revenue
2013
% of
revenue
2012
% of
revenue
2011
Year ended December 31,
(in millions)
Interest income
Trading assets
Investment securities
Mortgages held for sale (MHFS)
Loans held for sale (LHFS)
Loans
Other interest income
Total interest income
Interest expense
Deposits
Short-term borrowings
Long-term debt
Other interest expense
Total interest expense
$
1,406
8,841
1,290
13
35,618
724
47,892
1,337
71
2,585
307
4,300
2 %
$
11
1
-
42
1
57
2
-
3
-
5
Net interest income (on a taxable-equivalent basis)
43,592
52
Taxable-equivalent adjustment
Net interest income (A)
Noninterest income
Service charges on deposit accounts
Trust and investment fees (1)
Card fees
Other fees (1)
Mortgage banking (1)
Insurance
Net gains from trading activities
Net gains (losses) on debt securities
Net gains from equity investments
Lease income
Other
(792)
(1)
42,800
51
5,023
13,430
3,191
4,340
8,774
1,814
1,623
(29)
1,472
663
679
6
16
4
5
10
2
2
-
2
1
1
1,380
8,757
1,825
41
36,517
587
49,107
1,727
94
3,110
245
5,176
43,931
(701)
43,230
4,683
11,890
2,838
4,519
11,638
1,850
1,707
(128)
1,485
567
1,807
2 % $
10
2
-
42
1
57
2
-
4
-
6
51
(1)
50
5
14
3
5
14
2
2
-
2
1
2
1,463
9,107
1,644
58
37,302
548
50,122
2,275
94
3,978
316
6,663
43,459
(696)
42,763
4,280
11,304
3,653
4,193
7,832
1,960
1,014
54
1,482
524
1,889
2 %
11
2
-
46
1
62
3
-
5
-
8
54
(1)
53
5
14
5
5
10
2
1
-
2
1
2
Total noninterest income (B)
40,980
49
42,856
50
38,185
47
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Other (2)
Total noninterest expense
15,152
9,951
5,033
1,984
2,895
1,504
961
11,362
48,842
18
12
6
2
3
2
1
14
58
14,689
9,504
4,611
2,068
2,857
1,674
1,356
13,639
50,398
17
11
6
2
3
2
2
16
59
14,462
8,857
4,348
2,283
3,011
1,880
1,266
13,286
49,393
18
11
5
3
4
2
2
16
61
Revenue (A) + (B)
$
83,780
$
86,086
$
80,948
(1) See Table 7 – Noninterest Income in this Report for additional detail.
(2) See Table 8 – Noninterest Expense in this Report for additional detail.
35
Earnings Performance (continued)
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 for 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 5 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 assets portfolio and the cost of funding those assets. In
addition, some variable 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
$43.6 billion in 2013, compared with $43.9 billion in 2012, and
$43.5 billion in 2011. The net interest margin was 3.39% in 2013,
down 37 basis points from 3.76% in 2012 and down 55 basis
points from 3.94% in 2011. The decrease in net interest income
for 2013, compared with 2012, was largely driven by declines in
interest income from MHFS and loans as the portfolio mix
changed. Strong growth in commercial, retained real estate and
automobile loans has replaced runoff of higher yielding
liquidating portfolios. Net interest income declines were
partially offset by reduced funding costs due to disciplined
deposit pricing and the maturity of higher yielding long-term
debt. The decline in net interest margin in 2013, compared with
a year ago, was primarily driven by higher funding balances,
including actions taken in response to increased regulatory
liquidity expectations which raised long-term debt and term
deposits in addition to customer-driven deposit growth. This
growth in funding increased cash and federal funds sold and
other short-term investments and was dilutive to net interest
margin although essentially neutral to net interest income.
Table 4 presents the components of earning assets and
funding sources as a percentage of earning assets to provide a
more meaningful analysis of year-over-year changes that
influenced net interest income.
Average earning assets increased $115.2 billion in 2013 from
a year ago, as average investment securities increased
$26.1 billion and average federal funds sold and other short-
term investments increased $70.8 billion for the same period,
respectively. In addition, average loans increased $29.8 billion
in 2013, compared with a year ago. The increases in average
investment securities, average federal funds sold and other
short-term investments and average loans were partially offset
by a $13.7 billion decline in average MHFS.
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 $942.1 billion in 2013,
compared with $893.9 billion in 2012, and funded 117% of
average loans compared with 115% a year ago. Average core
deposits decreased to 73% of average earning assets in 2013,
compared with 76% a year ago. 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 95% of our average core deposits are in
checking and savings deposits, one of the highest industry
percentages.
Table 5 presents the individual components of net interest
income and the net interest margin. The effect on interest
income and costs of earning asset and funding mix changes
described above, combined with rate changes during 2013, are
analyzed in Table 6.
36
Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earnings Assets
(in millions)
Earning assets
Federal funds sold, securities purchased under resale agreements
and other short-term investments
Trading assets
Investment securities:
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt and equity securities
Total available-for-sale securities
Held-to-maturity securities
Mortgages held for sale (1)
Loans held for sale (1)
Loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgag
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans (1)
Other
Funding sources
Deposits:
Total earning assets
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
Total interest-bearing liabilities
Portion of noninterest-bearing funding sources
Total funding sources
Noninterest-earning assets
Cash and due from banks
Goodwill
Other
Total noninterest-earning assets
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to fund earning assets
Net noninterest-bearing funding sources
Total assets
(1) Nonaccrual loans are included in their respective loan categories.
2013
% of
earning
assets
Average
balance
Year ended December 31,
2012
% of
earning
assets
e
Averag
balance
$
154,902
44,745
12 %
4
$
84,081
41,950
7 %
4
6,750
39,922
107,148
30,717
137,865
55,002
239,539
717
35,273
163
188,092
105,475
16,445
12,048
43,447
365,507
254,000
70,227
24,747
48,476
42,035
439,485
804,992
4,354
1
3
8
3
11
4
19
-
3
-
15
8
1
1
3
28
20
5
2
4
3
34
62
-
3,604
34,875
92,887
33,545
126,432
49,245
214,156
-
48,955
661
173,913
105,437
17,963
12,771
39,852
349,936
234,619
80,840
22,772
44,986
42,071
425,288
775,224
4,438
-
3
8
3
11
4
18
-
4
-
15
9
2
1
4
31
20
7
2
4
3
36
67
-
$
$
$
$
$
$
$
$
1,284,685
100 %
$
1,169,465
100 %
35,570
550,394
49,510
28,090
76,894
740,458
54,716
134,937
12,471
942,582
342,103
$
3 %
43
4
2
6
58
4
10
1
73
27
30,564
505,310
59,484
13,363
67,920
676,641
51,196
127,547
10,032
865,416
304,049
3 %
43
5
1
6
58
4
11
1
74
26
1,284,685
100 %
$
1,169,465
100 %
16,272
25,637
121,711
163,620
280,229
60,500
164,994
(342,103)
163,620
1,448,305
16,303
25,417
130,450
172,170
263,863
61,214
151,142
(304,049)
172,170
1,341,635
37
Earnings Performance (continued)
Table 5: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
(in millions)
Earning assets
Federal funds sold, securities purchased under
resale agreements and other short-term investments
$
Trading assets (3)
Investment securities (4):
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt and equity securities
Held-to-maturity securities (5)
Total available-for-sale securities
Mortgages held for sale (6)
Loans held for sale (6)
Loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans (6)
Other
Funding sources
Deposits:
Average
balance
Yields/
rates
2013
Interest
income/
expense
Average
balance
Yields/
rates
2012
Interest
income/
expense
154,902
44,745
0.32 % $
3.14
489
1,406
84,081
41,950
0.45 % $
3.29
378
1,380
6,750
39,922
107,148
30,717
137,865
55,002
239,53
9
717
35,273
163
188,092
105,475
16,445
12,048
43,447
365,507
254,000
70,227
24,747
48,476
42,035
439,485
804,992
4,354
1.66
4.38
2.83
6.47
3.64
3.53
3.68
3.06
3.66
7.95
3.62
3.93
4.77
6.13
2.18
3.67
4.22
4.29
12.46
6.94
4.80
5.05
4.42
5.39
112
1,748
3,031
1,988
5,019
1,940
8,81
9
22
1,290
13
6,807
4,147
784
738
946
13,422
10,716
3,013
3,083
3,365
2,019
22,196
35,618
235
3,604
34,875
92,887
33,545
126,432
49,245
214,156
-
48,955
661
173,913
105,437
17,963
12,771
39,852
349,936
234,619
80,840
22,772
44,986
42,071
425,288
775,224
4,438
1.31
4.48
3.12
6.75
4.08
4.04
4.09
-
3.73
6.22
4.01
4.18
4.98
7.22
2.47
4.06
4.55
4.28
12.67
7.54
4.57
5.25
4.71
4.70
47
1,561
2,893
2,264
5,157
1,992
8,757
-
1,825
41
6,981
4,411
894
921
984
14,191
10,671
3,457
2,885
3,390
1,923
22,326
36,517
209
Total earning assets
$
1,284,685
3.73 % $
47,892
1,169,465
4.20 % $
49,107
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
Total interest-bearing liabilities
Portion of noninterest-bearing funding sources
$
35,570
550,394
49,510
28,090
76,894
740,458
54,716
134,937
12,471
942,582
342,103
Total funding sources
$
1,284,685
Net interest margin and net interest income
on a taxable-equivalent basis (7)
Noninterest-earning assets
Cash and due from banks
Goodwill
Other
Total noninterest-earning assets
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to
fund earning assets
Net noninterest-bearing funding sources
Total assets
$
$
$
$
$
16,272
25,637
121,711
163,620
280,229
60,500
164,994
(342,103)
163,620
1,448,305
0.06 % $
0.08
1.13
0.69
0.15
0.18
0.13
1.92
2.46
0.46
-
0.34
22
450
559
194
112
1,33
7
71
2,585
307
4,300
-
4,300
30,564
505,310
59,484
13,363
67,920
676,641
51,196
127,547
10,032
865,416
304,049
1,169,465
0.06 % $
0.12
1.31
1.68
0.16
0.26
0.18
2.44
2.44
0.60
-
0.44
19
592
782
225
109
1,727
94
3,110
245
5,176
-
5,176
3.39 % $
43,592
3.76 % $
43,931
16,303
25,417
130,450
172,170
263,863
61,214
151,142
(304,049)
172,170
1,341,635
(1) Our average prime rate was 3.25% for 2013, 2012, 2011, 2010, and 2009, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 0.27%,
0.43%, 0.34%, 0.34%, and 0.69% for the same years, respectively.
(2) Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3) Interest income/expense for trading assets represents interest and dividend income earned on trading securities.
(4) The average balance amounts represent amortized cost for the periods presented.
38
Average
balance
Yields/
rates
2011
Interest
income/
expense
e
Averag
balance
Yields/
rates
2010
Interest
income/
expense
Average
balance
Yields/
rates
$
87,186
39,737
0.40 % $
3.68
345
1,463
62,961
29,920
0.36 % $
3.75
230
1,121
26,869
21,092
0.56 % $
4.48
5,503
24,035
74,665
31,902
106,567
38,625
174,730
-
37,232
1,104
157,608
102,236
21,592
12,944
36,768
331,148
226,980
90,705
21,463
43,744
43,104
425,996
757,144
4,929
1.25
5.09
4.36
8.20
5.51
5.03
5.21
-
4.42
5.25
4.37
4.07
4.88
7.54
2.56
4.24
4.89
4.33
13.02
8.13
4.43
5.46
4.93
4.12
69
1,223
3,257
2,617
5,874
1,941
9,107
-
1,644
58
6,894
4,163
1,055
976
941
14,029
11,090
3,926
2,794
3,555
1,908
23,273
37,302
203
1,870
16,089
71,953
31,815
103,768
32,611
154,338
-
36,716
3,773
149,576
98,497
31,286
13,451
29,726
322,536
235,568
101,537
22,375
43,642
44,943
448,065
770,601
5,849
3.24
6.09
5.14
10.67
6.84
6.45
6.63
-
4.73
2.67
4.80
3.89
3.36
9.21
3.49
4.45
5.18
4.45
13.35
8.84
4.21
5.68
5.17
3.56
61
980
3,697
3,396
7,093
2,102
10,236
-
1,736
101
7,186
3,836
1,051
1,239
1,037
14,349
12,206
4,519
2,987
3,856
1,891
25,459
39,808
207
2,436
13,098
84,295
45,672
129,967
32,022
177,523
-
37,416
6,293
180,924
96,273
40,885
14,751
30,661
363,494
238,359
106,957
23,357
44,196
46,470
459,339
822,833
6,113
2.83
6.42
5.45
9.09
6.73
7.16
6.73
-
5.16
2.90
4.22
3.50
2.91
9.32
3.95
4.07
5.45
4.76
12.16
9.22
4.04
5.85
5.06
3.05
2009
Interest
income/
expense
150
944
69
840
4,591
4,150
8,741
2,291
11,941
-
1,930
183
7,643
3,365
1,190
1,375
1,212
14,785
12,992
5,089
2,841
4,077
1,875
26,874
41,659
186
$
1,102,062
4.55 % $
50,122
1,064,158
5.02 % $
53,439
1,098,139
5.19 % $
56,993
$
47,705
464,450
69,711
13,126
61,566
656,558
51,781
141,079
10,955
860,373
241,689
$
1,102,062
$
$
$
$
$
17,388
24,904
125,911
168,203
215,242
57,399
137,251
(241,689)
168,203
1,270,265
0.08 % $
0.18
1.43
2.04
0.22
0.35
0.18
2.82
2.88
0.77
-
0.61
40
836
995
268
136
2,275
94
3,978
316
6,663
-
6,663
60,941
416,877
87,133
14,654
55,097
634,702
46,824
185,426
6,863
873,815
190,343
1,064,158
0.12 % $
0.26
1.43
2.07
0.22
0.45
0.22
2.64
3.31
0.92
-
0.76
72
1,088
1,247
302
123
2,832
106
4,888
227
8,053
-
8,053
70,179
351,892
140,197
20,459
53,166
635,893
51,972
231,801
4,904
924,570
173,569
1,098,139
0.14 % $
0.39
1.24
2.03
0.27
0.59
0.44
2.50
3.50
1.08
-
0.91
100
1,375
1,738
415
146
3,774
231
5,786
172
9,963
-
9,963
3.94 % $
43,459
4.26 % $
45,386
4.28 % $
47,030
17,618
24,824
120,338
162,780
183,008
47,877
122,238
(190,343)
162,780
1,226,938
19,218
23,997
121,000
164,215
171,712
48,193
117,879
(173,569)
164,215
1,262,354
(5) Includes $6.3 billion of federal agency mortgage-backed securities purchased during the fourth quarter of 2013 and $6.0 billion of auto asset-backed securities that were
transferred near the end of 2013 from the available-for-sale portfolio.
(6) Nonaccrual loans and related income are included in their respective loan categories.
(7) Includes taxable-equivalent adjustments of $792 million, $701 million, $696 million, $629 million and $706 million for 2013, 2012, 2011, 2010 and 2009, respectively,
primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.
39
Earnings Performance (continued)
Table 6 allocates the changes in net interest income on a
taxable-equivalent basis to changes in either average balances or
average rates for both interest-earning assets and
interest-bearing liabilities. Because of the numerous
simultaneous volume and rate changes during any period, it is
not possible to precisely allocate such changes between volume
and rate. For this table, changes that are not solely due to either
volume or rate are allocated to these categories on a pro-rata
basis based on the absolute value of the change due to average
volume and average rate.
Table 6: Analysis of Changes of Net Interest Income
(in millions)
Volume
Rate
Total
Volume
Rate
Total
2013 over 2012
2012 over 2011
Year ended December 31,
Increase (decrease) in interest income:
Federal funds sold, securities purchased under resale
agreements and other short-term investments
Trading assets
Investment securities:
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt and equity securities
Total available-for-sale securities
Held-to-maturity securities
Mortgages held for sale
Loans held for sale
Loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans
$
245
90
(134)
(64)
111
26
(12)
78
45
(161)
33
(83)
49
223
421
(185)
236
217
725
22
(502)
(37)
539
2
(73)
(50)
84
16
(36)
(283)
(91)
(374)
(269)
(663)
-
(33)
9
(713)
(266)
(37)
(133)
(122)
65
187
138
(276)
(138)
(52)
62
22
(535)
(28)
(174)
(264)
(110)
(183)
(38)
(25)
499
3
(161)
(22)
338
687
(1,051)
129
(482)
(364)
(353)
816
475
(1,533)
(717)
(424)
51
1,765
(2,115)
(350)
-
465
(26)
-
(284)
9
-
181
(17)
680
133
(182)
(13)
77
(593)
115
21
(42)
(34)
87
248
(161)
(55)
43
502
(1,271)
(769)
695
(533)
162
848
(452)
247
254
(2)
(803)
45
8
(444)
(49)
(279)
98
198
(25)
96
367
(424)
167
99
(46)
(786)
(45)
(76)
(419)
(469)
91
(264)
(165)
61
15
895
(1,025)
(130)
163
(1,110)
(947)
1,397
(2,296)
(899)
858
(1,643)
(785)
Other
(4)
30
26
(21)
27
6
Total increase (decrease) in interest income
1,936
(3,151)
(1,215)
3,107
(4,122)
(1,015)
Increase (decrease) in interest expense:
Deposits:
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
3
55
(123)
152
11
98
6
171
61
-
(197)
(100)
(183)
(8)
(488)
(29)
(696)
1
3
(142)
(223)
(31)
3
(390)
(23)
(525)
62
(12)
65
(135)
5
13
(64)
-
(362)
(25)
(9)
(309)
(78)
(48)
(40)
(21)
(244)
(213)
(43)
(27)
(484)
(548)
-
(506)
(46)
-
(868)
(71)
Total increase (decrease) in interest expense
336
(1,212)
(876)
(451)
(1,036)
(1,487)
Increase (decrease) in net interest income
on a taxable-equivalent basis
40
$
1,600
(1,939)
(339)
3,558
(3,086)
472
Noninterest Income
Table 7: Noninterest Income
(in millions)
2013
2012
2011
Year ended December 31,
Service charges on
deposit accounts
Trust and investment fees:
Brokerage advisory, commissions
and other fees (1)
Trust and investment management (1)
Investment banking
Total trust and
investment fees
Card fees
Other fees:
$
5,023
4,683
4,280
8,395
3,289
1,746
7,524
3,080
1,286
7,332
3,008
964
13,430
11,890
11,304
3,191
2,838
3,653
Charges and fees on loans
1,540
1,746
1,641
Merchant transaction
processing fees
Cash network fees
Commercial real estate
brokerage commissions
Letters of credit fees
All other fees
669
493
338
410
890
583
470
307
441
972
478
389
236
472
977
Total other fees
4,340
4,519
4,193
Mortgage banking:
Servicing income, net
Net gains on mortgage loan
1,920
1,378
3,266
origination/sales activities
6,854
10,260
4,566
Total mortgage banking
8,774
11,638
7,832
Insurance
Net gains from trading activities
Net gains (losses) on debt securities
1,814
1,623
(29)
1,850
1,707
(128)
1,960
1,014
54
Net gains from equity investments
1,472
1,485
1,482
Lease income
Life insurance investment income
All other
663
566
113
567
757
524
700
1,050
1,189
Total
$
40,980
42,856
38,185
(1) Prior year periods have been revised to reflect all fund distribution fees as
brokerage related income.
Noninterest income of $41.0 billion represented 49% of revenue
for 2013 compared with $42.9 billion, or 50%, for 2012 and
$38.2 billion, or 47%, for 2011. The decrease in noninterest
income in 2013 reflected declines in our mortgage banking
business, partially offset by growth in many of our other
businesses, including retail deposits, credit card, merchant card
processing, commercial banking, corporate banking, capital
markets, asset-backed finance, commercial real estate,
commercial mortgage servicing, corporate trust, asset
management, wealth management, brokerage and retirement.
Excluding mortgage banking, noninterest income increased
$988 million from a year ago.
Our service charges on deposit accounts increased in 2013 by
$340 million, or 7%, from 2012, due to primary consumer
checking customer growth, product changes and continued
customer adoption of overdraft services. These charges increased
$403 million, or 9%, in 2012 compared with 2011,
predominantly due to product and account changes including
changes to service charges and fewer fee waivers, continued
customer adoption of overdraft services and customer account
growth.
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 transactional commissions based on the number of
transactions executed at the customer’s direction, and
asset-based fees, which are based on the market value of the
customer’s assets. These fees increased to $8.4 billion in 2013,
from $7.5 billion and $7.3 billion in 2012 and 2011, respectively.
The increase in brokerage income for both periods was
predominantly due to higher asset-based fees as a result of
higher market values and growth in assets under management.
Brokerage client assets totaled $1.4 trillion at
December 31, 2013, an increase from $1.2 trillion at
December 31, 2012 and $1.1 trillion at December 31, 2011.
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 $3.3 billion in 2013 from $3.1 billion in 2012 and
$3.0 billion in 2011, primarily due to growth in assets under
management reflecting higher market values. At
December 31, 2013, these assets totaled $2.4 trillion, an increase
from $2.2 trillion at both December 31, 2012 and 2011.
We earn investment banking fees from underwriting debt
and equity securities, arranging loan syndications, and
performing other related advisory services. Investment banking
fees increased to $1.7 billion in 2013, from $1.3 billion in 2012
and $964 million in 2011, primarily due to increased loan
syndication volume and equity originations.
Card fees were $3.2 billion in 2013, compared with
$2.8 billion in 2012, which was down from $3.7 billion in 2011.
Card fees increased in 2013 due to account growth and increased
purchase activity. During 2012, card fees decreased compared
with 2011 because of lower debit card interchange rates resulting
from the Federal Reserve Board rules implementing the debit
interchange provisions of the Dodd-Frank Act, which became
effective in fourth quarter 2011. The reduction in debit
interchange income for 2012 was partially offset by growth in
purchase volume and new accounts.
Mortgage banking income, consisting of net servicing income
and net gains on loan origination/sales activities, totaled
$8.8 billion in 2013, compared with $11.6 billion in 2012 and
$7.8 billion in 2011.
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 of $1.9 billion
for 2013 included a $489 million net MSR valuation gain
($3.4 billion increase in the fair value of the MSRs offset by a
$2.9 billion hedge loss). Net servicing income of $1.4 billion for
2012 included a $681 million net MSR valuation gain
($2.9 billion decrease in the fair value of MSRs offset by a
41
Earnings Performance (continued)
$3.6 billion hedge gain), and net servicing income of $3.3 billion
for 2011 included a $1.6 billion net MSR valuation gain
($3.7 billion decrease in the fair value of MSRs offset by a
$5.3 billion hedge gain). The decrease in the 2012 net MSR
valuation gain from that for 2011 reflected a $677 million
reduction in valuation due to additional costs associated with
implementation of the servicing standards developed in
connection with our settlement with the Department of Justice
(DOJ) and other state and federal agencies relating to our
mortgage servicing and foreclosure practices as well as higher
foreclosure costs. Our portfolio of loans serviced for others was
$1.90 trillion at December 31, 2013, $1.91 trillion at
December 31, 2012, and $1.85 trillion at December 31, 2011. At
December 31, 2013, the ratio of MSRs to related loans serviced
for others was 0.88%, compared with 0.67% at
December 31, 2012 and 0.76% at December 31, 2011. See the
“Risk Management – Mortgage Banking Interest Rate and
Market Risk” section in this Report for additional information
regarding our MSRs risks and hedging approach.
Net gains on mortgage loan origination/sale activities were
$6.9 billion in 2013, compared with $10.3 billion in 2012 and
$4.6 billion in 2011. The decrease from 2012 was primarily
driven by lower margins and origination volumes, and the
increase in 2012 from 2011 was driven by higher loan origination
volume and margins. Mortgage loan originations were
$351 billion in 2013, of which 47% were for home purchases,
compared with $524 billion and 35%, respectively, for 2012 and
$357 billion and 40%, respectively, for 2011. During 2013, we
retained for investment $3.6 billion ($19.4 billion for 2012) of
1-4 family conforming first mortgage loans, forgoing
approximately $120 million ($575 million for 2012) of revenue
that could have been generated had the loans been originated for
sale along with other agency conforming loan production. While
retaining these mortgage loans on our balance sheet reduced
mortgage revenue, we expect to generate spread income in
future quarters from mortgage loans with higher yields than
mortgage-backed securities we could have purchased in the
market. While we do not currently plan to hold additional
conforming mortgages on balance sheet, we have a large
mortgage business and strong capital that provides us with the
flexibility to make such choices in the future to benefit our long-
term results. Mortgage applications were $438 billion in 2013,
compared with $736 billion in 2012 and $537 billion in 2011.
The 1-4 family first mortgage unclosed pipeline was $25 billion
at December 31, 2013, compared with $81 billion at
December 31, 2012 and $72 billion at December 31, 2011. For
additional information about our mortgage banking activities
and results, see the “Risk Management – Mortgage Banking
Interest Rate and Market Risk” section and Note 9 (Mortgage
Banking Activities) and Note 17 (Fair Values of Assets and
Liabilities) to Financial Statements in this Report.
Net gains on mortgage loan origination/sales activities
include the cost of additions 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. Additions to the
mortgage repurchase liability that were charged against net
gains on mortgage loan origination/sales activities during 2013
42
totaled $428 million (compared with $1.9 billion for 2012 and
$1.3 billion for 2011), of which $285 million ($1.7 billion for
2012 and $1.2 billion for 2011) was for subsequent increases in
estimated losses on prior period loan sales. In September and
December 2013, we announced agreements with Federal Home
Loan Mortgage Corporation (FHLMC) and Federal National
Mortgage Association (FNMA), respectively, which resolved
substantially all agency repurchase liabilities for mortgage loans
sold or originated prior to 2009. As a result, outstanding
repurchase demands were down $1.2 billion from a year ago and
our repurchase liability declined to $899 million, the lowest level
since second quarter 2009. For additional information about
mortgage loan repurchases, see the “Risk Management – Credit
Risk Management – Liability for Mortgage Loan Repurchase
Losses” section and Note 9 (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 (losses) from trading activities, which reflect
unrealized changes in fair value of our trading positions and
realized gains and losses, were $1.6 billion in 2013, $1.7 billion
in 2012 and $1.0 billion in 2011. The year-over-year decrease in
2013 was largely driven by lower results in customer
accommodation, and the increase in 2012 from 2011 was driven
by gains on customer accommodation trading activities and
economic hedging gains, which included higher gains on
deferred compensation plan investments based on participant
elections (offset entirely in employee benefit expense). 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. Proprietary trading
generated $13 million and $15 million of net gains in 2013 and
2012, respectively, and $14 million of net losses in 2011. 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 $1.4 billion for
both 2013 and 2012 and $1.5 billion for 2011, after other-than-
temporary impairment (OTTI) write-downs of $344 million,
$416 million and $711 million, respectively, for the same periods.
All other income was $113 million for 2013 compared with
$1.1 billion in 2012 and $1.2 billion in 2011. All other income
includes ineffectiveness recognized on derivatives that qualify
for hedge accounting and pre-tax losses on tax credits and
foreign currency adjustments, any of which can cause other
income losses. Lower other income for 2013 compared with a
year ago reflected larger ineffectiveness losses on derivatives that
qualify for hedge accounting and interest-related valuation
changes on certain mortgage-related assets carried at fair value.
Noninterest Expense
Table 8: Noninterest Expense
(in millions)
Salaries
Commission and incentive
compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit
assessments
Outside professional services
Outside data processing
Contract services
Travel and entertainment
Operating losses
Postage, stationery and supplies
Advertising and promotion
Foreclosed assets
Telecommunications
Insurance
Operating leases
All other
Total
Year ended December 31,
2013
2012
2011
$
15,152
14,689
14,462
8,857
4,348
2,283
3,011
1,880
1,266
2,692
935
1,407
821
1,261
942
607
9,951
5,033
1,984
2,895
1,504
9,504
4,611
2,068
2,857
1,674
961
2,519
1,356
2,729
983
935
885
821
756
610
605
482
437
204
910
1,011
839
2,235
799
578
1,061
1,354
500
453
109
523
515
112
2,125
2,415
2,117
$
48,842
50,398
49,393
Noninterest expense was $48.8 billion in 2013, down 3% from
$50.4 billion in 2012, which was up 2% from $49.4 billion in
2011. The decrease in 2013 was driven predominantly by lower
operating losses ($821 million, down from $2.2 billion in 2012),
lower foreclosed assets expense ($605 million, down from
$1.1 billion in 2012), lower FDIC and other deposit assessments
($961 million, down from $1.4 billion in 2012), and the
completion of Wachovia merger integration activities in the prior
year ($218 million in first quarter 2012), partially offset by
higher personnel expense ($30.1 billion, up from $28.8 billion in
2012). The increase in 2012 from 2011 was driven by higher
personnel expense and higher operating losses, partially offset
by lower merger integration costs.
Personnel expenses, which include salaries, commissions,
incentive compensation and employee benefits, were up
$1.3 billion, or 5%, in 2013 compared with 2012, primarily due
to annual salary increases and related salary taxes, and higher
revenue-based compensation (non-mortgage-related). Included
in personnel expense was a $422 million increase in employee
benefits, a significant portion of which was driven by higher
deferred compensation expense (offset in trading income). For
2012, these expenses were up 4% compared with 2011 due
mostly to higher revenue-based compensation, higher employee
benefits, and increased staffing.
The completion of Wachovia integration activities in the prior
year contributed to a year-over-year reduction in noninterest
expense for 2013, primarily in outside professional services and
contract services. Lower costs associated with our mortgage
servicing regulatory consent orders also contributed to the
decline in outside professional services in 2013, though this was
partially offset by project spend on business investments and
compliance and regulatory related initiatives. Outside
professional services were also elevated in 2012 and 2011,
reflecting investments by our businesses in their service delivery
systems and higher costs associated with regulatory driven
mortgage servicing and foreclosure matters.
Foreclosed assets expense was down 43% in 2013 compared
with 2012 and down 22% in 2012 compared with 2011, reflecting
lower write-downs, gains on sale, and lower expenses associated
with foreclosed properties, primarily driven by the real estate
market improvement.
FDIC and other deposit assessments were down 29% in 2013
compared with 2012, due primarily to lower FDIC assessment
rates related to improved credit performance and the Company’s
liquidity position.
Operating losses were down 63% in 2013 compared with
2012, which was elevated predominantly due to mortgage
servicing and foreclosure-related matters, including the
Attorneys General settlement announced in February 2012, a
$175 million settlement in July 2012 with the U.S. Department
of Justice (DOJ), which resolved alleged claims related to our
mortgage lending practices, and the $766 million accrual for the
Independent Foreclosure Review (IFR) settlement and
additional remediation-related costs.
All other expenses of $2.1 billion in 2013 were down from
$2.4 billion in 2012, primarily due to a $250 million charitable
contribution to the Wells Fargo Foundation in 2012.
Income Tax Expense
The 2013 annual effective tax rate was 32.2% compared with
32.5% in 2012 and 31.9% in 2011. The effective tax rate for 2013
included a net reduction in the reserve for uncertain tax
positions primarily due to settlements with authorities regarding
certain cross border transactions and tax benefits recognized
from the realization for tax purposes of a previously written
down investment. The 2012 effective tax rate included a tax
benefit resulting from the surrender of previously written-down
Wachovia life insurance investments. The 2011 effective tax rate
included a decrease in tax expense associated with leverage
leases, as well as tax benefits related to charitable donations of
appreciated securities. See Note 21 (Income Taxes) to Financial
Statements in this Report for information regarding tax matters
related to undistributed foreign earnings.
43
Earnings Performance (continued)
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
Table 9: Operating Segment Results – Highlights
guidance equivalent to generally accepted accounting principles
(GAAP). Table 9 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
24 (Operating Segments) to Financial Statements in this Report.
(in billions)
2013
Revenue
Provision (reversal of
provision) for credit losses
Noninterest expense
Net income (loss)
Average loans
Average core deposits
2012
Revenue
Provision for credit losses
Noninterest expense
Net income (loss)
Average loans
Average core deposits
2011
Revenue
Provision (reversal of
provision) for credit losses
Noninterest expense
Net income (loss)
Average loans
Average core deposits
Community
Wholesale
Wealth, Brokerage
Banking
Banking
and Retirement
Other (1)
Consolidated
Company
Year ended December 31,
$
50.3
2.8
28.7
12.7
499.3
620.1
53.4
6.8
30.8
10.5
487.1
591.2
50.8
8.0
29.3
9.1
496.3
556.3
$
$
$
$
$
24.1
(0.4)
12.4
8.1
290.0
237.2
24.1
0.3
12.1
7.8
273.8
227.0
13.2
-
10.5
1.7
46.1
150.1
12.2
0.1
9.9
1.3
42.7
137.5
21.6
12.2
(0.1)
11.2
7.0
249.1
202.1
0.2
9.9
1.3
43.0
130.0
(3.8)
(0.1)
(2.8)
(0.6)
(30.4)
(65.3)
(3.6)
-
(2.4)
(0.7)
(28.4)
(61.8)
(3.7)
(0.2)
(1.0)
(1.5)
(31.3)
(61.7)
83.8
2.3
48.8
21.9
805.0
942.1
86.1
7.2
50.4
18.9
775.2
893.9
80.9
7.9
49.4
15.9
757.1
826.7
(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 a record 6.16 products
per household in November 2013, up from 6.05 in November
2012 and 5.93 in November 2011. 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 November 2013, one
of every four of our retail banking households had eight or more
of our products.
Community Banking reported net income of $12.7 billion in
2013, up $2.2 billion, or 21%, from $10.5 billion in 2012, which
was up 15% from $9.1 billion in 2011. Revenue was $50.3 billion
in 2013, a decrease of $3.1 billion, or 6%, compared with
$53.4 billion in 2012, which was up 5% compared with
$50.8 billion in 2011. The decrease in 2013 was a result of lower
mortgage banking revenue, partially offset by higher trust and
investment fees, and revenue from debit, credit and merchant
card volumes. The increase in 2012 was the result of higher
mortgage banking revenue and growth in deposit service
charges, partially offset by lower debit card revenue due to
regulatory changes enacted in October 2011, and lower net
interest income. Average core deposits increased $28.9 billion in
2013, or 5%, from 2012, which increased $34.9 billion, or 6%,
from 2011. Noninterest expense declined $2.1 billion in 2013, or
7%, from 2012, which increased $1.6 billion, or 5%, from 2011.
The decrease in noninterest expense for 2013 reflected lower
FDIC and other deposit insurance assessments due to lower
FDIC assessment rates. Noninterest expense for 2012 was
elevated, compared with 2013 and 2011, due to costs associated
with settling mortgage servicing and foreclosure-related matters
including the DOJ and the IFR settlement, and a $250 million
contribution to the Wells Fargo Foundation. The provision for
44
credit losses of $2.8 billion in 2013 was 60% lower than 2012,
which was $1.1 billion, or 14%, lower than 2011, due to improved
portfolio performance in both 2013 and 2012.
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, 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 a record 7.1 products per customer in
September 2013, up from 6.8 in September 2012 and 6.5 in
September 2011.
Wholesale Banking reported net income of $8.1 billion in
2013, up $359 million, or 5%, from $7.8 billion in 2012, which
was up 11% from $7.0 billion in 2011. The year over year
increase in net income during 2013 was the result of
improvement in provision for credit losses and stable revenue
performance partially offset by increased noninterest expense.
The year over year increase in net income during 2012 was the
result of strong revenue growth partially offset by increased
noninterest expense and a higher provision for credit losses.
Revenue in 2013 of $24.1 billion was flat from 2012, as business
growth from asset backed finance, asset management, capital
markets and commercial real estate was offset by lower PCI
resolution income. Revenue in 2012 of $24.1 billion increased
$2.5 billion, or 12%, from 2011, due to broad-based business
growth as well as growth from acquisitions. Net interest income
of $12.3 billion in 2013 decreased $350 million, or 3%, from
2012, which was up 9% from 2011. The decrease in 2013 was due
to a strong loan and deposit growth, which was more than offset
by lower PCI resolutions and net interest margin compression.
The increase in 2012 was driven by strong loan and deposit
growth. Average loans of $290.0 billion in 2013 increased
$16.2 billion, or 6%, from $273.8 billion in 2012, which was up
10% from $249.1 billion in 2011. The loan growth in both 2013
and 2012 was driven by strong customer demand as well as
growth from acquisitions. Average core deposits of $237.2
billion in 2013 increased $10.2 billion, or 4%, from 2012 which
was up 12%, from 2011, reflecting continued strong customer
liquidity for both years. Noninterest income of $11.8 billion in
2013 increased $322 million, or 3%, from 2012 due to strong
growth in asset backed finance, asset management, capital
markets, commercial banking, commercial real estate and
corporate banking. Noninterest income of $11.4 billion in 2012
increased $1.5 billion, or 15%, from 2011 due to strong growth in
asset backed finance, capital markets, commercial banking,
commercial real estate and real estate capital markets. Total
noninterest expense in 2013 increased $296 million, or 2%,
compared with 2012, which was up 8%, or $905 million, from
2011. The increase in both 2013 and 2012 was due to higher
personnel expenses and higher non-personnel expenses related
to growth initiatives and compliance and regulatory
requirements, partially offset in 2013 by lower foreclosed asset
expenses. The provision for credit losses decreased $731 million
from 2012, due to lower loan losses, while the provision for
credit losses increased $396 million in 2012 from 2011, as a
$319 million decline in loan losses was more than offset by a
provision for increase in loans, particularly from acquisitions.
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 reached a record
10.42 products per household in November 2013, up from
10.27 in November 2012 and 10.05 in November 2011.
Wealth, Brokerage and Retirement reported net income of
$1.7 billion in 2013, up $384 million, or 29%, from 2012, which
was up 4% from $1.3 billion in 2011. Net income growth in 2013
was driven by higher noninterest income and improved credit
quality. Growth in net income for 2012 was affected by the
$153 million gain on the sale of the H.D. Vest Financial Services
business included in the 2011 results. Revenue of $13.2 billion in
2013 increased $1.0 billion from 2012, which was flat compared
with 2011. The increase in revenue for 2013 was due to increases
in both net interest income and noninterest income. Net interest
income increased 4% in 2013, due to growth in loan balances
and low-cost core deposits, partially offset by lower interest rates
on the loan and investment portfolios. Net interest income
decreased 3% in 2012 due to lower interest rates on the loan and
investment portfolios partially offset by the impact of growth in
low-cost core deposits. Average core deposits in 2013 of
$150.1 billion increased 9% from 2012, which was up 6% from
2011. Noninterest income increased 10% in 2013 from 2012,
largely due to strong growth in asset-based fees from improved
market performance and growth in assets under management,
partially offset by reduced securities gains in the brokerage
business. A slight increase of $59 million in noninterest income
in 2012 compared with 2011 was due to higher asset-based fees
and gains on deferred compensation plan investments (offset in
expense), partially offset by the 2011 gain on the sale of H.D.
Vest Financial Services business, lower transaction revenue and
reduced securities gains in the brokerage business. Noninterest
expense for 2013 was up 6% from 2012, which was flat from
2011. The increase in 2013 was predominantly due to higher
personnel expenses, primarily reflecting increased broker
commissions. Noninterest expense for 2012 included the impact
of deferred compensation plan expense (offset in revenue). Total
provision for credit losses improved for both 2013 and 2012,
45
Earnings Performance (continued)
driven by lower net charge-offs and continued improvement in
credit quality.
Balance Sheet Analysis
At December 31, 2013, our assets totaled $1.5 trillion, up
$104.0 billion from December 31, 2012. The predominant areas
of asset growth were in federal funds sold and other short-term
investments, which increased $76.5 billion, investment
securities, which increased $29.2 billion, and loans, which
increased $26.2 billion, partially offset by a $30.4 billion
decrease in mortgages held for sale. Deposit growth of
$76.3 billion, total equity growth of $12.1 billion and an increase
in long-term debt of $25.6 billion from December 31, 2012 were
the predominant sources funding our asset growth during 2013.
The deposit growth resulted in an increase in the proportion of
interest-bearing deposits. Equity growth benefited from
$14.7 billion in earnings net of dividends paid, as well as from
the issuance of preferred stock. The strength of our business
model produced record earnings and continued internal capital
Investment Securities
Table 10: Investment Securities – Summary
generation as reflected in our capital ratios, all of which
improved from December 31, 2012. Tier 1 capital as a percentage
of total risk-weighted assets increased to 12.33%, total capital
increased to 15.43%, Tier 1 leverage increased to 9.60%, and
Tier 1 common equity increased to 10.82% at December 31,
2013, compared with 11.75%, 14.63%, 9.47%, and 10.12%,
respectively, at December 31, 2012.
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 26 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report.
(in millions)
Available-for-sale securities:
Debt securities
Marketable equity securities
December 31, 2013
December 31, 2012
Net
unrealized
Cost
gain (loss)
Fair
value
Net
unrealized
Cost
gain
Fair
value
$
246,048
2,574
248,622
220,946
11,468
232,414
2,039
1,346
3,385
2,337
448
2,785
Total available-for-sale securities
Held-to-maturity securities
248,087
12,346
3,920
252,007
223,283
11,916
235,199
(99)
12,247
-
-
-
Total investment securities (1)
$
260,433
3,821
264,254
223,283
11,916
235,199
(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 10 presents a summary of our investment securities
portfolio, which consists of debt securities classified as available-
for-sale and held-to-maturity and marketable equity securities
classified as available-for-sale. During fourth quarter 2013, we
began purchasing high-quality agency mortgage-backed
securities (MBS) into our held-to-maturity portfolio.
Additionally, we transferred a portfolio of asset-backed
securities (ABS) primarily collateralized by auto loans and leases
from available-for-sale, reflecting our intent to hold these
securities to maturity. Our investment securities portfolio
increased $29.2 billion from December 31, 2012, primarily due
to purchases of agency MBS. The total net unrealized gains on
available-for-sale securities were $3.9 billion at
December 31, 2013, down from net unrealized gains of
$11.9 billion at December 31, 2012, due primarily to an increase
in long-term interest rates.
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 agency debt and 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 agency MBS and ABS
46
primarily collateralized by auto loans and leases, 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 $344 million in
OTTI write-downs recognized in 2013, $158 million related to
debt securities and $25 million related to marketable equity
securities, which are each included in available-for-sale
securities. Another $161 million in OTTI write-downs is 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 – Investments) and
Note 5 (Investment Securities) to Financial Statements in this
Report.
At December 31, 2013, investment securities included
$42.5 billion of municipal bonds, of which 86% were rated “A-”
or better based 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 7.5 years at December 31, 2013. 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 are shown in Table 11.
Table 11: Mortgage-Backed Securities
(in billions)
At December 31, 2013
Expected
Net
remaining
Fair
unrealized
maturity
value
gain (loss)
(in years)
Actual
$
148.8
0.7
6.4
Assuming a 200 basis point:
Increase in interest rates
Decrease in interest rates
133.7
159.1
(14.4)
11.0
7.5
3.6
See Note 5 (Investment Securities) to Financial Statements in
this Report for a summary of investment securities by security
type.
47
Balance Sheet Analysis (continued)
Loan Portfolio
Total loans were $825.8 billion at December 31, 2013, up
$26.2 billion from December 31, 2012. Table 12 provides a
summary of total outstanding loans by non-strategic/liquidating
and core loan portfolios. The runoff in the non-
strategic/liquidating portfolios was $13.7 billion, while loans in
the core portfolio grew $39.9 billion from December 31, 2012.
Our core loan growth in 2013 included:
x
a $20.7 billion increase in the commercial segment
predominantly from growth in commercial and industrial
loans and foreign loans, which included $5.2 billion of
commercial real estate portfolio acquisitions, consisting of
$4.0 billion U.K. commercial real estate loans classified
within foreign loans and $1.2 billion within commercial real
estate mortgage; and
a $19.2 billion increase in consumer loans, predominantly
from growth in first lien mortgages.
x
Additional information on the non-strategic and liquidating
loan portfolios is included in Table 17 in the “Risk Management
– Credit Risk Management” section in this Report.
Table 12: Loan Portfolios
(in millions)
Commercial
Consumer
Total loans
December 31, 2013
December 31, 2012
Core
Liquidating
Total
Core
Liquidating
Total
$
378,743
366,190
2,013
78,853
380,756
445,043
358,028
346,984
3,170
91,392
361,198
438,376
$
744,933
80,866
825,799
705,012
94,562
799,574
A discussion of average loan balances and a comparative
detail of average loan balances is included in Table 5 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
Table 13: Maturities for Selected Commercial Loan Categories
information are in Note 6 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report.
Table 13 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.
(in millions)
Selected loan maturities:
Commercial and industrial
$
Real estate mortgage
Real estate construction
Foreign
Within
one
year
44,801
17,746
6,095
33,681
December 31, 2013
December 31, 2012
After
one year
through
five years
After
five
years
After
Within
one year
one
through
After
five
Total
year
five years
years
Total
131,745
20,664
197,210
45,212
123,578
18,969
187,759
60,004
29,350
107,100
9,207
11,602
1,445
2,382
16,747
47,665
22,328
7,685
27,219
56,085
27,927
106,340
7,961
7,460
1,258
3,092
16,904
37,771
Total selected loans
$
102,323
212,558
53,841
368,722
102,444
195,084
51,246
348,774
Distribution of loans to
changes in interest rates:
Loans at fixed
interest rates
$
18,409
23,891
14,684
56,984
17,218
20,894
11,387
49,499
Loans at floating/variable
interest rates
83,914
188,667
39,157
311,738
85,226
174,190
39,859
299,275
Total selected loans
$
102,323
212,558
53,841
368,722
102,444
195,084
51,246
348,774
48
Deposits
Deposits totaled $1.1 trillion at December 31, 2013, compared
with $1.0 trillion at December 31, 2012. Table 14 provides
additional information regarding deposits. Deposit growth of
$76 billion from December 31, 2012 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 5 earlier in this Report. Total core deposits
were $980.1 billion at December 31, 2013, up $34.4 billion
from $945.7 billion at December 31, 2012.
Table 14: Deposits
($ in millions)
Noninterest-bearing
Interest-bearing checking
Market rate and other savings
Savings certificates
Foreign deposits (1)
Core deposits
Other time and savings deposits
Other foreign deposits
Dec. 31,
% of
total
Dec. 31,
% of
total
%
2013
deposits
2012
deposits
Change
$
288,116
27 %
$
37,346
556,763
41,567
56,271
980,063
64,477
34,637
3
52
4
5
91
6
3
288,207
35,275
517,464
55,966
48,837
945,749
33,755
23,331
29 %
4
52
6
4
95
3
2
-
6
8
(26)
15
4
91
48
8
Total deposits
$
1,079,177
100 %
$
1,002,835
100 %
(1) Reflects Eurodollar sweep balances included in core deposits.
Equity
Total equity was $171.0 billion at December 31, 2013 compared
with $158.9 billion at December 31, 2012. The increase was
predominantly driven by a $14.7 billion increase in retained
earnings from earnings net of dividends paid, partially offset by
a $4.3 billion decline in cumulative other comprehensive
income (OCI). The decline in OCI was due to a $7.9 billion
($4.9 billion after tax) reduction in net unrealized gains on our
investment securities portfolio resulting from an increase in
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
not expected to be fully utilized or will expire without being used
by the customer. For more information on lending
commitments, see Note 6 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report.
long-term interest rates. This decline was partially offset by our
re-measurement of our pension and post-retirement plan
liabilities, combined with pension settlement losses and
amortization of actuarial losses, which increased cumulative
other comprehensive income by $1.8 billion ($1.1 billion after
tax). See Note 5 (Investment Securities) and Note 20
(Employee Benefits and Other Expenses) to Financial
Statements in this Report for additional information.
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 8 (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, liquidity agreements,
written put options, recourse obligations for loans and
mortgages sold, and contingent consideration.
For more information on guarantees and certain contingent
arrangements, see Note 14 (Guarantees, Pledged Assets and
Collateral) to Financial Statements in this Report.
49
Off-Balance Sheet Arrangements (continued)
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 16
(Derivatives) to Financial Statements in this Report.
Contractual Cash Obligations
In addition to the contractual commitments and arrangements
previously described, which, depending on the nature of the
obligation, may or may not require use of our resources, we enter
into other contractual obligations that may require future cash
payments in the ordinary course of business, including debt
issuances for the funding of operations and leases for premises
and equipment.
Table 15 summarizes these contractual obligations as of
December 31, 2013, excluding the projected cash payments for
obligations for short-term borrowing arrangements and pension
and postretirement benefit plans. More information on those
obligations is in Note 12 (Short-Term Borrowings) and Note 20
(Employee Benefits and Other Expenses) to Financial
Statements in this Report.
Table 15: Contractual Cash Obligations
(in millions)
Contractual payments by period:
Deposits (1)
Long-term debt (2)
Interest (3)
Operating leases
Unrecognized tax obligations
Commitments to purchase debt
and equity securities (4)
Purchase and other obligations (5)
Note(s) to
Financial
Statements
Less than
1 year
1-3
years
3-5
than
Indeterminate
years
5 years
maturity
Total
More
11
$
7, 13
7
21
86,958
12,800
2,494
1,155
8
20,932
46,263
3,776
1,960
-
3,041
302
1,013
592
5,924
39,981
2,436
1,426
3,619
53,954
10,292
2,812
-
7
51
-
-
7
961,744
1,079,177
-
-
-
2,839
-
-
152,998
18,998
7,353
2,847
4,061
952
Total contractual obligations
$
106,758
74,536
49,825
70,684
964,583
1,266,386
(1) Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
(2) Balances are presented net of unamortized debt discounts and premiums and purchase accounting adjustments.
(3) Represents the future interest obligations related to interest-bearing time deposits and long-term debt in the normal course of business including a net reduction of
$26 billion related to hedges used to manage interest rate risk. These interest obligations assume no early debt redemption. We estimated variable interest rate payments
using December, 31 2013 rates, which we held constant until maturity. We have excluded interest related to structured notes where our payment obligation is contingent on
the performance of certain benchmarks.
(4) Includes unfunded commitments to purchase debt and equity investments, excluding trade date payables, of $2.8 billion and $1.2 billion, respectively. Our unfunded equity
commitments include certain investments subject to the Volcker Rule, which we expect to divest in the near future. For additional information regarding the Volcker Rule, see
the "Regulatory Reform" section in this Report. We have presented our contractual obligations on equity investments above in the maturing in less than one year category as
there are no specified contribution dates in the agreements. These obligations may be requested at any time by the investment manager.
(5) Represents agreements to purchase goods or services.
We are subject to the income tax laws of the U.S., its states
and municipalities, and those of the foreign jurisdictions in
which we operate. We have various unrecognized tax
obligations related to these operations that may require future
cash tax payments to various taxing authorities. Because of
their uncertain nature, the expected timing and amounts of
these payments generally are not reasonably estimable or
determinable. We attempt to estimate the amount payable in
the next 12 months based on the status of our tax examinations
and settlement discussions. See Note 21 (Income Taxes) to
Financial Statements in this Report for more information.
Transactions with Related Parties
The Related Party Disclosures topic of the Accounting
Standards Codification (ASC) requires disclosure of material
related party transactions, other than compensation
arrangements, expense allowances and other similar items in
the ordinary course of business. We had no related party
transactions required to be reported for the years ended
December 31, 2013, 2012 and 2011.
50
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.
Risk Management Framework and Culture
The key elements of our risk management framework and
culture include the following:
x We strongly believe in managing risk as close to
the source as possible. We manage risk through three
lines of defense, and the first line of defense is our team
members in our lines of business who are responsible for
identifying, assessing, monitoring, managing, mitigating,
and owning the risks in their businesses. All of our team
members have accountability for risk management.
x We recognize the importance of strong oversight.
Our Corporate Risk group, led by our Chief Risk Officer
who reports to the Board’s Risk Committee, as well as
other corporate functions such as the Law Department,
Corporate Controllers, and the Human Resources
Department serve as the second line of defense and
provide company-wide leadership, oversight, an enterprise
view, and appropriate challenge to help ensure effective
and consistent understanding and management of all risks
by our lines of business. Wells Fargo Audit Services, led by
our Chief Auditor who reports to the Board’s Audit and
Examination Committee, serves as the third line of defense
and through its audit, assurance, and advisory work
evaluates and helps improve the effectiveness of the
governance, risk management, and control processes
across the enterprise.
x We have a significant bias for conservatism. We
strive to maintain a conservative financial position
measured by satisfactory asset quality, capital levels,
funding sources, and diversity of revenues. Our risk is
distributed by geography, product type, industry segment,
and asset class, and while we want to grow the Company,
we will attempt to do so in a way that supports our long-
term goals and does not compromise our ability to manage
risk.
x We have a long-term customer focus. Our focus is
on knowing our customers and meeting our customers’
long-term financial needs by offering products and value-
added services that are appropriate for their needs and
circumstances. In addition, our team members are
committed to operational excellence, and we recognize
that our infrastructure, systems, processes, and
compliance programs must support the financial success
of our customers through a superior customer service
experience.
x We must understand and follow our risk appetite.
Our risk management framework is based on
understanding and following our overall enterprise
statement of risk appetite, which describes the nature and
level of risks that we are willing to take to achieve our
strategic and business objectives. This statement provides
the philosophical underpinnings that guide business and
risk leaders as they manage risk on a day-to-day basis. Our
CEO and Operating Committee, which consists of our
Chief Risk Officer and other senior executives, develop our
enterprise statement of risk appetite in the context of our
risk management framework and culture described above.
The Board approves our statement of risk appetite
annually, and the Board’s Risk Committee reviews and
approves any proposed changes to the statement to help
ensure that it remains consistent with our risk profile.
As part of our review of our risk appetite, we maintain
metrics along with associated objectives to measure and
monitor the amount of risk that the Company is prepared to
take. Actual results of these metrics are reported to the
Enterprise Risk Management Committee on a quarterly basis
as well as to the Risk Committee of the Board. Our operating
segments also have business-specific risk appetite statements
based on the enterprise statement of risk appetite. The metrics
included in the operating segment statements are harmonized
with the enterprise level metrics to ensure consistency where
appropriate. Business lines also maintain metrics and
qualitative statements that are unique to their line of business.
This allows for monitoring of risk and definition of risk
appetite deeper within the organization.
Our risk culture seeks to promote proactive risk
management and putting the customer first by implementing
an ongoing program of training, performance management,
and regular communication. Our risk culture also depends on
the “tone at the top” set by our Board, CEO, and Operating
Committee members. Through oversight of the three lines of
defense, the Board and the Operating Committee are the
starting point for establishing and reinforcing our risk culture
and have overall and ultimate responsibility for oversight of
our risks, which they carry out through committees with
specific risk management functions.
Board Oversight of Risk
The Board performs its risk oversight function primarily
through its seven standing committees, all of which report to
the full Board. Each of the Board’s committees is responsible
for oversight of specific risks, including reputation risks, as
outlined in each of their charters and as summarized on the
following chart. The Risk Committee assists the Board and its
other committees by, among other things, helping to ensure
end-to-end ownership of oversight of all risk issues in one
Board committee, overseeing risk across the entire Company
and across all risk types, and by reviewing and monitoring the
Company’s overall risk appetite. To facilitate discussion and
communication about enterprise-wide risk matters and avoid
51
Risk Management – Credit Risk Management (continued)
unnecessary duplication, the Risk Committee’s members
consist of the chairs of each of the Board’s other committees.
Board of Directors
Annually approves overall enterprise risk appetite statement
Board Committees
Risk Committee
Oversight includes:
x
Enterprise-wide risk
management
framework, including
processes and resources
necessary to execute the
Company’s risk program
x Performance of Chief
Risk Officer
x Aggregate enterprise-
wide risk profile and
alignment of risk profile
with strategy, objectives,
and risk appetite
x Risk appetite statement,
including changes in risk
appetite, and adherence
to risk limits
x Emerging risks
x Risks associated with
acquisitions and
significant new business
or strategic initiatives
Audit &
Examination
Committee
Oversight includes:
x Internal controls
over financial
reporting
x External auditor
performance
x Internal audit
function, including
performance of Chief
Auditor
x Legal, regulatory,
and compliance risks
x Operational risks,
including technology
x Major financial risk
exposures and
general process for
risk assessment and
management
Credit Committee
Oversight includes:
x Credit risk,
including high risk
portfolios
x Allowance for credit
losses, including
governance and
methodology
x Adherence to
enterprise credit
risk appetite
metrics and
concentration limits
x Compliance with
lending policies and
credit underwriting
standards
x Credit stress testing
activities
Corporate
Responsibility
Committee
Oversight includes:
x Mortgage and
x
other consumer
lending
reputational risks
Reputation with
customers,
including
complaints and
service matters
x Social
responsibility
risks, including
political and
environmental
risks
Human
Resources
Committee
Oversight includes:
x Compensation
x
risk management
Talent
management and
succession
planning
Governance &
Nominating
Committee
Oversight includes:
x Corporate
governance
compliance
x Board and
committee
performance
Finance Committee
Oversight includes:
x Interest rate risk,
including the MSR
x Market risk, including
trading and derivative
activities and
counterparty risks
x Liquidity and funding
risks
x Investment risk,
including fixed-
income and equity
portfolios
x Capital adequacy
assessment and
planning, and stress
testing activities
52
Management’s Oversight of Risk
The Board and its committees work closely with management
in overseeing risk. Each Board committee receives reports and
information regarding risk issues directly from management.
Managers are accountable for managing risks through day-to-
day operations and, in some cases, management committees
have been established to inform the risk management
framework and provide governance and advice regarding
management functions. These committees include:
x
x
x
x
x
x
x
The Operating Committee, which meets weekly to,
among other things, discuss strategic, operational and risk
issues at the enterprise level.
The Enterprise Risk Management Committee
(ERMC), which meets regularly during the year and
reviews significant and emerging risk topics and high-risk
business initiatives, particularly those that may result in
additional regulatory or reputational risk.
The Asset and Liability Committee (ALCO), which is
responsible for enterprise-wide oversight of the Company's
balance sheet, interest rate exposure, market risks,
liquidity, and capital. The committee provides guidance
and recommendations to management and the Board
related to risk management for these areas.
The Market Risk Committee, which provides oversight
of the Company’s market risk exposures to ensure
significant market risks throughout the Company are
identified, measured and monitored in accordance with
the Company’s stated risk appetite.
The Compliance and Operational Risk Committee
(CORC), which provides a forum for senior risk managers
to focus on enterprise-wide compliance and operational
risk issues, and provides leadership and direction in
evaluating management of operational risks, establishing
priorities, and fostering collaboration and coordination of
risk management activities across the Company.
The Regulatory Compliance Risk Management
Committee (RCRM), which provides a forum for senior
compliance managers to provide leadership, direction, and
assessment of the management of enterprise-wide
regulatory risks, and to escalate such risks to the chief
compliance officer as necessary
The Corporate Allowance for Credit Losses
Approval Committee, which reviews the process and
supporting analytics for allowance for loan and lease losses
and the allowance for unfunded credit commitments to
help ensure allowances for credit losses are maintained at
adequate levels in conformity with generally accepted
accounting principles and regulatory guidelines.
These committees help management facilitate enterprise-
wide understanding and monitoring of risks and challenges
faced by the Company. Management’s corporate risk
organization, which is part of the second line of defense, is
headed by the Company’s Chief Risk Officer who, among other
things, provides oversight, opines on the performance and
strategy of all risks taken by the businesses, and provides
credible challenge to risks incurred. The Chief Risk Officer, as
well as the Chief Enterprise, Credit, Market, and Operational
Risk Officers as his or her direct reports, work closely with the
Board’s committees and frequently provide reports and
updates to the committees and the committee chairs on risk
issues during and outside of regular committee meetings, as
appropriate. The full Board receives reports at each of its
meetings from the committee chairs about committee
activities, including risk oversight matters, and receives a
quarterly report from the ERMC regarding current or emerging
risk issues.
Further discussion and specific examples of reporting,
measurement and monitoring techniques we use in each risk
area are included within the subsequent sub-sections of the
Risk Management section in this Report.
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
denial-of-service or other cyber attacks as part of what appears
to be a coordinated effort to disrupt the operations of financial
institutions and potentially test their cybersecurity capabilities.
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 this Report
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.
53
Risk Management – Credit Risk Management (continued)
We manage our credit risk by establishing what we believe
are sound credit policies for underwriting new business, while
monitoring and reviewing the performance of our existing loan
portfolios. We employ various credit risk management and
monitoring activities to mitigate risks associated with multiple
risk factors affecting loans we hold, could acquire or originate
including:
x
x
x Economic and market conditions
x
x
x Merger and acquisition activities
x Reputation risk
Loan concentrations and related credit quality
Counterparty credit risk
Legislative or regulatory mandates
Changes in interest rates
Our credit risk management oversight process is governed
centrally, but provides for decentralized management and
accountability by our lines of business. Our overall credit
process includes comprehensive credit policies, disciplined
credit underwriting, frequent and detailed risk measurement
and modeling, extensive credit training programs, and a
continual loan review and audit process.
A key to our credit risk management is adherence to a well-
controlled underwriting process, which we believe is
appropriate for the needs of our customers as well as investors
who purchase the loans or securities collateralized by the loans.
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 16 presents our
total loans outstanding by portfolio segment and class of
financing receivable.
Table 16: Total Loans Outstanding by Portfolio Segment and
Class of Financing Receivable
(in millions)
Commercial:
December 31,
2013
2012
Commercial and industrial
$
197,210
Real estate mortgage
Real estate construction
Lease financing
Foreign (1)
107,100
16,747
12,034
47,665
187,759
106,340
16,904
12,424
37,771
Total commercial
380,756
361,198
Consumer:
Real estate 1-4 family first mortgage
258,497
249,900
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans
65,914
26,870
50,808
42,954
75,465
24,640
45,998
42,373
445,043
438,376
$
825,799
799,574
(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.
54
Credit Quality Overview Credit quality continued to
improve during 2013 due in part to improving economic
conditions as well as our proactive credit risk management
activities. The improvement occurred for both commercial and
consumer portfolios as evidenced by their credit metrics:
x Nonaccrual loans decreased to $3.5 billion and $12.2 billion
in our commercial and consumer portfolios, respectively, at
December 31, 2013, from $5.8 billion and $14.7 billion at
December 31, 2012. Nonaccrual loans represented 1.90% of
total loans at December 31, 2013, compared with 2.56% at
December 31, 2012.
x Net charge-offs as a percentage of average total loans
improved to 0.56% in 2013 compared with 1.17% a year ago
and were 0.06% and 0.98% in our commercial and
consumer portfolios, respectively, compared with 0.35%
and 1.84% in 2012.
x Loans that are not government insured/guaranteed and
90 days or more past due and still accruing decreased to
$143 million and $902 million in our commercial and
consumer portfolios, respectively, at December 31, 2013,
from $303 million and $1.1 billion at December 31, 2012.
In addition to credit metric improvements we saw
improvement in various economic indicators such as home
prices that influenced our evaluation of the allowance and
provision for credit losses. Accordingly:
x Our provision for credit losses decreased to $2.3 billion in
2013 from $7.2 billion in 2012.
Table 17: Non-Strategic and Liquidating Loan Portfolios
(in millions)
Commercial:
Legacy Wachovia commercial and industrial, CRE and foreign PCI loans (1)
Total commercial
Consumer:
Pick-a-Pay mortgage (1)
Liquidating home equity
Legacy Wells Fargo Financial indirect auto
Legacy Wells Fargo Financial debt consolidation
Education Finance - government guaranteed
Legacy Wachovia other PCI loans (1)
Total consumer
x The allowance for credit losses decreased to $15.0 billion at
December 31, 2013 from $17.5 billion at December 31, 2012.
Additional information on our loan portfolios and our
credit quality trends follows.
Non-Strategic and Liquidating Loan Portfolios We
continually evaluate and 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 17 identifies our non-strategic and liquidating loan
portfolios. 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. The total balance of our non-
strategic and liquidating loan portfolios has decreased 58%
since the merger with Wachovia at December 31, 2008, and
decreased 14% from the end of 2012.
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.
Outstanding balance
December 31,
2013
2012
2008
$
2,013
2,013
3,170
3,170
18,704
18,704
50,971
3,695
207
12,893
10,712
375
58,274
4,647
830
14,519
12,465
657
95,315
10,309
18,221
25,299
20,465
2,478
78,853
91,392
172,087
Total non-strategic and liquidating loan portfolios
$
80,866
94,562
190,791
(1) Net of purchase accounting adjustments related to PCI loans.
55
Risk Management – Credit Risk Management (continued)
PURCHASED CREDIT-IMPAIRED (PCI) LOANS Loans
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
$26.7 billion at December 31, 2013, down from $31.0 billion and
$58.8 billion at December 31, 2012 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. The accretable yield at
December 31, 2013, was $17.4 billion, which reflects a revision
from the $19.1 billion reported in our earnings release, filed
January 14, 2014, on Form 8-K. This revision primarily reflects a
correction of our projected cash flow estimates for our Pick-a-
Pay portfolio related to the anticipated volume of future
modifications and defaults on modified loans. As a result, the
estimated weighted-average life of our projected cash flow
estimates for our Pick-a-Pay portfolio declined from 14.0 years
to 12.7 years.
A nonaccretable difference is established for PCI loans to
absorb losses expected on those loans at the date of acquisition.
Amounts absorbed by the nonaccretable difference do not affect
the income statement or the allowance for credit losses.
Substantially all commercial and industrial, CRE and foreign
PCI loans are accounted for as individual loans. Conversely,
Pick-a-Pay and other consumer PCI loans have been aggregated
into pools based on common risk characteristics. Each pool is
accounted for as a single asset with a single composite interest
rate and an aggregate expectation of cash flows.
Resolutions of loans may include sales to third parties,
receipt of payments in settlement with the borrower, or
foreclosure of the collateral. Our policy is to remove an
individual PCI loan from a pool based on comparing the amount
received from its resolution with its contractual amount. Any
difference between these amounts is absorbed by the
nonaccretable difference. This removal method assumes that the
amount received from resolution approximates pool
performance expectations. The accretable yield percentage is
unaffected by the resolution and any changes in the effective
yield for the remaining loans in the pool are addressed by our
quarterly cash flow evaluation process for each pool. For loans
that are resolved by payment in full, there is no release of the
nonaccretable difference for the pool because there is no
difference between the amount received at resolution and the
contractual amount of the loan. Modified PCI loans are not
removed from a pool even if those loans would otherwise be
deemed TDRs. Modified PCI loans that are accounted for
individually are TDRs, and removed from PCI accounting, if
there has been a concession granted in excess of the original
nonaccretable difference. We include these TDRs in our
impaired loans.
During 2013, we recognized as income $91 million released
from the nonaccretable difference related to commercial PCI
loans due to payoffs and other resolutions. We also transferred
$971 million from the nonaccretable difference to the accretable
yield for PCI loans with improving credit-related cash flows and
absorbed $751 million of losses in the nonaccretable difference
from loan resolutions and write-downs. Our cash flows expected
to be collected have been favorably affected 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 18 provides an analysis of changes
in the nonaccretable difference.
56
Table 18: Changes in Nonaccretable Difference for PCI Loans
(in millions)
Balance, December 31, 2008
Addition of nonaccretable difference due to acquisitions
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)
Balance, December 31, 2011
Addition of nonaccretable difference due to acquisitions
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
Other
Commercial Pick-a-Pay consumer
Total
$
10,410
188
26,485
-
4,069
-
40,964
188
(1,345)
(299)
(1,216)
-
-
(1,345)
-
(2,383)
(85)
(614)
(384)
(4,213)
(6,809)
(14,976)
(2,718)
(24,503)
929
7
(81)
(4)
9,126
652
10,707
-
-
-
-
-
-
7
(81)
(4)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
(315)
(648)
(178)
(1,141)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)
Balance, December 31, 2012
Addition of nonaccretable difference due to acquisitions
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)
Balance, December 31, 2013
(114)
(2,246)
(164)
(2,524)
422
6,232
310
6,964
18
(86)
(5)
(74)
-
-
-
-
-
-
18
(86)
(5)
(866)
(31)
(971)
(10)
(662)
(79)
(751)
$
265
4,704
200
5,169
(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 for loans with increased cash flow estimates 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.
Since December 31, 2008, we have released $8.2 billion in
nonaccretable difference, including $6.3 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 $6.5 billion
reduction from December 31, 2008, through December 31, 2013,
in our initial projected losses of $41.0 billion on all PCI loans.
At December 31, 2013, the allowance for credit losses on
certain PCI loans was $30 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 19 analyzes the actual and projected loss results on PCI
loans since acquisition through December 31, 2013.
For additional information on PCI loans, see Note 1
(Summary of Significant Accounting Policies – Loans) and Note
6 (Loans and Allowance for Credit Losses) to Financial
Statements in this Report.
57
Risk Management – Credit Risk Management (continued)
Table 19: Actual and Projected Loss Results on PCI Loans Since Acquisition of Wachovia
(in millions)
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
Commercial Pick-a-Pay
consumer
Total
Other
$
1,512
308
-
-
-
85
1,512
393
6,325
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
1,605
3,897
823
Total releases of nonaccretable difference due to better than expected losses
Provision for losses due to credit deterioration (4)
3,425
(1,641)
3,897
-
908
(107)
8,230
(1,748)
Actual and projected losses on PCI loans less than originally expected
$
1,784
3,897
801
6,482
(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 for loans with increased cash flow estimates 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.
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 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report for more analysis and credit metric information.
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 20 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 $209.2 billion or 25% of total loans at
December 31, 2013, generally experienced credit improvement in
2013. The net charge-off rate for this portfolio declined to 0.18%
in 2013 from 0.46% in 2012. At December 31, 2013, 0.37% of
this portfolio was nonaccruing compared with 0.72% at
December 31, 2012. In addition, $15.5 billion of this portfolio
was rated as criticized in accordance with regulatory guidance at
December 31, 2013, down from $19.0 billion at
December 31, 2012.
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. See Note 6 (Loans and
58
Allowance for Credit Losses) to Financial Statements in this
Report for additional credit metric information.
Table 20: Commercial and Industrial Loans and Lease
Financing by Industry
(in millions)
Investors
Cyclical Retailers
Oil & Gas
Food and beverage
Financial Institutions
Healthcare
Real Estate Lessor
Industrial Equipment
Technology
Transportation
Public Administration
Business Services
Other
Total
December 31, 2013
$
Nonaccrual
Total
loans
portfolio (1)
17
25
67
45
44
39
16
6
7
7
16
34
444
19,627
15,112
14,102
12,719
12,055
11,608
11,242
10,483
7,386
5,936
5,832
5,798
77,344 (2)
% of
total
loans
2 %
2
2
2
1
1
1
1
1
1
1
1
9
$
767
209,244
25 %
Less than 1%.
*
(1) Includes $215 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 $4.8 billion.
Risk mitigation actions, including the restructuring of
repayment terms, securing collateral or guarantees, and entering
into extensions, are based on a re-underwriting of the loan and
our assessment of the borrower’s ability to perform under the
agreed-upon terms. Extension terms generally range from six to
thirty-six months and may require that the borrower provide
additional economic support in the form of partial repayment, or
additional collateral or guarantees. In cases where the value of
collateral or financial condition of the borrower is insufficient to
repay our loan, we may rely upon the support of an outside
repayment guarantee in providing the extension.
Our ability to seek performance under a guarantee is directly
related to the guarantor’s creditworthiness, capacity and
willingness to perform, which is evaluated on an annual basis, or
more frequently as warranted. Our evaluation is based on the
most current financial information available and is focused on
various key financial metrics, including net worth, leverage, and
current and future liquidity. We consider the guarantor’s
reputation, creditworthiness, and willingness to work with us
based on our analysis as well as other lenders’ experience with
the guarantor. Our assessment of the guarantor’s credit strength
is reflected in our loan risk ratings for such loans. The loan risk
rating and accruing status are important factors in our allowance
methodology.
In considering the accrual status of the loan, we evaluate the
collateral and future cash flows as well as the anticipated support
of any repayment guarantor. In many cases the strength of the
guarantor provides sufficient assurance that full repayment of
the loan is expected. When full and timely collection of the loan
becomes uncertain, including the performance of the guarantor,
we place the loan on nonaccrual status. As appropriate, we also
charge the loan down in accordance with our charge-off policies,
generally to the net realizable value of the collateral securing the
loan, if any.
At 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 6 (Loans and Allowance for Credit Losses) to Financial
Statements in this Report.
Table 21: CRE Loans by State and Property Type
COMMERCIAL REAL ESTATE (CRE) The CRE portfolio totaled
$123.8 billion, or 15% of total loans at December 31, 2013, and
consisted of $107.1 billion of mortgage loans and $16.7 billion of
construction loans. Table 21 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 (28% of the total CRE portfolio), and in Florida and
Texas (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 2.2% of the
CRE outstanding balance at December 31, 2013, compared with
3.5% at December 31, 2012. At December 31, 2013, we had
$11.8 billion of criticized CRE mortgage loans, down from
$18.8 billion at December 31, 2012, and $2.0 billion of criticized
CRE construction loans, down from $4.5 billion at
December 31, 2012. See Note 6 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report for additional
information on criticized loans.
At December 31, 2013, the recorded investment in PCI CRE
loans totaled $1.6 billion, down from $12.3 billion when
acquired at December 31, 2008, reflecting principal payments,
loan resolutions and write-downs.
December 31, 2013
Real estate mortgage
Real estate construction
Total
Nonaccrual
loans
Total
portfolio (1)
Nonaccrual
loans
Total
portfolio (1)
Nonaccrual
loans
Total
portfolio (1)
(in millions)
By state:
California
Florida
Texas
New York
North Carolina
Arizona
Virginia
Washington
Georgia
Colorado
Other
Total
By property:
Office buildings
Apartments
Industrial/warehouse
Retail (excluding shopping center)
Real estate - other
Hotel/motel
Shopping center
Institutional
Land (excluding 1-4 family)
Agriculture
Other
Total
$
$
$
536
303
166
48
148
104
77
30
153
39
648
30,854
8,971
8,598
6,610
4,058
3,992
2,742
3,244
3,026
2,829
32,176
2,252
107,100
572
139
367
278
272
93
184
77
7
45
218
32,294
10,606
12,038
11,627
10,709
8,919
8,042
2,850
80
2,295
7,640
$
2,252
107,100
50
49
23
5
26
7
6
3
45
7
195
416
49
3
-
22
5
10
9
-
97
-
221
416
3,550
1,426
1,673
1,188
971
422
1,054
423
453
602
4,985
16,747
2,030
4,883
732
890
335
792
880
430
2,992
29
2,754
% of
total
loans
4 %
1
1
1
1
1
1
*
*
*
5
586
352
189
53
174
111
83
33
198
46
843
34,404
10,397
10,271
7,798
5,029
4,414
3,796
3,667
3,479
3,431
37,161 (2)
2,668
123,847
15 %
621
142
367
300
277
103
193
77
104
45
439
34,324
15,489
12,770
12,517
11,044
9,711
8,922
3,280
3,072
2,324
10,394
4 %
2
2
2
1
1
1
1
*
*
1
Less than 1%.
*
(1) Includes a total of $1.6 billion PCI loans, consisting of $1.1 billion of real estate mortgage and $433 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 $2.8 billion.
59
16,747
2,668
123,847
15 %
Risk Management – Credit Risk Management (continued)
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
December 31, 2013, foreign loans totaled $47.7 billion,
representing approximately 6% of our total consolidated loans
outstanding, compared with $37.8 billion, or approximately 5%
of total consolidated loans outstanding, at December 31, 2012.
A significant portion of the growth in foreign loans was due to
the acquisition of CRE loans in the U.K. in third quarter 2013.
Foreign loans were approximately 3% of our consolidated total
assets at December 31, 2013 and at December 31, 2012.
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 December 31, 2013, was the United
Kingdom, which totaled $21.1 billion, or approximately 1% of
our total assets, and included $3.0 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 22 provides information regarding our top 20
exposures by country (excluding the U.S.) and our Eurozone
exposure, on an ultimate risk basis.
60
Table 22: Select Country Exposures
(in millions)
December 31, 2013
Top 20 country exposures:
Lending (1)
Securities (2) Derivatives and other (3)
Total exposure
Sovereign
sovereign
Sovereign
sovereign
Sovereign
sovereign
Sovereign
Non-
Non-
Non-
Non-
sovereign (4)
Total
United Kingdom
Canada
China
Brazil
Germany
Netherlands
Switzerland
Bermuda
France
Turkey
Australia
South Korea
India
Chile
Luxembourg
Mexico
Ireland
Russia
Spain
Taiwan
$
3,031
-
-
-
66
-
-
-
-
-
-
-
-
-
-
-
34
-
-
-
10,024
6,636
5,575
2,751
1,470
1,784
1,251
1,775
519
1,653
913
1,381
1,266
1,265
1,065
1,131
940
754
714
754
Total top 20 country exposures
$
3,131
43,621
Eurozone exposure:
Eurozone countries included in Top 20 above (5) $
Austria
Italy
Belgium
Other Eurozone countries (6)
Total Eurozone exposure
$
100
103
-
-
-
203
6,492
331
242
115
55
7,235
1
-
-
-
-
-
-
-
-
-
-
-
7
-
-
-
-
-
-
-
8
-
-
-
-
-
-
7,120
4,778
55
13
788
401
351
77
1,192
-
664
51
140
18
105
38
154
32
62
1
-
-
3
-
-
-
-
-
-
-
-
12
-
-
-
5
2
-
-
-
911
575
1
-
137
40
440
42
152
-
11
-
-
57
6
1
25
-
-
2
16,040
22
2,400
2,702
2
86
50
25
2,865
2
-
-
-
26
28
360
2
-
8
2
372
3,032
-
3
-
66
-
-
-
-
-
-
12
7
-
-
5
36
-
-
-
3,161
102
103
-
-
26
231
18,055
11,989
5,631
2,764
2,395
2,225
2,042
1,894
1,863
1,653
1,588
1,432
1,406
1,340
1,176
1,170
1,119
786
776
757
21,087
11,989
5,634
2,764
2,461
2,225
2,042
1,894
1,863
1,653
1,588
1,444
1,413
1,340
1,176
1,175
1,155
786
776
757
62,061
65,222
9,554
335
328
173
82
9,656
438
328
173
108
10,472
10,703
(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 $472 million in PCI loans, predominantly to
customers in Germany and the United Kingdom, and $2.0 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
December 31, 2013, the gross notional amount of our CDS sold that reference assets in the Top 20 or Eurozone countries was $5.4 billion, which was offset by the notional
amount of CDS purchased of $5.4 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 $30.8 billion exposure to financial institutions and $32.2 billion to non-financial corporations at
December 31, 2013.
(5) Consists of exposure to Germany, Netherlands, France, Luxembourg, Ireland and Spain included in Top 20.
(6) Includes non-sovereign exposure to Greece, Cyprus and Portugal in the amount of $1 million, $7 million and $39 million, respectively. We had no sovereign debt exposure to
these countries at December 31, 2013.
Our real estate 1-4 family first and junior
REAL ESTATE 1-4 FAMILY FIRST AND JUNIOR LIEN
MORTGAGE LOANS
lien mortgage loans primarily include loans we have made to
customers and retained as part of our asset liability management
strategy. These loans include the Pick-a-Pay portfolio acquired
from Wachovia and the home equity portfolio, which are
discussed later in this Report. These loans also include other
purchased loans and loans included on our balance sheet due to
the adoption of consolidation accounting guidance related to
variable interest entities (VIEs).
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. AVMs are computer-based tools used to estimate the
market value of homes. AVMs are a lower-cost alternative to
appraisals and support valuations of large numbers of properties
in a short period of time using market comparables and price
trends for local market areas. The primary risk associated with
the use of AVMs is that the value of an individual property may
vary significantly from the average for the market area. We have
processes to periodically validate AVMs and specific risk
management guidelines addressing the circumstances when
AVMs may be used. AVMs are generally used in underwriting to
support property values on loan originations only where the loan
amount is under $250,000. We generally require property
visitation appraisals by a qualified independent appraiser for
larger residential property loans.
Some of our real estate 1-4 family first and junior lien
mortgage loans include an interest-only feature as part of the
loan terms. These interest-only loans were approximately 15% of
total loans at December 31, 2013, compared with 18% at
December 31, 2012.
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. Our liquidating option ARM loans
are included in the Pick-a-Pay portfolio which was acquired from
Wachovia. Since our acquisition of the Pick-a-Pay loan portfolio
at the end of 2008, we have reduced the option payment portion
of the portfolio, from 86% to 44% at December 31, 2013. For
more information, see the “Pick-a-Pay Portfolio” section in this
Report.
61
Risk Management – Credit Risk Management (continued)
We continue to modify real estate 1-4 family mortgage loans
to assist homeowners and other borrowers experiencing
financial difficulties. Loans are underwritten at the time of the
modification in accordance with underwriting guidelines
established for governmental and proprietary loan modification
programs. As a participant in the U.S. Treasury’s Making Home
Affordable (MHA) programs, we are focused on helping
customers stay in their homes. The MHA programs create a
standardization of modification terms including incentives paid
to borrowers, servicers, and investors. MHA includes the Home
Affordable Modification Program (HAMP) for first lien loans and
the Second Lien Modification Program (2MP) for junior lien
loans. Under both our proprietary programs and the MHA
programs, we may provide concessions such as interest rate
reductions, forbearance of principal, and in some cases,
principal forgiveness. These programs generally include trial
payment periods of three to four months, and after successful
completion and compliance with terms during this period, the
loan is permanently modified. Once the loan enters a trial period
or permanent modification, it is accounted for as a TDR. See the
“Critical Accounting Policies – Allowance for Credit Losses”
section in this Report for discussion on how we determine the
allowance attributable to our modified residential real estate
portfolios.
Real estate 1-4 family first and junior lien mortgage loans by
state are presented in Table 23. Our real estate 1-4 family
mortgage loans to borrowers in California represented
approximately 13% of total loans at December 31, 2013, located
mostly within the larger metropolitan areas, with no single
California metropolitan area consisting of more than 3% of total
loans. 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.
We monitor the credit performance of our junior lien
mortgage portfolio for trends and factors that influence the
frequency and severity of loss. In 2012, we aligned our
nonaccrual reporting with Interagency Guidance issued by bank
regulators so that a junior lien is reported as a nonaccrual loan if
the related first lien is 120 days past due or is in the process of
foreclosure, regardless of delinquency status. Additionally, in
third quarter 2012, we aligned our nonaccrual and troubled debt
reclassification policies in accordance with guidance in the Office
of the Comptroller of the Currency (OCC) update to the Bank
Accounting Advisory Series (OCC Guidance), which requires
consumer loans discharged in bankruptcy to be written down to
net realizable collateral value and classified as nonaccrual TDRs,
regardless of their delinquency status.
Table 23: Real Estate 1-4 Family First and Junior Lien
Mortgage Loans by State
December 31, 2013
Real estate
1-4 family
Real estate
1-4 family
Total real
estate 1-4
first
mortgage
junior lien
mortgage
family
mortgage
% of
total
loans
$
16,228
1,884
1,007
4,981
31
21
16
55
16,259
1,905
1,023
5,036
2 %
*
*
1
(in millions)
PCI loans:
California
Florida
New Jersey
Other (1)
Total PCI loans
$
24,100
123
24,223
3 %
All other loans:
California
Florida
New York
New Jersey
Virginia
Pennsylvania
North Carolina
Texas
Georgia
Other (2)
Government insured/
$
71,422
18,325
14,872
14,338
10,122
6,850
5,925
5,978
7,770
4,830
5,943
2,877
5,107
3,532
3,160
2,848
944
2,618
89,747
20,815
17,215
15,229
10,382
9,085
8,826
8,714
7,448
11 %
2
2
2
1
1
1
1
1
61,553
20,437
81,990
10
guaranteed loans (3)
30,737
-
30,737
4
Total all other loans $
234,397
65,791
300,188
36 %
Total
$
258,497
65,914
324,411
39 %
Less than 1%.
*
(1) Consists of 45 states; no state had loans in excess of $614 million.
(2) Consists of 41 states; no state had loans in excess of $7.1 billion.
(3) Represents loans whose repayments are predominantly insured by the Federal
Housing Administration (FHA) or guaranteed by the Department of Veterans
Affairs (VA).
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 fourth quarter 2013 on the non-PCI
mortgage portfolio. Loans 30 days or more delinquent at
December 31, 2013, totaled $11.9 billion, or 4%, of total non-PCI
mortgages, compared with $15.5 billion, or 5%, at
December 31, 2012. Loans with FICO scores lower than 640
totaled $31.5 billion at December 31, 2013, or 10% of total non-
PCI mortgages, compared with $37.7 billion, or 13%, at
December 31, 2012. Mortgages with a LTV/CLTV greater than
100% totaled $34.3 billion at December 31, 2013, or 11% of total
non-PCI mortgages, compared with $58.7 billion, or 20%, at
December 31, 2012. Information regarding credit risk indicators
can be found in Note 6 (Loans and Allowance for Credit Losses)
to Financial Statements in this Report.
62
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. Real estate
1-4 family junior lien mortgages and lines of credit associated
Table 24: Pick-a-Pay Portfolio - Comparison to Acquisition Date
with Pick-a-Pay loans are reported in the home equity portfolio.
Table 24 provides balances by types of loans as of
December 31, 2013, 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 $28.8 billion at December 31, 2013, compared with
$61.0 billion at acquisition. Modification efforts have largely
involved option payment PCI loans, which, based on adjusted
unpaid principal balance, have declined to 17% of the total Pick-
a-Pay portfolio at December 31, 2013, compared with 51% at
acquisition.
(in millions)
Option payment loans
Non-option payment adjustable-rate
and fixed-rate loans (2)
Full-term loan modifications
Total adjusted unpaid principal balance (2)
Total carrying value
2013
December 31,
2008
Adjusted
unpaid
principal
Adjusted
unpaid
principal
balance (1) % of total
balance (1) % of total
$
24,420
44 %
$
99,937
86 %
7,892
23,509
14
42
55,821
100 %
50,971
15,763
-
14
-
115,700
100 %
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.
(2) Includes loans refinanced under the Consumer Relief Refinance Program.
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 $902 million at December 31, 2013, and
$1.4 billion at December 31, 2012. Approximately 93% of the
Pick-a-Pay customers making a minimum payment in
December 2013 did not defer interest, compared with 90% in
December 2012.
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. The majority 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: $40 million in 2014,
$69 million in 2015 and $45 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: $211 million in 2014, $411 million in 2015
and $470 million in 2016. In 2013, the amount of loans reaching
their recast anniversary date and also having a payment change
over the annual 7.5% reset was $36 million.
Table 25 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 predicting 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.
63
Risk Management – Credit Risk Management (continued)
Table 25: Pick-a-Pay Portfolio (1)
Adjusted
unpaid
principal
Current
LTV
Carrying
December 31, 2013
PCI loans
All other loans
Ratio of
carrying
value to
current
Ratio of
carrying
value to
current
Carrying
balance (2)
ratio (3)
value (4)
value (5)
value (4)
value (5)
$
19,797
89 % $
16,213
72 % $
13,219
65 %
2,395
1,029
609
266
4,704
98
87
84
70
89
1,827
974
592
241
4,001
69
74
73
62
74
2,764
1,770
797
1,081
7,492
80
74
73
56
75
(in millions)
California
Florida
New Jersey
New York
Texas
Other states
Total Pick-a-Pay loans
$
28,800
$
23,848
$
27,123
(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 2013.
(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.
approximately 12.7 years at December 31, 2013. The accretable
yield percentage at December 31, 2013 was 4.98%, up from
4.70% at the end of 2012 due to increased cash flows from
improved economic outlook and credit trends. 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 rate and the estimated weighted-
average life of the portfolio.
The Pick-a-Pay portfolio includes a significant portion of our
PCI loans. 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 this Report.
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 geographies with substantial
property value declines, we may offer permanent principal
forgiveness.
In 2013, we completed more than 11,800 proprietary and
Home Affordability Modification Program (HAMP) Pick-a-Pay
loan modifications. We have completed more than 123,000
modifications since the Wachovia acquisition, resulting in
$5.8 billion of principal forgiveness to our Pick-a-Pay customers
as well as an additional $229 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 $3.9 billion from the
nonaccretable difference to the accretable yield since acquisition,
including $866 million in 2013. 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
64
HOME EQUITY PORTFOLIOS Our home equity portfolios
consist of real estate 1-4 family junior lien mortgages and first
and junior lien lines of credit secured by real estate. Our first lien
lines of credit represent 22% of our home equity portfolio and
are included in real estate 1-4 family first mortgages. The
majority of our junior lien loan products are amortizing payment
loans with fixed interest rates and repayment periods between
five to 30 years.
Our first and junior 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
Table 26: Home Equity Portfolios Payment Schedule
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 26 reflects the outstanding balance of our home equity
portfolio 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 $156 million, because their losses were generally
reflected in our nonaccretable difference established at the date
of acquisition.
(in millions)
December 31, 2013
2014
2015
2016
2017
2018
thereafter (1)
Amortizing
Outstanding balance
Scheduled end of draw / term
2019 and
Home equity lines secured by real estate:
Junior residential lines
First residential lines
Total residential lines (2)(3)
Junior loans (4)
Total
% of portfolios
$
$
57,379
18,326
75,705
8,425
3,174
983
6,107
1,361
7,621
1,081
7,685
1,051
4,202
1,207
25,472
11,852
4,157
7,468
8,702
8,736
5,409
37,324
10
102
136
141
15
1,466
3,118
791
3,909
6,555
84,130
4,167
7,570
8,838
8,877
5,424
38,790
10,464
100 %
5
9
11
11
6
46
12
(1) The annual scheduled end of draw or term ranges from $2.0 billion to $10.9 billion per year for 2019 and thereafter. The loans that convert in 2025 and thereafter have draw
periods that generally extend to 15 or 20 years.
(2) Lines in their draw period are predominantly interest-only. The unfunded credit commitments total $73.6 billion at December 31, 2013.
(3) Includes scheduled end-of-term balloon payments totaling $890 million, $525 million, $348 million, $436 million, $601 million and $1.3 billion for 2014, 2015, 2016, 2017,
2018, 2019 and thereafter, respectively. Amortizing lines include $125 million of end-of-term balloon payments, which are past due. At December 31, 2013, $274 million, or
7% of outstanding lines of credit that are amortizing, are 30 or more days past due compared to $1.5 billion, or 2% for lines in their draw period.
(4) 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 $70 million of balloon loans that have reached end of term and are now past due.
65
Risk Management – Credit Risk Management (continued)
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 that the frequency of loss
has historically been lower when we own or service the first
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 observed higher delinquency 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 27 summarizes delinquency and loss rates for our
junior lien mortgages and lines by the holder of the first lien.
Table 27: Home Equity Portfolios Performance by Holder of 1st Lien (1)
Outstanding balance (2)
or more past due
% of loans
two payments
Loss rate
(annualized)
quarter ended
December 31,
December 31,
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
Dec. 31,
(in millions)
2013
2012
2013
2012
2013
2013
2013
2013
2012 (3)
Junior lien mortgages and lines behind:
Wells Fargo owned or
serviced first lien
Third party first lien
$
32,683
37,913
2.37 %
33,121
37,417
2.54
Total junior lien mortgages and lines
65,804
75,330
2.45
First lien lines
18,326
19,744
3.00
Total
$
84,130
95,074
2.57
2.65
2.86
2.75
3.08
2.82
1.35
1.38
1.36
0.41
1.16
1.60
1.65
1.62
0.41
1.36
2.08
2.00
2.04
0.56
1.72
2.46
2.48
2.47
0.61
2.08
3.81
3.15
3.48
1.00
2.97
(1) Excludes both real estate 1-4 family first lien line reverse mortgages predominantly insured by the FHA and PCI loans.
(2) Includes $1.2 billion and $1.3 billion at December 31, 2013 and 2012, respectively, associated with the Pick-a-Pay portfolio.
(3) Reflects the impact of the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be written down to net realizable collateral
value, regardless of their delinquency status. The junior lien loss rates for third quarter 2012 reflect losses based on estimates of collateral value to implement the OCC
guidance, which were then adjusted in the fourth quarter to reflect actual appraisals. Fourth quarter 2012 losses on the junior liens where Wells Fargo owns or services the
first lien were elevated primarily due to the OCC guidance.
We monitor the number of borrowers paying the minimum
amount due on a monthly basis. In December 2013,
approximately 94% of our borrowers with a home equity
outstanding balance paid the minimum amount due or more,
while approximately 45% paid only the minimum amount due.
The home equity liquidating portfolio includes home equity
loans generated through third party channels, including
correspondent loans. This liquidating portfolio represents less
than 1% of our total loans outstanding at December 31, 2013, and
contains some of the highest risk in our home equity portfolio,
with a loss rate of 4.80% compared with 1.43% for the core (non-
liquidating) home equity portfolio for the year ended
December 31, 2013.
66
Table 28 shows the credit attributes of the core and
liquidating home equity 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, 2012 primarily reflects loan paydowns and charge-
offs. As of December 31, 2013, 23% of the outstanding balance of
the core home equity 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 of the outstanding balances of
these loans (the outstanding amount that was in excess of the
most recent property collateral value) totaled 9% of the core
home equity portfolio at December 31, 2013.
Table 28: Home Equity Portfolios (1)
(in millions)
Core portfolio (3)
California
Florida
New Jersey
Virginia
Pennsylvania
Other
Total
Liquidating portfolio
Total core and
liquidating portfolios
Outstanding balance
% of loans
two payments
or more past due
Loss rate
December 31,
December 31,
Year ended December 31,
2013
2012
2013
2012
2013
2012 (2)
$
20,198
22,900
2.08 %
8,699
6,734
4,328
4,282
9,763
7,338
4,758
4,683
36,194
40,985
80,435
90,427
3,695
4,647
3.57
3.57
1.96
2.79
2.37
2.53
3.49
2.46
4.15
3.43
2.04
2.67
2.59
2.77
3.82
1.34
1.99
1.47
1.00
1.07
1.44
3.59
4.10
2.50
1.83
1.73
2.84
1.43
3.03
4.80
9.03
$
84,130
95,074
2.57
2.82
1.59
3.34
(1) Consists predominantly of real estate 1-4 family junior lien mortgages and first and junior lines of credit secured by real estate, but excludes PCI loans because their losses
were generally reflected in PCI accounting adjustments at the date of acquisition, and excludes real estate 1-4 family first lien open-ended line reverse mortgages because
they do not have scheduled payments. These reverse mortgage loans are predominantly insured by the FHA.
(2) Reflects the impact of the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be written down to net realizable collateral
value, regardless of their delinquency status.
(3) Includes $1.2 billion and $1.3 billion at December 31, 2013 and 2012, respectively, associated with the Pick-a-Pay portfolio.
CREDIT CARDS Our credit card portfolio totaled $26.9 billion
at December 31, 2013, which represented 3% of our total
outstanding loans. The net charge-off rate for our credit card
portfolio was 3.62% for 2013, compared with 4.02% for 2012.
AUTOMOBILE Our automobile portfolio, predominantly
composed of indirect loans, totaled $50.8 billion at
December 31, 2013. The net charge-off rate for our automobile
portfolio was 0.63% for 2013, compared with 0.64% for 2012.
OTHER REVOLVING CREDIT AND INSTALLMENT Other
revolving credit and installment loans totaled $43.0 billion at
December 31, 2013, and primarily included student and security-
based margin loans. Student loans totaled $22.0 billion at
December 31, 2013, of which $10.7 billion were government
guaranteed. The net charge-off rate for other revolving credit
and installment loans was 1.43% for 2013, compared with 1.38%
for 2012. Excluding government guaranteed student loans, the
net charge-off rates were 1.88% for 2013 and 1.96% for 2012,
respectively.
67
Risk Management – Credit Risk Management (continued)
NONPERFORMING ASSETS (NONACCRUAL LOANS AND
Table 29 summarizes nonperforming
FORECLOSED ASSETS)
assets (NPAs) for each of the last five years. We generally place
loans on nonaccrual status when:
x
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;
x
x
x
x
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.
Note 1 (Summary of Significant Accounting Policies – Loans)
to Financial Statements in this Report describes our accounting
policy for nonaccrual and impaired loans.
Table 29: Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)
(in millions)
Nonaccrual loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial (1)
Consumer:
Real estate 1-4 family first mortgage (2)
Real estate 1-4 family junior lien mortgage
Automobile
Other revolving credit and installment
Total consumer (3)
Total nonaccrual loans (4)(5)(6)
As a percentage of total loans
Foreclosed assets:
Government insured/guaranteed (7)
Non-government insured/guaranteed
Total foreclosed assets
2013
2012
2011
2010
2009
December 31,
$
$
738
2,252
416
29
40
1,422
3,322
1,003
27
50
2,142
4,085
1,890
53
47
3,213
5,227
2,676
108
127
4,397
3,696
3,313
171
146
3,475
5,824
8,217
11,351
11,723
9,799
2,188
173
33
11,455
2,922
245
40
10,913
12,289
10,100
1,975
2,302
2,263
159
40
244
56
270
62
12,193
14,662
13,087
14,891
12,695
15,668
20,486
21,304
26,242
24,418
1.90 %
2.56
2.77
3.47
3.12
2,093
1,844
3,937
1,509
2,514
4,023
1,319
3,342
4,661
1,479
4,530
6,009
960
2,199
3,159
Total nonperforming assets
$
19,605
24,509
25,965
32,251
27,577
As a percentage of total loans
2.37 %
3.07
3.37
4.26
3.52
(1) Includes LHFS of $1 million, $16 million, $25 million, $3 million and $27 million at December 31, 2013, 2012, 2011, 2010, and 2009 respectively.
(2) Includes MHFS of $227 million, $336 million, $301 million, $426 million and $339 million at December 31, 2013, 2012, 2011, 2010, and 2009 respectively.
(3) December 31, 2012, includes the impact of the implementation of the Interagency and OCC Guidance issued in 2012.
(4) Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.
(5) Real estate 1-4 family mortgage loans predominantly insured by the FHA or guaranteed by the VA and student loans predominantly guaranteed by agencies on behalf of the
U.S. Department of Education under the Federal Family Education Loan Program are not placed on nonaccrual status because they are insured or guaranteed.
(6) See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans.
(7) Consistent with regulatory reporting requirements, foreclosed real estate resulting from government insured/guaranteed loans are classified as nonperforming. Both principal
and interest related to these foreclosed real estate assets are collectible because the loans were predominantly insured by the FHA or guaranteed by the VA. Increase in
balance at December 31, 2013, reflects the impact of changes to loan modification programs, slowing foreclosures earlier in the year.
68
Table 30 provides a summary of nonperforming assets during 2013.
Table 30: Nonperforming Assets During 2013
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
% of
total
loans
% of
total
loans
Balance
% of
total
loans
Balance
% of
total
loans
Balance
Balance
($ in millions)
Nonaccrual loans:
Commercial:
Commercial and industrial
$
738
0.37 % $
809
0.42 % $
Real estate mortgage
Real estate construction
Lease financing
Foreign
2,252
416
29
40
2.10
2.48
0.24
0.08
2,496
517
17
47
2.36
3.15
0.15
0.10
1,022
2,708
665
20
40
0.54 % $
2.59
4.04
0.17
0.10
1,193
3,098
870
25
56
0.64 %
2.92
5.23
0.20
0.14
Total commercial
3,475
0.91
3,886
1.04
4,455
1.23
5,242
1.45
Consumer:
Real estate 1-4 family
first mortgage
Real estate 1-4 family
junior lien mortgage
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual
loans
Foreclosed assets:
Government insured/guaranteed
Non-government insured/guaranteed
Total foreclosed assets
Total nonperforming assets
Change in NPAs from prior quarter
$
$
9,799
3.79
10,450
4.10
10,705
4.23
11,320
4.49
2,188
173
33
12,193
3.32
0.34
0.08
2.74
2,333
188
36
13,007
3.45
0.38
0.08
2.95
2,522
200
33
13,460
3.60
0.41
0.08
3.07
2,712
220
32
14,284
3.74
0.47
0.08
3.26
15,668
1.90
16,893
2.08
17,915
2.23
19,526
2.44
2,093
1,844
3,937
1,781
2,021
3,802
1,026
2,114
3,140
969
2,381
3,350
19,605
2.37 % $
20,695
2.55 % $
21,055
2.63 % $
22,876
2.86 %
(1,090)
(360)
(1,821)
(1,633)
69
Risk Management – Credit Risk Management (continued)
Table 31 provides an analysis of the changes in nonaccrual
loans.
Table 31: Analysis of Changes in Nonaccrual Loans
(in millions)
Commercial nonaccrual loans
Balance, beginning of period
Inflows
Outflows:
Returned to accruing
Foreclosures
Charge-offs
Payments, sales and other (1)
Total outflows
Balance, end of period
Consumer nonaccrual loans
Balance, beginning of period
Inflows
Outflows:
Returned to accruing
Foreclosures
Charge-offs
Payments, sales and other (1)
Total outflows
Balance, end of period
Quarter ended
Dec. 31, Sept. 30,
June 30,
Mar. 31,
Year ended Dec. 31,
2013
2013
2013
2013
2013
2012
$
3,886
520
4,455
490
5,242
5,824
557
611
5,824
2,178
8,217
3,812
(67)
(34)
(191)
(639)
(192)
(77)
(150)
(640)
(128)
(120)
(193)
(903)
(109)
(91)
(189)
(804)
(496)
(322)
(723)
(2,986)
(655)
(469)
(1,435)
(3,646)
(931)
(1,059)
(1,344)
(1,193)
(4,527)
(6,205)
3,475
3,886
4,455
5,242
3,475
5,824
13,007
1,691
13,460
2,015
14,284
2,071
14,662
2,340
14,662
8,117
13,087
14,569
(953)
(162)
(437)
(953)
(997)
(167)
(480)
(824)
(1,156)
(1,031)
(4,137)
(4,219)
(95)
(651)
(993)
(173)
(775)
(739)
(597)
(2,343)
(3,509)
(745)
(4,541)
(3,489)
(2,505)
(2,468)
(2,895)
(2,718)
(10,586)
(12,994)
12,193
13,007
13,460
14,284
12,193
14,662
Total nonaccrual loans
$
15,668
16,893
17,915
19,526
15,668
20,486
(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
x
believe exposure to loss is significantly mitigated by the
following factors at December 31, 2013:
x 97% 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 64%
have a combined LTV (CLTV) ratio of 80% or less.
losses of $938 million and $3.9 billion have already been
recognized on 35% of commercial nonaccrual loans and
52% 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
70
time. Thereafter, we reevaluate each loan regularly and
record additional write-downs if needed.
x 66% of commercial nonaccrual loans were current on
x
interest.
the risk of loss of all nonaccrual loans has been considered
and we believe is adequately covered by the allowance for
loan losses.
x $2.3 billion of consumer loans discharged in bankruptcy
and classified as nonaccrual were 60 days or less past due,
of which $2.1 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, some states,
including California, Oregon and Massachusetts, have recently
enacted legislation or the courts have changed the foreclosure
process in a manner that significantly increases the time to
complete the foreclosure process; therefore loans remain in
nonaccrual status for longer periods. In certain other states,
including New York, New Jersey and Florida, the foreclosure
timeline has significantly increased due to backlogs in an
already complex process.
If interest due on all nonaccrual loans (including loans that
were, but are no longer on nonaccrual at year end) had been
accrued under the original terms, approximately $764 million
of interest would have been recorded as income on these loans,
compared with $575 million actually recorded as interest
income in 2013, versus $938 million and $406 million,
respectively, in 2012.
Table 32 provides a summary of foreclosed assets and an
analysis of changes in foreclosed assets.
Table 32: Foreclosed Assets
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
Year ended Dec. 31
Quarter ended
(in millions)
2013
2013
2013
Government insured/guaranteed (1)
$
2,093
1,781
1,026
PCI loans:
Commercial
Consumer
Total PCI loans
All other loans:
Commercial
Consumer
Total all other loans
Total foreclosed assets
Analysis of changes in foreclosed assets
Balance, beginning of period
Net change in government insured/guaranteed (1)(2)
Additions to foreclosed assets (3)
Reductions:
Sales
Write-downs and net gains (losses) on sales
Total reductions
Balance, end of period
2013
969
641
179
820
597
127
724
1,012
378
1,060
501
2013
2012
2,093
1,509
497
149
646
759
439
667
219
886
1,073
555
497
149
646
759
439
559
125
684
944
393
$
$
1,198
1,337
1,390
1,561
1,198
1,628
3,937
3,802
3,140
3,350
3,937
4,023
3,802
3,140
3,350
4,023
312
428
(823)
218
(605)
755
459
(545)
(7)
(552)
57
406
(647)
(26)
(673)
(540)
559
(658)
(34)
4,023
584
1,852
4,661
190
2,819
(2,673)
(3,359)
151
(288)
(692)
(2,522)
(3,647)
$
3,937
3,802
3,140
3,350
3,937
4,023
(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. Increase in
balances at December 31 and September 30, 2013, reflects the impact of changes to loan modification programs, slowing foreclosures in prior quarters.
(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 $892 million, $1.3 billion, $639 million and $71 million for the quarter ended
December 31, September 30, June 30 and March 31, 2013, respectively, and $2.9 billion and $3.7 billion for the year ended December 31, 2013 and 2012, respectively.
These transfer amounts have been revised for the quarters and year ended prior to December 31, 2013 to conform with the current period presentation.
(3) Predominantly include loans moved into foreclosure from nonaccrual status, PCI loans transitioned directly to foreclosed assets and repossessed automobiles.
Foreclosed assets at December 31, 2013, included
$2.1 billion of foreclosed real estate that is predominantly FHA
insured or VA guaranteed and expected to have minimal or no
loss content. The remaining balance of $1.8 billion of
foreclosed assets has been written down to estimated net
realizable value. Foreclosed assets at December 31, 2013 were
stable, compared with December 31, 2012. At
December 31, 2013, 68% of foreclosed assets of $3.9 billion
have been in the foreclosed assets portfolio one year or less.
Given our real estate-secured loan concentrations, current
economic conditions, and recent changes to loan modification
programs slowing down foreclosures in prior periods, we
anticipate continuing to hold an elevated level of foreclosed
assets on our balance sheet.
71
Risk Management – Credit Risk Management (continued)
TROUBLED DEBT RESTRUCTURINGS (TDRs)
Table 33: Troubled Debt Restructurings (TDRs)
(in millions)
Commercial TDRs
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial TDRs
Consumer TDRs
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit Card
Automobile
Other revolving credit and installment
Trial modifications
Total consumer TDRs (1)(2)
Total TDRs
TDRs on nonaccrual status
TDRs on accrual status (1)
Total TDRs
2013
2012
2011
2010
2009
December 31,
1,032
2,248
475
8
2
1,683
2,625
801
20
17
2,026
2,262
1,008
33
20
613
725
407
-
6
82
73
110
-
-
3,765
5,146
5,349
1,751
265
18,925
2,468
17,804
2,390
13,799
1,986
11,603
1,626
6,685
1,566
431
189
33
650
531
314
24
705
593
260
19
651
548
214
16
-
-
-
17
-
22,696
21,768
17,308
14,007
8,268
26,461
26,914
22,657
15,758
8,533
8,172
18,289
10,149
16,765
6,811
15,846
5,185
10,573
2,289
6,244
26,461
26,914
22,657
15,758
8,533
$
$
$
$
(1) TDR loans include $2.5 billion, $1.9 billion, $318 million, $429 million and $486 million at December 31, 2013, 2012, 2011, 2010 and 2009, respectively, of government
insured/guaranteed loans that are predominantly insured by the FHA or guaranteed by the VA and are accruing.
(2) Reflects the impact of the prospective adoption of the OCC guidance issued in 2012.
Table 34: TDRs Balance by Quarter During 2013
(in millions)
Commercial TDRs
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial TDRs
Consumer TDRs
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit Card
Automobile
Other revolving credit and installment
Trial modifications
Total consumer TDRs
Total TDRs
TDRs on nonaccrual status
TDRs on accrual status
Total TDRs
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
2013
2013
2013
2013
$
$
$
$
1,032
2,248
475
8
2
1,153
2,457
598
9
2
1,238
2,605
1,493
2,556
680
11
17
735
17
17
3,765
4,219
4,551
4,818
18,925
2,468
18,974
2,399
19,093
2,408
18,928
2,431
431
189
33
650
455
212
32
717
477
246
29
716
501
279
27
723
22,696
22,789
22,969
22,889
26,461
27,008
27,520
27,707
8,172
18,289
8,609
18,399
9,030
18,490
10,332
17,375
26,461
27,008
27,520
27,707
Table 33 and Table 34 provide information regarding the
recorded investment of loans modified in TDRs. The allowance
for loan losses for TDRs was $4.5 billion and $5.0 billion at
December 31, 2013 and 2012, respectively. See Note 6 (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.
72
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
Table 35: Analysis of Changes in TDRs
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 35 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.
(in millions)
Commercial TDRs
Balance, beginning of period
Inflows
Outflows
Charge-offs
Foreclosure
Payments, sales and other (1)
Balance, end of period
Consumer TDRs
Balance, beginning of period
Inflows
Outflows
Charge-offs (2)
Foreclosure
Payments, sales and other (1)
Net change in trial modifications (3)
Balance, end of period
Total TDRs
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
Year ended Dec. 31,
2013
2013
2013
2013
2013
2012
Quarter ended
$
4,219
292
(44)
(16)
(686)
3,765
4,551
534
(24)
(16)
(826)
4,219
4,818
468
(24)
(26)
(685)
5,146
500
(40)
(30)
(758)
5,146
1,794
(132)
(88)
5,349
2,559
(381)
(60)
(2,955)
(2,321)
4,551
4,818
3,765
5,146
22,789
1,248
22,969
1,282
22,889
1,352
21,768
2,076
21,768
5,958
17,308
8,050
(155)
(417)
(701)
(68)
(183)
(519)
(761)
1
(241)
(240)
(785)
(6)
(280)
(114)
(579)
18
(859)
(1,290)
(2,826)
(55)
(1,400)
(426)
(1,818)
54
22,696
22,789
22,969
22,889
22,696
21,768
$
26,461
27,008
27,520
27,707
26,461
26,914
(1) Other outflows include normal amortization/accretion of loan basis adjustments and loans transferred to held-for-sale. It also includes $29 million, $40 million and
$15 million of loans refinanced or restructured as new loans and removed from TDR classification for the quarters ended September 30, June 30, and March 31, 2013,
respectively. No loans were removed from TDR classification in 2012 as a result of being refinanced or restructured as new loans.
(2) Year ended December 31, 2012 charge-offs reflect the impact of loans discharged in bankruptcy being reported as TDRs in accordance with the OCC guidance issued in
2012.
(3) 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.
73
Risk Management – Credit Risk Management (continued)
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 December 31, 2013, were down
$390 million, or 27%, from December 31, 2012, 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 $22.2 billion at December 31, 2013,
up from $21.8 billion at December 31, 2012.
Table 36 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 6 (Loans and Allowance for
Credit Losses) to Financial Statements in this Report.
Table 36: Loans 90 Days or More Past Due and Still Accruing
(in millions)
2013
2012
2011
2010
2009
December 31,
Loans 90 days or more past due and still accruing:
Total (excluding PCI (1)):
Less: FHA insured/guaranteed by the VA (2)(3)
Less: Student loans guaranteed under the FFELP (4)
$
23,219
21,274
900
23,245
20,745
1,065
22,569
18,488
22,188
19,240
14,733
15,336
1,281
1,106
994
Total, not government insured/guaranteed
$
1,045
1,435
2,048
2,649
5,858
By segment and class, not government insured/guaranteed:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage (3)
Real estate 1-4 family junior lien mortgage (3)
Credit card
Automobile
Other revolving credit and installment
Total consumer
$
11
35
97
-
143
354
86
321
55
86
47
228
27
1
303
564
133
310
40
85
153
256
89
6
504
781
279
346
51
87
308
104
193
22
627
941
366
516
79
120
590
1,014
909
73
2,586
1,623
515
795
92
247
902
1,132
1,544
2,022
3,272
Total, not government insured/guaranteed
$
1,045
1,435
2,048
2,649
5,858
(1) PCI loans totaled $4.5 billion, $6.0 billion, $8.7 billion, $11.6 billion and $16.1 billion at December 31, 2013, 2012, 2011, 2010 and 2009, respectively.
(2) Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
(3) Includes MHFS 90 days or more past due and still accruing.
(4) Represents loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the FFELP.
74
NET CHARGE-OFFS
Table 37: Net Charge-offs
($ in millions)
2013
Commercial:
Commercial and
industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Year ended
Quarter ended
December 31,
December 31,
September 30,
June 30,
March 31,
Net loan
charge-
offs
% of
avg.
loans
Net loan
charge-
offs
% of
avg.
loans (1)
Net loan
charge-
offs
% of
avg.
loans (1)
Net loan
charge-
offs
% of
avg.
loans (1)
Net loan
charge-
offs
% of
avg.
loans (1)
$
335
0.18 % $
107
0.22 % $
58
0.12 % $
77
0.17 % $
93
0.20 %
(37)
(109)
(0.03)
(0.66)
17
-
0.15
-
(41)
(13)
(0.15)
(0.32)
-
-
-
-
(20)
(17)
-
(2)
(0.08)
(0.41)
-
(0.02)
(5)
(45)
18
(1)
(0.02)
(1.10)
0.57
(0.01)
29
(34)
(1)
3
0.11
(0.83)
(0.02)
0.03
Total commercial
206
0.06
53
0.06
19
0.02
44
0.05
90
0.10
Consumer:
Real estate 1-4 family
first mortgage
1,194
0.47
195
0.30
242
0.38
328
0.52
429
0.69
Real estate 1-4 family
junior lien mortgage
1,309
Credit card
Automobile
Other revolving credit
896
304
1.86
3.62
0.63
226
220
108
1.34
3.38
0.85
275
207
78
1.58
3.28
0.63
359
234
42
2.02
3.90
0.35
449
235
76
2.46
3.96
0.66
and installment
600
1.43
161
1.50
154
1.46
145
1.38
140
1.37
Total consumer
4,303
0.98
910
0.82
956
0.86
1,108
1.01
1,329
1.23
Total
$
4,509
0.56 % $
963
0.47 % $
975
0.48 % $
1,152
0.58 % $
1,419
0.72 %
2012
Commercial:
Commercial and industrial $
Real estate mortgage
Real estate construction
Lease financing
Foreign
845
219
67
5
79
0.49 % $
0.21
0.37
0.04
0.20
209
38
0.46 % $
0.14
(18)
(0.43)
2
24
0.04
0.25
131
54
1
1
30
0.29 % $
249
0.58 % $
256
0.62 %
0.21
0.03
0.03
0.29
81
17
-
11
0.31
0.40
-
0.11
46
67
2
14
0.17
1.43
0.06
0.14
Total commercial
1,215
0.35
255
0.29
217
0.24
358
0.42
385
0.45
Consumer:
Real estate 1-4 family
first mortgage
2,856
1.22
649
1.05
673
1.15
743
1.30
791
1.39
Real estate 1-4 family
junior lien mortgage
Credit card
Automobile
Other revolving credit
3,178
916
289
3.93
4.02
0.64
690
222
112
3.57
3.71
0.97
1,036
212
75
5.17
3.67
0.66
689
240
28
3.38
4.37
0.25
763
242
74
3.62
4.40
0.68
and installment
580
1.38
153
1.46
145
1.38
142
1.35
140
1.32
Total consumer (2)
7,819
1.84
1,826
1.68
2,141
2.01
1,842
1.76
2,010
1.91
Total
$
9,034
1.17 % $ 2,081
1.05 % $ 2,358
1.21 % $ 2,200
1.15 % $ 2,395
1.25 %
(1) Quarterly net charge-offs (recoveries) as a percentage of average respective loans are annualized.
(2) The year ended December 31, 2012, reflects the impact of the OCC guidance issued in third quarter 2012.
75
Risk Management – Credit Risk Management (continued)
Table 37 presents net charge-offs for the four quarters and
full year of 2013 and 2012. Net charge-offs in 2013 were
$4.5 billion (0.56% of average total loans outstanding)
compared with $9.0 billion (1.17%) in 2012. We continued to
have strong improvement in our commercial and residential real
estate secured portfolios. Our commercial real estate portfolios
were in a net recovery position every quarter in 2013. Our
consumer real estate portfolios continued to benefit from the
improvement in the housing market with losses down
$3.5 billion, or 59%, from 2012.
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 6 (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 loss factors. 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. For additional information on our
allowance for credit losses, see the “Critical Accounting Policies
– Allowance for Credit Losses” section and Note 1 (Summary of
Significant Accounting Policies) and Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report.
Table 38 presents the allocation of the allowance for credit
losses by loan segment and class for the last five years.
76
Table 38: Allocation of the Allowance for Credit Losses (ACL)
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Loans
as %
of total
loans
ACL (1)
Loans
as %
of total
loans
ACL
Loans
as %
of total
loans
ACL
Loans
as %
of total
loans
ACL
Loans
as %
of total
loans
ACL
$ 2,775
2,102
24 % $ 2,543
2,283
13
23 % $ 2,649
2,550
13
22 % $ 3,299
3,072
14
20 % $ 4,014
2,398
13
20 %
12
770
127
329
2
1
6
552
85
251
2
2
5
893
82
184
2
2
5
1,387
173
238
4
2
4
1,242
181
306
5
2
4
Total commercial
6,103
46
5,714
45
6,358
45
8,169
43
8,141
43
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family
junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
4,087
32
6,100
31
6,934
30
7,603
30
6,449
29
2,534
1,224
475
548
8
3
6
5
3,462
1,234
417
550
10
3
6
5
3,897
1,294
555
630
11
3
6
5
4,557
1,945
771
418
13
3
6
5
5,430
2,745
1,381
885
13
3
6
6
Total consumer
8,868
54
11,763
55
13,310
55
15,294
57
16,890
57
Total
$ 14,971
100 % $ 17,477
100 % $ 19,668
100 % $ 23,463
100 % $ 25,031
100 %
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
14,502
17,060
19,372
23,022
24,516
Components:
Allowance for loan losses
Allowance for unfunded
credit commitments
Allowance for credit losses
Allowance for loan losses as a percentage
$
$
469
14,971
417
17,477
of total loans
1.76 %
Allowance for loan losses as a percentage
of total net charge-offs
Allowance for credit losses as a percentage
of total loans
Allowance for credit losses as a percentage
of total nonaccrual loans
322
1.81
96
2.13
189
2.19
85
(1) Reflects refinement in determination of allowance for the credit losses inherent in the respective loan classes.
296
19,668
2.52
171
2.56
92
441
23,463
3.04
130
3.10
89
515
25,031
3.13
135
3.20
103
77
Risk Management – Credit Risk Management (continued)
In addition to the allowance for credit losses, there was
$5.2 billion at December 31, 2013, and $7.0 billion at
December 31, 2012, 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,
Note 1 (Summary of Significant Accounting Policies) and Note 6
(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 home mortgages at
December 31, 2013.
The allowance for credit losses again declined in 2013, which
reflected continued improvement in consumer loss severity,
delinquency trends and improved portfolio performance,
particularly in residential real estate and primarily associated
with continued improvement in the housing market. The total
provision for credit losses was $2.3 billion in 2013, $7.2 billion
in 2012 and $7.9 billion in 2011.
LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES
We sell residential mortgage loans to various parties, including
(1) government-sponsored entities (GSEs) Federal Home Loan
Mortgage Corporation (FHLMC) and Federal National Mortgage
Association (FNMA) who include the mortgage loans in GSE-
guaranteed mortgage securitizations, (2) SPEs that issue private
label MBS, and (3) other financial institutions that purchase
mortgage loans for investment or private label securitization. In
addition, we pool FHA-insured and VA-guaranteed mortgage
loans that are then used to back securities guaranteed by the
Government National Mortgage Association (GNMA). We may
be required to repurchase these mortgage loans, indemnify the
securitization trust, investor or insurer, or reimburse the
securitization trust, investor or insurer for credit losses incurred
on loans (collectively, repurchase) in the event of a breach of
contractual representations or warranties that is not remedied
within a period (usually 90 days or less) after we receive notice
of the breach.
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.
The 2013 provision for credit losses was $2.3 billion,
The overall level of unresolved repurchase demands and
$2.2 billion less than net charge-offs, due to strong underlying
credit, and home prices and market fundamentals improving
faster and in more markets than forecasted.
The 2012 provision was $7.2 billion, $1.8 billion less than net
charge-offs, and the 2011 provision was $7.9 billion, $3.4 billion
less than net charge-offs. In each of 2012 and 2011 the provision
was influenced by continually improving credit performance.
We believe the allowance for credit losses of $15.0 billion at
December 31, 2013, 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. Given current favorable conditions, we continue to
expect future allowance releases, absent a significant
deterioration in the economy. 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 Significant Accounting Policies) to Financial
Statements in this Report.
78
mortgage insurance rescissions outstanding at
December 31, 2013, 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. Table 39 provides the number of
unresolved repurchase demands and mortgage insurance
rescissions.
Customary with industry practice, we have the right of
recourse against correspondent lenders from whom we have
purchased loans with respect to representations and warranties.
Of total repurchase demands and mortgage insurance
rescissions outstanding as of December 31, 2013, presented in
Table 39, approximately 10% relate to loans purchased from
correspondent lenders. Due primarily to the financial difficulties
of some correspondent lenders, we have been recovering on
average approximately 45% of losses from these lenders.
Historical recovery rates as well as projected lender performance
are incorporated in the establishment of our mortgage
repurchase liability.
We do not typically receive repurchase requests from GNMA,
FHA and the Department of Housing and Urban Development
(HUD) or VA. As an originator of an FHA-insured or VA-
guaranteed loan, we are responsible for obtaining the insurance
with FHA or the guarantee with the VA. To the extent we are not
able to obtain the insurance or the guarantee we must request
permission to repurchase the loan from the GNMA pool. Such
repurchases from GNMA pools typically represent a self-
initiated process upon discovery of the uninsurable loan (usually
within 180 days from funding of the loan). Alternatively, in lieu
of repurchasing loans from GNMA pools, we may be asked by
FHA/HUD or the VA to indemnify them (as applicable) for
defects found in the Post Endorsement Technical Review
process or audits performed by FHA/HUD or the VA. The Post
Endorsement Technical Review is a process whereby HUD
performs underwriting audits of closed/insured FHA loans for
potential deficiencies. Our liability for mortgage loan repurchase
losses incorporates probable losses associated with such
indemnification.
Table 39: Unresolved Repurchase Demands and Mortgage Insurance Rescissions
Government
sponsored entities (1)
Private
rescissions with no demand (2)
Total
Mortgage insurance
Number of
loans
Original loan
balance (3)
Number of
loans
Original loan
balance (3)
Number of
loans
Original loan
balance (3)
Number of
loans
Original loan
balance (3)
674 $
4,422
6,313
5,910
6,621
6,525
5,687
6,333
124
958
1,413
1,371
1,503
1,489
1,265
1,398
2,260 $
1,240
1,206
1,278
1,306
1,513
913
857
497
264
258
278
281
331
213
241
394 $
385
561
652
753
817
840
970
87
87
127
145
160
183
188
217
3,328 $
6,047
8,080
7,840
8,680
8,855
7,440
8,160
708
1,309
1,798
1,794
1,944
2,003
1,666
1,856
($ in millions)
2013
December 31,
September 30,
June 30,
March 31,
2012
December 31,
September 30,
June 30,
March 31,
(1) Includes unresolved repurchase demands of 42 and $6 million, 1,247 and $225 million, 942 and $190 million, 674 and $147 million, 661 and $132 million, 534 and
$111 million, 526 and $103 million and 694 and $131 million at December 31, September 30, June 30 and March 31, 2013, and December 31, September 30, June 30 and
March 31, 2012, 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. To the extent 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). Over the last year, approximately 7% of our repurchase demands from GSEs had mortgage insurance rescission as one of the reasons for the
repurchase demand. Of all the mortgage insurance rescission notices received in 2012, approximately 78% have resulted in repurchase demands through December 2013.
Not all mortgage insurance rescissions received in 2012 have been completed through the appeals process with the mortgage insurer and, upon successful appeal, we work
with the investor to rescind the repurchase demand.
(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.
79
Risk Management – Credit Risk Management (continued)
We believe we have a high quality residential mortgage loan
servicing portfolio. Of the $1.8 trillion in the residential
mortgage loan servicing portfolio at December 31, 2013, 94%
was current, less than 2% was subprime at origination, and less
than 1% was related to home equity loan securitizations. Our
combined delinquency and foreclosure rate on this portfolio was
6.40% at December 31, 2013, compared with 7.04% at
December 31, 2012. Three percent of this portfolio is private
label securitizations for which we originated the loans and
therefore have some repurchase risk. We have observed an
increase in outstanding demands, compared with
December 31, 2012, associated with our pre-2009 private label
securitizations due to an increase in new demands received in
fourth quarter 2013, most of which were anticipated and were
covered through mortgage loan repurchase accruals established
in prior periods. Investors continue to review defaulted loans for
potential breaches of our loan sale representations and
warranties, and we continue to believe the risk of repurchase in
our private label securitizations is substantially reduced, relative
to third-party issued private label securitizations, because
approximately one-half of this portfolio of private label
securitizations does not contain representations and warranties
regarding borrower or other third party misrepresentations
related to the mortgage loan, general compliance with
underwriting guidelines, or property valuation, which are
commonly asserted bases for repurchase. For the 3% private
label securitization segment of our residential mortgage loan
servicing portfolio (weighted-average age of 98 months), 57% are
loans from 2005 vintages or earlier; 76% were prime at
origination; and approximately 60% are jumbo loans. The
weighted-average LTV as of December 31, 2013 for this private
Table 40: Changes in Mortgage Repurchase Liability
securitization segment was 67%. We believe the highest risk
segment of these private label securitizations is the subprime
loans originated in 2006 and 2007. These subprime loans have
seller representations and warranties and currently have LTVs
close to or exceeding 100%, and represent 10% of the private
label securitization portion of the residential mortgage servicing
portfolio. We had $67 million of repurchases related to private
label securitizations in 2013 compared with $180 million in
2012.
Of the servicing portfolio, 3% is non-agency acquired
servicing and 1% is private whole loan sales. We did not
underwrite and securitize the non-agency acquired servicing and
therefore we have no obligation on that portion of our servicing
portfolio to the investor for any repurchase demands arising
from origination practices. For the private whole loan segment,
while we do have repurchase risk on these loans, less than 2%
were subprime at origination and loans that were sold and
subsequently securitized are included in the private label
securitization segment discussed above.
Table 40 summarizes the changes in our mortgage
repurchase liability. We incurred net losses on repurchased
loans and investor reimbursements totalling $481 million on
mortgage loans with original balances of $1.4 billion in 2013,
excluding the $746 million and the $508 million cash payments
for the FHLMC and FNMA settlement agreements, respectively,
compared with net losses of $1.1 billion on mortgage loans with
original balances of $2.5 billion for 2012. Both the FHLMC and
FNMA settlement agreements executed in the third and fourth
quarters of 2013, respectively, were covered through mortgage
loan repurchase accruals established in prior periods.
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
Year ended Dec. 31,
Quarter ended
(in millions)
2013
2013
2013
2013
2013
2012
2011
Balance, beginning of period
Provision for repurchase losses:
Loan sales
Change in estimate (1)
Total additions
Losses (2)
$
1,421
2,222
2,317
2,206
2,206
1,326
1,289
16
10
26
28
-
28
40
25
65
59
250
309
143
285
428
275
1,665
1,940
101
1,184
1,285
(548)
(829)
(160)
(198)
(1,735)
(1,060)
(1,248)
Balance, end of period
$
899
1,421
2,222
2,317
899
2,206
1,326
(1) Results from changes in investor demand and mortgage insurer practices, credit deterioration and changes in the financial stability of correspondent lenders.
(2) Quarter and year ended September 30 and December 31, 2013, respectively, 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 and year ended December 31, 2013, reflect $508 million as a result of the agreement
with FNMA that resolves substantially all repurchase liabilities related to loans sold to FNMA that were originated prior to January 1, 2009.
80
Our liability for mortgage repurchases, included in “Accrued
expenses and other liabilities” in our consolidated balance sheet,
was $899 million at December 31, 2013 and $2.2 billion at
December 31, 2012. In 2013, we provided $428 million, which
reduced net gains on mortgage loan origination/sales activities,
compared with a provision of $1.9 billion for 2012 and
$1.3 billion for 2011. Our provision in 2013 reflected an increase
in projected repurchase losses for the GSE pre-2009 vintages to
incorporate the impact of trends in file requests and repurchase
demand activity observed in the first quarter (comprising
approximately 58% of the 2013 provision), an increase for
indemnifications and specific private investor demands
(approximately 8%) and new loan sales (approximately 34%).
Our provision in 2012 reflected an increase in projections of
future GSE repurchase demands, net of appeals, for the pre-
2009 vintages to incorporate the impact of trends in file requests
and repurchase demand activity (comprising approximately 58%
of the 2012 provision), an increase in probable loss estimates for
mortgage insurance rescissions (approximately 10%), new loan
sales (approximately 14%), an increase in probable loss
estimates for non-agency risk (approximately 9%), and various
other observed trends affecting our repurchase liability including
higher than anticipated loss severity (approximately 9%). The
increase in projected future GSE repurchase demands in 2012
was predominantly a result of an increase in the expected file
reviews by the GSEs as well as an increase in observed demand
rates on these file reviews based on our experience with them at
that time.
The mortgage repurchase liability of $899 million at
December 31, 2013, 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 mortgage repurchase liability estimation process
requires management to make difficult, subjective and complex
judgments about matters that are inherently uncertain,
including demand expectations, economic factors, and the
specific characteristics of the loans subject to repurchase. Our
evaluation considers all vintages and the collective actions of the
GSEs and their regulator, the Federal Housing Finance Agency
(FHFA), mortgage insurers and our correspondent lenders. We
maintain regular contact with the GSEs, the FHFA, and other
significant investors to monitor their repurchase demand
practices and issues as part of our process to update our
repurchase liability estimate as new information becomes
available.
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
$896 million at December 31, 2013, 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. For additional information on our repurchase
liability, see the “Critical Accounting Policies – Liability for
Mortgage Loan Repurchase Losses” section and Note 9
(Mortgage Banking Activities) to Financial Statements in this
Report.
Table 41: Mortgage Repurchase Liability - Sensitivity
Assumptions
(in millions)
Balance at December 31, 2013
Loss on repurchases (1)
Increase in liability from:
10% higher losses
25% higher losses
Repurchase rate assumption (2)
Increase in liability from:
10% higher repurchase rates
25% higher repurchase rates
Mortgage
repurchase
liability
$
899
28.3 %
80
200
0.2 %
65
162
$
$
(1) Represents total estimated average loss rate on repurchased loans, net of
recovery from third party originators, based on historical experience and current
economic conditions. The average loss rate includes the impact of repurchased
loans for which no loss is expected to be realized.
(2) Represents the combination of the estimated investor audit/file review rate, the
investor demand rate on those audited loans, and the unsuccessful appeal rate on
those demands. As such, the repurchase rate can be significantly impacted by
changes in investor behavior if they decide to review/audit more loans or demand
more repurchases on the loans they audit. These behavior changes drive a
significant component of our estimated high end of the range of reasonably
possible losses in excess of our recorded repurchase liability, which includes
adverse assumptions in excess of the sensitivity ranges presented in this table.
To the extent that economic conditions and the housing
market do not recover or future investor repurchase demands
and appeals success rates differ from past experience, we could
continue to have increased demands and increased loss severity
on repurchases, causing future additions to the repurchase
liability. However, some of the underwriting standards that were
permitted by the GSEs for conforming loans in the 2006 through
2008 vintages, which significantly contributed to recent levels of
repurchase demands, were tightened starting in mid to late 2008
and as of December 31, 2013, we have resolved substantially all
of our repurchase exposures on the pre-2009 vintages with
FNMA and FHLMC. Given the tightening of underwriting
standards in late 2008, we do not expect a similar rate of
repurchase requests from the 2009 and prospective vintages,
absent deterioration in economic conditions or changes in
investor behavior.
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. The
following discussion summarizes the primary duties and
requirements of servicing and related industry developments.
81
Risk Management – Credit Risk Management (continued)
General Servicing Duties and Requirements
The loans we service were originated by us or by other mortgage
loan originators. As servicer, our primary duties are typically to
(1) collect payments due from borrowers, (2) advance certain
delinquent payments of principal and interest, (3) maintain and
administer any hazard, title or primary mortgage insurance
policies relating to the mortgage loans, (4) maintain any
required escrow accounts for payment of taxes and insurance
and administer escrow payments, (5) foreclose on defaulted
mortgage loans or, to the extent consistent with the documents
governing a securitization, consider alternatives to foreclosure,
such as loan modifications or short sales, and (6) for loans sold
into private label securitizations, manage the foreclosed property
through liquidation. As master servicer, our primary duties are
typically to (1) supervise, monitor and oversee the servicing of
the mortgage loans by the servicer, (2) consult with each servicer
and use reasonable efforts to cause the servicer to fulfill its
servicing obligations, (3) prepare monthly distribution
statements to security holders and, if required by the
securitization documents, certain periodic reports required to be
filed with the SEC, (4) if required by the securitization
documents, calculate distributions and loss allocations on the
mortgage-backed securities, (5) prepare tax and information
returns of the securitization trust, and (6) advance amounts
required by non-affiliated servicers who fail to perform their
advancing obligations.
Each agreement under which we act as servicer or master
servicer generally specifies a standard of responsibility for
actions we take in such capacity and provides protection against
expenses and liabilities we incur when acting in compliance with
the specified standard. For example, most private label
securitization agreements under which we act as servicer or
master servicer typically provide that the servicer and the master
servicer are entitled to indemnification by the securitization
trust for taking action or refraining from taking action in good
faith or errors in judgment. However, we are not indemnified,
but rather are required to indemnify the securitization trustee,
against any failure by us, as servicer or master servicer, to
perform our servicing obligations or against any of our acts or
omissions that involve wilful misfeasance, bad faith or gross
negligence in the performance of, or reckless disregard of, our
duties. In addition, if we commit a material breach of our
obligations as servicer or master servicer, we may be subject to
termination if the breach is not cured within a specified period
following notice, which can generally be given by the
securitization trustee or a specified percentage of security
holders. Whole loan sale contracts under which we act as
servicer generally include similar provisions with respect to our
actions as servicer. The standards governing servicing in GSE-
guaranteed securitizations, and the possible remedies for
violations of such standards, vary, and those standards and
remedies are determined by servicing guides maintained by the
GSEs, contracts between the GSEs and individual servicers and
topical guides published by the GSEs from time to time. Such
remedies could include indemnification or repurchase of an
affected mortgage loan.
82
Consent Orders and Settlement Agreements for
Mortgage Servicing and Foreclosure Practices
In April 2011, the FRB and the Office of the Comptroller of
the Currency (OCC) issued Consent Orders that require us to
correct deficiencies in our residential mortgage loan servicing
and foreclosure practices that were identified by federal banking
regulators in their fourth quarter 2010 review. The Consent
Orders also require that we improve our servicing and
foreclosure practices. We believe that we have implemented all
of the operational changes that resulted from the expanded
servicing responsibilities outlined in the Consent Orders.
On February 28, 2013, we entered into amendments to the
April 2011 Consent Order with both the OCC and the FRB, which
effectively ceased the Independent Foreclosure Review (IFR)
program created by such Consent Order and replaced it with an
accelerated remediation process to be administered by the OCC
and the FRB.
In aggregate, the servicers agreed to make cash payments
into a qualified settlement fund to be administered by the OCC
and the FRB and to provide additional assistance, such as loan
modifications, to consumers. Our portion of the cash settlement
was $766 million, which was based on the proportionate share of
Wells Fargo-serviced loans in the overall IFR population. We
accrued the cash portion of the settlement in 2012, along with
our estimate of other remediation-related costs, and we paid this
settlement in first quarter 2013. We also committed to
foreclosure prevention actions which include first and second
lien modifications and short sales/deeds-in-lieu of foreclosure
on $1.2 billion of loans. We anticipate meeting this commitment
primarily through first lien modification and short sale activities.
We are required to meet this commitment by January 7, 2015,
and we anticipate that we will be able to meet our commitment
within the required timeline. This commitment did not result in
any charge as we believe that this commitment is covered
through the existing allowance for credit losses and the
nonaccretable difference relating to the purchased credit-
impaired loan portfolios.
On February 9, 2012, a federal/state settlement was
announced among the DOJ, HUD, the Department of the
Treasury, the Department of Veterans Affairs, the Federal Trade
Commission (FTC), the Executive Office of the U.S. Trustee, the
Consumer Financial Protection Bureau, a task force of Attorneys
General representing 49 states, Wells Fargo, and four other
servicers related to investigations of mortgage industry servicing
and foreclosure practices. While Oklahoma did not participate in
the larger settlement, it settled separately with the five servicers
under a simplified agreement. Under the terms of the larger
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:
x
x
x
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, Wells
Fargo believes 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.
We believe we have successfully executed activities required
under both the Consumer Relief (and state-level sub-
commitments) and the Refinance Programs in accordance with
the terms of our commitments. In our August 14, 2013,
submission to the Monitor of the National Mortgage Settlement,
we reported sufficient credits to satisfy the requirements of both
programs. Our earned credits are subject to review and approval
by the Monitor.
83
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 both lower rate scenarios contains
initial benefit from increased mortgage banking activity, each
results in 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 December 31, 2013, 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 42, 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).
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 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 the market risks related to our trading activities.
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:
x
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.
x
x
x
x
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
84
Table 42: 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:
Fed funds
0.50 %
0.25
0.25
1.25
4.00
10-year treasury (1)
3.60
1.70
3.10
4.10
5.40
Earnings relative to
most likely
N/A
-4.2%
-0.4%
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
December 31, 2013, and December 31, 2012, are presented in
Note 16 (Derivatives) to Financial Statements in this Report. We
use derivatives for asset/liability management in three main
ways:
x
to convert a major portion of our long-term fixed-rate debt,
which we issue to finance the Company, from fixed-rate
payments to floating-rate payments by entering into
receive-fixed swaps;
to convert the cash flows from selected asset and/or liability
instruments/portfolios 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.
x
x
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. Based on market conditions and other factors, we reduce
credit and liquidity risks by selling or securitizing some or all of
the long-term fixed-rate mortgage loans we originate and most
of the ARMs we originate. On the other hand, we may hold
originated ARMs and fixed-rate mortgage loans in our loan
portfolio as an investment for our growing base of core deposits.
We determine whether the loans will be held for investment or
held for sale at the time of commitment. We may subsequently
change our intent to hold loans for investment and sell some or
all of our ARMs or fixed-rate mortgages as part of our corporate
asset/liability management. We may also acquire and add to our
securities available for sale a portion of the securities issued at
the time we securitize MHFS.
As expected, with the increase in mortgage interest rates in
2013, our mortgage banking revenue declined as the level of
mortgage loan refinance activity significantly decreased
compared with 2012. The decline in mortgage loan origination
income (primarily driven by the decline in mortgage loan
refinancing volume) more than offset the increase in net
servicing income. The 2012 results reflected an environment of
very low mortgage interest rates which led to high origination
volumes and margins. Despite the increase in mortgage interest
rates, the slow recovery in the housing sector, and the continued
lack of liquidity in the nonconforming secondary markets, our
mortgage banking revenue was strong in 2013, reflecting the
complementary origination and servicing strengths of the
business. The secondary market for agency-conforming
mortgages functioned well during 2013.
Interest rate and market risk can be substantial in the
mortgage business. Changes in interest rates may potentially
reduce total origination and servicing fees, the value of our
residential MSRs measured at fair value, the value of MHFS and
the associated income and loss reflected in mortgage banking
noninterest income, the income and expense associated with
instruments (economic hedges) used to hedge changes in the fair
value of MSRs and MHFS, and the value of derivative loan
commitments (interest rate “locks”) extended to mortgage
applicants.
Interest rates affect the amount and timing of origination and
servicing fees because consumer demand for new mortgages and
the level of refinancing activity are sensitive to changes in
mortgage interest rates. Typically, a decline in mortgage interest
rates will lead to an increase in mortgage originations and fees
and may also lead to an increase in servicing fee income,
depending on the level of new loans added to the servicing
portfolio and prepayments. Given the time it takes for consumer
behavior to fully react to interest rate changes, as well as the
time required for processing a new application, providing the
commitment, and securitizing and selling the loan, interest rate
changes will affect origination and servicing fees with a lag. The
amount and timing of the impact on origination and servicing
fees will depend on the magnitude, speed and duration of the
change in interest rates.
We measure originations of MHFS at fair value where an
active secondary market and readily available market prices exist
to reliably support fair value pricing models used for these loans.
Loan origination fees on these loans are recorded when earned,
and related direct loan origination costs are recognized when
incurred. We also measure at fair value certain of our other
interests held related to residential loan sales and
securitizations. We believe fair value measurement for MHFS
and other interests held, which we hedge with free-standing
derivatives (economic hedges) along with our MSRs measured at
fair value, reduces certain timing differences and better matches
changes in the value of these assets with changes in the value of
derivatives used as economic hedges for these assets. During
2013 and 2012, in response to continued secondary market
illiquidity, we continued to originate certain prime non-agency
loans to be held for investment for the foreseeable future rather
than to be held for sale. In addition, in 2013 and 2012, we
originated certain prime agency-eligible loans to be held for
investment as part of our asset/liability management strategy.
We initially measure all of our MSRs at fair value and carry
substantially all of them at fair value depending on our strategy
for managing interest rate risk. Under this method, the MSRs
are recorded at fair value at the time we sell or securitize the
related mortgage loans. The carrying value of MSRs carried at
fair value reflects changes in fair value at the end of each quarter
85
Risk Management – Asset/Liability Management (continued)
and changes are included in net servicing income, a component
of mortgage banking noninterest income. If the fair value of the
MSRs increases, income is recognized; if the fair value of the
MSRs decreases, a loss is recognized. We use a dynamic and
sophisticated model to estimate the fair value of our MSRs and
periodically benchmark our estimates to independent appraisals.
The valuation of MSRs can be highly subjective and involve
complex judgments by management about matters that are
inherently unpredictable. See “Critical Accounting Policies –
Valuation of Residential Mortgage Servicing Rights” section in
this Report for additional information. Changes in interest rates
influence a variety of significant assumptions included in the
periodic valuation of MSRs, including prepayment speeds,
expected returns and potential risks on the servicing asset
portfolio, the value of escrow balances and other servicing
valuation elements.
A decline in interest rates generally increases the propensity
for refinancing, reduces the expected duration of the servicing
portfolio and therefore reduces the estimated fair value of MSRs.
This reduction in fair value causes a charge to income for MSRs
carried at fair value, net of any gains on free-standing derivatives
(economic hedges) used to hedge MSRs. We may choose not to
fully hedge all the potential decline in the value of our MSRs
resulting from a decline in interest rates because the potential
increase in origination/servicing fees in that scenario provides a
partial “natural business hedge.” An increase in interest rates
generally reduces the propensity for refinancing, extends the
expected duration of the servicing portfolio and therefore
increases the estimated fair value of the MSRs. However, an
increase in interest rates can also reduce mortgage loan demand
and therefore reduce origination income.
The price risk associated with our MSRs is economically
hedged with a combination of highly liquid interest rate forward
instruments including mortgage forward contracts, interest rate
swaps and interest rate options. All of the instruments included
in the hedge are marked to market daily. Because the hedging
instruments are traded in highly liquid markets, their prices are
readily observable and are fully reflected in each quarter’s mark
to market. Quarterly MSR hedging results include a combination
of directional gain or loss due to market changes as well as any
carry income generated. If the economic hedge is effective, its
overall directional hedge gain or loss will offset the change in the
valuation of the underlying MSR asset. Gains or losses
associated with these economic hedges are included in mortgage
banking noninterest income. Consistent with our longstanding
approach to hedging interest rate risk in the mortgage business,
the size of the hedge and the particular combination of forward
hedging instruments at any point in time is designed to reduce
the volatility of the mortgage business’s earnings over various
time frames within a range of mortgage interest rates. Because
market factors, the composition of the mortgage servicing
portfolio and the relationship between the origination and
servicing sides of our mortgage business change continually, the
types of instruments used in our hedging are reviewed daily and
rebalanced based on our evaluation of current market factors
and the interest rate risk inherent in our MSRs portfolio.
Throughout 2013, our economic hedging strategy generally used
forward mortgage purchase contracts that were effective at
86
offsetting the impact of interest rates on the value of the MSR
asset.
Mortgage forward contracts are designed to pass the full
economics of the underlying reference mortgage securities to the
holder of the contract, including both the directional gain and
loss from the forward delivery of the reference securities and the
corresponding carry income. Carry income represents the
contract’s price accretion from the forward delivery price to the
spot price including both the yield earned on the reference
securities and the market implied cost of financing during the
period. The actual amount of carry income earned on the hedge
each quarter will depend on the amount of the underlying asset
that is hedged and the particular instruments included in the
hedge. The level of carry income is driven by the slope of the
yield curve and other market driven supply and demand factors
affecting the specific reference securities. A steep yield curve
generally produces higher carry income while a flat or inverted
yield curve can result in lower or potentially negative carry
income. The level of carry income is also affected by the type of
instrument used. In general, mortgage forward contracts tend to
produce higher carry income than interest rate swap contracts.
Carry income is recognized over the life of the mortgage forward
as a component of the contract’s mark to market gain or loss.
Hedging the various sources of interest rate risk in mortgage
banking is a complex process that requires sophisticated
modeling and constant monitoring. While we attempt to balance
these various aspects of the mortgage business, there are several
potential risks to earnings:
x
Valuation changes for MSRs associated with interest rate
changes are recorded in earnings immediately within the
accounting period in which those interest rate changes
occur, whereas the impact of those same changes in interest
rates on origination and servicing fees occur with a lag and
over time. Thus, the mortgage business could be protected
from adverse changes in interest rates over a period of time
on a cumulative basis but still display large variations in
income from one accounting period to the next.
The degree to which the “natural business hedge” offsets
valuation changes for MSRs is imperfect, varies at different
points in the interest rate cycle, and depends not just on the
direction of interest rates but on the pattern of quarterly
interest rate changes.
Origination volumes, the valuation of MSRs and hedging
results and associated costs are also affected by many
factors. Such factors include the mix of new business
between ARMs and fixed-rate mortgages, the relationship
between short-term and long-term interest rates, the degree
of volatility in interest rates, the relationship between
mortgage interest rates and other interest rate markets, and
other interest rate factors. Additional factors that can
impact the valuation of the MSRs include changes in
servicing and foreclosure costs due to changes in investor or
regulatory guidelines, as well as individual state foreclosure
legislation, and changes in discount rates due to market
participants requiring a higher return due to updated
market expectations on costs and risks associated with
investing in MSRs. Many of these factors are hard to predict
x
x
x
and we may not be able to directly or perfectly hedge their
effect.
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 we earn 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 $16.8 billion and $12.7 billion at December 31, 2013
and 2012, respectively. The weighted-average note rate on our
portfolio of loans serviced for others was 4.52% and 4.77% at
December 31, 2013 and 2012, respectively. The carrying value of
our total MSRs represented 0.88% and 0.67% of mortgage loans
serviced for others at December 31, 2013 and 2012, respectively.
As part of our mortgage banking activities, we enter into
commitments to fund residential mortgage loans at specified
times in the future. A mortgage loan commitment is an interest
rate lock that binds us to lend funds to a potential borrower at a
specified interest rate and within a specified period of time,
generally up to 60 days after inception of the rate lock. These
loan commitments are derivative loan commitments if the loans
that will result from the exercise of the commitments will be held
for sale. These derivative loan commitments are recognized at
fair value on the balance sheet with changes in their fair values
recorded as part of mortgage banking noninterest income. The
fair value of these commitments include, at inception and during
the life of the loan commitment, the expected net future cash
flows related to the associated servicing of the loan as part of the
fair value measurement of derivative loan commitments.
Changes subsequent to inception are based on changes in fair
value of the underlying loan resulting from the exercise of the
commitment and changes in the probability that the loan will not
fund within the terms of the commitment, referred to as a fall-
out factor. The value of the underlying loan commitment is
affected primarily by changes in interest rates and the passage of
time.
Outstanding derivative loan commitments expose us to the
risk that the price of the mortgage loans underlying the
commitments might decline due to increases in mortgage
interest rates from inception of the rate lock to the funding of the
loan. To minimize this risk, we employ mortgage forwards and
options, Eurodollar futures and options, and Treasury futures,
forwards and options contracts as economic hedges against the
potential decreases in the values of the loans. We expect that
these derivative financial instruments will experience changes in
fair value that will either fully or partially offset the changes in
fair value of the derivative loan commitments. However, changes
in investor demand, such as concerns about credit risk, can also
cause changes in the spread relationships between underlying
loan value and the derivative financial instruments that cannot
be hedged.
MARKET RISK – 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 of our balance sheet risks and for a
very limited amount of proprietary trading for our own account.
These activities primarily occur within our trading businesses
and include entering into transactions with our customers that
are recorded as trading assets and liabilities on our balance
sheet. The primary risk metric used to monitor our trading
assets and liabilities is Value-at-Risk (VaR). Value-at-Risk is
covered in more detail in the Value-At-Risk Overview section in
this Report. Assets and liabilities held outside of our trading
portfolio are primarily monitored through the use of earnings
simulations as described above.
Valuation Process 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 (losses) on
trading activities, a component of noninterest income in our
income statement. For a discussion of our significant accounting
policies and how we determine fair value, see Note 1 (Summary
of Significant Accounting Policies) to Financial Statements in
this Report. For descriptions of the valuation methodologies we
use for assets and liabilities recorded at fair value on a recurring
basis and for estimating fair value for financial instruments at
fair value, see Note 16 (Derivatives) and Note 17 (Fair Values of
Assets and Liabilities) to Financial Statements in this Report.
From a market risk perspective, our net income is exposed to
changes in the fair value of trading assets and liabilities due to
changes in interest rates, credit spreads, foreign exchange rates,
equity and commodity prices. Our Market Risk Committee,
which is a management committee reporting to the Finance
Committee of the Board, provides governance and oversight over
market risk-taking activities across the Company.
87
Risk Management – Asset/Liability Management (continued)
Table 43 presents total revenue from trading activities.
of market-making activity is reflected in the fair value changes of
these positions recorded in net gain (losses) 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.” On December 10, 2013,
federal banking regulators, the SEC and CFTC 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, however, we will
be required to report 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. Accordingly, we
reduced and are exiting certain business activities in anticipation
of the final Volcker Rule. 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.
Daily Trading Revenue Table 44 and Table 45 provide
information on 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.
Table 43: Income from Trading Activities
(in millions)
Year ended December 31,
2013
2012
2011
Interest income (1)
$
1,376
1,358
1,440
Less: Interest expense (2)
307
245
316
Net interest income
1,069
1,113
1,124
Noninterest income:
Net gains (losses) from
trading activities (3):
Customer accommodation
1,278
1,347
1,029
Economic hedges and other (4)
Proprietary trading
332
13
345
15
(1)
(14)
Total net trading gains
1,623
1,707
1,014
Total trading-related net interest
and noninterest income
$
2,692
2,820
2,138
(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 activities and asset/liability
management.
Customer accommodation Customer accommodation activities
are conducted to help customers manage their investment needs
and risk management and hedging activities. 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 such 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
(losses) 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 anticipated buying and selling demand from our
customers. As market-maker in these securities, we earn income
due (1) to the difference between the price paid or received for
the purchase and sale of the security (bid-ask spread) and (2) the
net interest income and 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
88
Table 44: Distribution of Daily Trading-Related Revenues (for the year ended December 31, 2013)
Table 45: Daily Trading-Related Revenues
Market Risk Governance The Finance Committee of our Board
reviews and approves the acceptable level of market risk for the
Company. The Corporate Risk Group’s Market Risk Committee
is responsible for governance and oversight over market risk-
taking activities across the Company as well as the establishment
of risk tolerances and line of business VaR 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 quantitative market risk model
development, establishing independent risk limits, calculation
and analysis of 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. There is an automated limits
monitoring system that enables a daily comprehensive review of
multiple limits mandated across businesses by the Corporate
Market Risk Group. 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. As
described below, we measure and monitor market risk for both
management and regulatory capital purposes.
Market Risk Measurement 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
89
Risk Management – Asset/Liability Management (continued)
Stress Testing Overview 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 also assume that the market moves happen
instantaneously and no repositioning or hedging activity takes
place to mitigate losses as events unfold (although 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. 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. 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. However, this analysis lacks historical
and economic content, which can limit its usefulness.
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
risk measures. 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.
Market Risk Monitoring Trading VaR is the VaR 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. In addition, the Company monitors and manages
a variety of sensitivity exposures and stress testing estimates.
Table 46 shows the results of the Company’s Trading VaR by
risk category. As presented in the table, average Trading VaR
was $21 million for the quarter ended December 31, 2013,
compared with $18 million for the quarter ended
September 30, 2013. The increase was primarily driven by
changes in portfolio composition.
monitored at both the business unit level and at aggregated
levels on a daily basis. Our corporate market risk management
function aggregates all Company exposures to monitor whether
risk measures are within our established risk appetite. Changes
to the Company’s 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 Overview VaR is a statistical risk measure used to
estimate the potential loss from adverse moves in the financial
markets. We utilize VaR models to measure market risk on an
aggregate basis as well as on a disaggregated basis for each
individual line of business. 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. The
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 with respect
to 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 and a 10-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 utilizing 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 institutions.
The VaR model is subject to limitations which are well
established in the industry. Some of the primary limitations
include availability of historical data and determining the
appropriate mathematical model assumptions. These limitations
are monitored by a management committee of the Market Risk
Committee and Corporate Model Risk Committee (CMoR). The
CMoR consists of senior executive management and reports on
material model risk issues to the Risk Committee of the Board.
Sensitivity Analysis Overview Sensitivity analysis is the measure
of exposure to a single risk factor, such as a one basis point
increase in 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.
Since VaR is based upon previous moves in market risk factors
over recent historical periods, it may not provide accurate
predictions of future market moves. Sensitivity analysis
complements VaR as it provides an indication of risk relative to
each factor irrespective of historical market moves.
90
Table 46: Trading 1-Day 99% VaR Metrics
(in millions)
VaR Risk Categories
Credit
Interest rate
Equity
Commodity
Foreign exchange
Diversification benefit (1)
Total VaR
December 31, 2013
Quarter ended
September 30, 2013
Period
Period
end
Average
Low
High
end
Average
Low
High
$
32
20
9
1
-
(38)
24
33
19
6
2
1
(40)
21
30
13
4
1
-
36
25
9
3
2
31
25
6
3
1
(47)
19
32
24
7
3
1
(49)
18
29
17
6
2
1
34
31
8
4
2
(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.
Model Risk Management Internal market risk models are
governed by our Corporate Model Risk 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 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 and CMoR.
Regulatory Market Risk Capital Effective January 1, 2013, U.S.
banking regulators adopted “Risk-Based Capital Guidelines:
Market Risk” as the regulations covering the calculation of
market risk regulatory capital. The market risk capital rule,
commonly known as Basel 2.5, requires banking organizations
with significant trading activities to adjust their capital
requirements to better account for the market risks of those
activities. The rule substantially modified the determination of
market risk-weighted assets, and implements a more risk
sensitive methodology. The Basel 2.5 regulatory market risk
capital rule introduced new measures of market risk including
stressed VaR, an incremental risk charge, and updates to
standard specific risk charges. The market risk capital rule was
reflected in the Company’s calculation of risk-weighted assets
upon initial adoption in first quarter 2013.
Table 47 summarizes the market risk-based capital
requirements charge and market RWA as of December 31, 2013,
in accordance with the Basel 2.5 market risk capital rule.
91
Risk Management – Asset/Liability Management (continued)
Table 47: Market Risk Regulatory Capital and RWA
(in millions)
Total VaR Measure
Total Stressed VaR Measure
Incremental Risk Charge (IRC)
$
December 31, 2013
Risk-
based
Risk-
weighted
capital
assets
252
921
393
3,149
11,512
4,913
Total Modeled Capital (1)
1,566
19,574
Comprehensive Risk Charge (CRC)
Standard Specific Risk Charge:
Securitized Charge
Non-securitized Charge
Total Standard Specific Risk Charge
De minimus Charges
-
633
583
1,216
125
-
7,913
7,289
15,202
1,563
x
Total
$
2,907
36,339
(1) Includes the capital multiplier.
Composition of Material Portfolio of Covered Positions The
Basel 2.5 market risk capital rule substantially modified the
determination of market 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.
Regulatory Market Risk Capital Components The Company’s
“covered’ positions are subject to the market risk capital
requirements, which are based on 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 2.5 prescribes various VaR measures (e.g., Total VaR
Measure) 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.
Regulatory VaR The Regulatory VaR measures include:
x
Total VaR Measure – is composed of General VaR and
Specific Risk VaR and uses the previous 12 months of
historical market data to comply with regulatory
requirements.
92
o
o
General VaR
Measures the risk of broad market movements
such as changes in the level of interest rates, credit
spreads, equity prices, foreign exchange rates, and
commodity prices.
Uses historical simulation analysis based on 99%
confidence level and a 10-day time horizon.
Specific Risk VaR
Measures the risk of loss that could result from
factors other than broad market movement or
name specific market risk.
Uses Monte Carlo simulation analysis based on a
99% confidence level and a 10-day time horizon.
Total Stressed VaR Measure – uses a historical period of
significant financial stress over a continuous 12 month
period using historically available market data and is
composed of General Stressed VaR and Specific Risk
Stressed VaR. Stressed VaR uses the same methodology and
models as the Total VaR measure.
Incremental Risk Charge An Incremental Risk model, 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 credit-sensitive non-securitized products.
The Company calculates Incremental Risk by generating a
portfolio loss distribution utilizing 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. That is, the model will utilize a constant
positions assumption. 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 48 shows the General VaR measure categorized by
major risk categories. Table 49 shows the results of the
Company’s modeled components for regulatory capital
calculations. As presented in Table 48, average 10-day General
VaR was $80 million for the quarter ended December 31, 2013,
compared with $64 million for the quarter ended
September 30, 2013. The increase was primarily driven by
changes in portfolio composition.
Table 48: 10-Day 99% Regulatory General VaR Categories
December 31, 2013
Period
Period
Quarter ended
September 30, 2013
(in millions)
end
Average
Low
High
end
Average
Low
High
Wholesale General VaR Risk Categories
Credit
Interest rate
Equity
Commodity
Foreign exchange
Diversification benefit (1)
Wholesale General VaR
Company General VaR
$
102
107
40
7
4
1
40
4
4
2
(81)
(92)
$
73
79
65
80
92
24
2
2
1
-
49
60
120
61
8
5
6
-
79
96
111
51
4
3
2
107
39
4
3
2
(115)
(105)
56
70
50
64
81
23
2
2
1
-
26
41
130
58
8
4
4
-
66
81
(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.
Table 49: Regulatory Modeled Components Used to Calculate RWA
(in millions)
Total VaR Measure
Total Stressed VaR Measure
Incremental Risk Charge (IRC)
Comprehensive Risk Charge (CRC)
Total Modeled Capital
December 31, 2013
Period
Period
end
Average
Low
High
end
Average
$
$
84
328
425
-
837
84
307
393
-
784
67
245
354
-
103
420
442
-
75
746
383
-
1,204
70
355
348
-
773
Quarter ended
September 30, 2013
Low
47
269
297
-
High
86
746
403
-
93
Risk Management – Asset/Liability Management (continued)
Securitization Positions Basel 2.5 imposes a separate market
risk capital charge for positions classified as a securitization or
re-securitization. The primary criteria for classification as a
securitization is 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 under Basel
2.5 include 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 50 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 December 31, 2013.
Table 50: Covered Securitization Positions by Exposure Type
(Market Value)
December 31, 2013
(in millions)
ABS
CMBS
RMBS CLO/CDO
Securitization Exposure
Securities
Derivatives
Total
$
$
604
(2)
602
559
2
561
479
16
495
561
(72)
489
Securitization Due Diligence and Risk Monitoring The market
risk capital rule requires that for every covered trading
securitization and re-securitization position, the Company
conducts due diligence on the risk of each position within three
days of the execution of the purchase of that 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 procedures
are again performed on a quarterly basis for each securitization
and re-securitization position. The Company attempts to manage
the risks associated with securitization and re-securitization
positions through the use of offsetting positions and portfolio
diversification. The Company has implemented an automated
solution intended to track the due diligence associated with
every transaction and position.
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 December 31, 2013 was a
net loss of less than $1 million, all of which were long positions.
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 utilize standard specific
risk charges for these positions.
Other Specific Risk 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 ranges 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%.
94
VaR Backtesting The Basel 2.5 market risk capital rule requires
conducting 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 Measure 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 Measure 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
Measure is considered an 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
VaR 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.
There were no backtesting exceptions which occurred in
fourth quarter 2013. There were exceptions in second quarter
2013 that were driven by increased volatility in the fixed income
markets from uncertainty about the Federal Reserve’s intentions
regarding their quantitative easing efforts. These exceptions did
not result in an increase in the capital multiplier.
Table 51 shows daily Total VaR Measure (1-day, 99%) for the
year ended December 31, 2013. The Wells Fargo average Total
VaR Measure for fourth quarter 2013 was $21 million with a low
of $18 million and a high of $25 million.
Table 51: Daily Total VaR Measure
95
Risk Management – Asset/Liability Management (continued)
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 the valuations of 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 and equity method. Private
equity investments are subject to OTTI.
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 securities available-for-
sale 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.
96
Table 52 provides information regarding our marketable and
nonmarketable equity investments.
Table 52: Nonmarketable and Marketable Equity Investments
(in millions)
Nonmarketable equity investments:
Cost method:
Private equity investments
$
Federal bank stock
Total cost method
Equity method and other:
LIHTC investments (1)
Private equity and other
December 31,
2013
2012
2,308
4,670
2,572
4,227
6,978
6,799
6,209
5,782
4,767
6,156
Total equity method and other
11,991
10,923
Fair value (2)
1,386
-
Total nonmarketable
equity investments (3)
Marketable equity securities:
Cost
Net unrealized gains
Total marketable
equity securities (4)
$
$
$
20,355
17,722
2,039
1,346
2,337
448
3,385
2,785
(1) Represents low income housing tax credit investments.
(2) Represents nonmarketable equity investments for which we have elected the fair
value option. See Note 7 (Premises, Equipment, Lease Commitments and Other
Assets) and Note 17 (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 7 (Premises, Equipment,
Lease Commitments and Other Assets) to Financial Statements in this Report for
additional information.
(4) Included in securities available for sale. See Note 5 (Investment Securities) to
Financial Statements in this Report for additional information.
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 Corporate ALCO
establishes and monitors liquidity guidelines that require
sufficient asset-based liquidity to cover potential funding
requirements and to avoid over-dependence on volatile, less
reliable funding markets. We set these guidelines for both the
consolidated company and for the Parent 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. 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 the available-for-sale
securities portfolio. We believe these securities provide quick
sources of liquidity through repurchase agreements or sales,
regardless of market conditions. High-quality, liquid held-to-
maturity securities are not intended for sale but may be utilized
in repurchase agreements 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 53: Primary Sources of Liquidity
(in millions)
Cash on deposit
Securities of U.S. Treasury and federal agencies
Mortgage-backed securities of federal agencies (1)
Total
Table 53 provides the primary sources of liquidity as of
December 31, 2013.
December 31, 2013
Total
Encumbered Unencumbered
$
186,249
6,280
123,796
-
571
60,605
186,249
5,709
63,191
$
316,325
61,176
255,149
(1) Included in encumbered securities are 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
53, 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 held-to-maturity securities, to
the extent not encumbered, may be used in repurchase
agreements to obtain financing.
Core customer deposits have historically provided a sizeable
source of relatively stable and low-cost funds. At
December 31, 2013, core deposits were 119% of total loans
compared with 118% a year ago. Additional funding is provided
by long-term debt, other foreign deposits, and short-term
borrowings. Long-term debt averaged $134.9 billion in 2013 and
$127.5 billion in 2012. Short-term borrowings averaged
$54.7 billion in 2013 and $51.2 billion in 2012.
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 2013,
and both the Parent and Wells Fargo Bank, N.A. remain among
the top-rated financial firms in the U.S. On October 8, 2013,
Table 54: Credit Ratings
Moody's
S&P
Fitch Ratings
DBRS
* middle **high
Fitch Ratings affirmed all the ratings of the Parent and its rated
subsidiaries; on October 25, 2013, Standard & Poor’s Ratings
Services (S&P) affirmed all the ratings of the Parent and its rated
subsidiaries; and on November 14, 2013, Moody’s Investors
Service (Moody’s) confirmed all the ratings of the Parent and its
rated subsidiaries. This ratings confirmation by Moody’s
followed completion of their review regarding whether to
continue incorporating the possibility of federal support in
ratings applicable to certain bank holding companies in light of
recent regulatory developments related to the Title II Orderly
Liquidation Authority of the Dodd-Frank Act. Moody’s decided
to eliminate any assumption of federal support for the impacted
holding companies, including the Parent. However, Moody’s also
concluded that the same regulatory developments were likely to
reduce the severity of losses for bank holding company creditors
in the event of default, reflecting the potential benefits of a more
orderly resolution of bank holding companies and their related
banks. The net result of these offsetting conclusions was the
confirmation of our ratings. S&P is likewise reviewing their
support assumptions for certain bank holding companies in light
of the same regulatory developments. That review is ongoing and
S&P has not specified a timeframe for completion of their
review.
See the “Risk Management – Asset/Liability Management”
and “Risk Factors” sections in this Report for additional
information regarding our credit ratings as of
December 31, 2013, and the potential impact a credit rating
downgrade would have on our liquidity and operations, as well
as Note 16 (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 December 31, 2013, are presented in Table 54.
Wells Fargo & Company
Wells Fargo Bank, N.A.
Senior debt
Short-term
borrowings
Long-term
deposits
Short-term
borrowings
A2
A+
AA-
AA
P-1
A-1
F1+
R-1*
Aa3
AA-
AA
AA**
P-1
A-1+
F1+
R-1**
97
Risk Management – Asset/Liability Management (continued)
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 BHCs 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.
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
April 2012, 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 December 31, 2013, the Parent had available
$41.9 billion in short-term debt issuance authority and
$82.2 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 2013, the
Parent issued $13.1 billion of senior notes, of which $6.9 billion
were registered with the SEC. In addition, during 2013, the
Parent issued $5.5 billion of subordinated notes, all of which
were registered with the SEC. During fourth quarter 2013, the
Parent exchanged $2.1 billion of subordinated notes issued by
Wells Fargo Bank, N.A. for $2.4 billion of unregistered
subordinated notes issued by the Parent. In addition, during
fourth quarter 2013, the Parent exchanged $672 million of
subordinated notes issued by the Parent for $723 million of
unregistered subordinated notes issued by the Parent. A
registration statement filed by the Parent on December 17, 2013,
was declared effective on January 3, 2014, and provides for these
newly issued unregistered subordinated notes to be exchanged
for registered securities. The offer to exchange these
unregistered subordinated notes for registered notes
commenced on January 6, 2014. In addition, in January 2014,
the Parent issued $1.7 billion of registered senior notes.
The Parent’s proceeds from securities issued in 2013 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.
98
Table 55 provides information regarding the Parent’s
medium-term note (MTN) programs. The Parent may issue
senior and subordinated debt securities under Series L & M, 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 55: Medium-Term Note (MTN) Programs
December 31, 2013
Debt
issuance
Available
for
Date
established
authority
issuance
(in billions)
MTN program:
Series L & M (1)
Series K (1)(3)
European (2)(4)
European (2)(5)
Australian (2)(6)
May 2012
$
25.0
April 2010
December 2009
August 2013
June 2005
25.0
25.0
10.0
10.0
AUD
9.4
22.3
16.7
10.0
5.7
(1) SEC registered.
(2) Not registered with the SEC. May not be offered in the United States without
applicable exemptions from registration.
(3) As amended in April 2012.
(4) As amended in April 2012 and April 2013. 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.
(5) 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.
(6) 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 December 31, 2013, Wells Fargo Bank, N.A. had available
$100 billion in short-term debt issuance authority and
$80.1 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 2013, Wells Fargo Bank, N.A. issued $8.9 billion
of senior notes under the bank note program. At
December 31, 2013, Wells Fargo Bank, N.A. had remaining
issuance capacity under the bank note program of $50 billion in
short-term senior notes and $36.6 billion in long-term senior or
subordinated notes. In addition, during 2013, Wells Fargo Bank,
N.A. executed advances of $24.0 billion with the Federal Home
Loan Bank of Des Moines, of which $19.0 billion remained
outstanding at December 31, 2013.
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 time to time in Canada of up
to CAD $7.0 billion in medium-term notes. During 2013, WFCC
issued CAD $1.5 billion in medium-term notes using availability
outstanding under its prior base shelf prospectus. In
January 2014, WFCC issued an additional CAD $1.3 billion in
medium-term notes also using availability outstanding under its
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.
Capital Management
We have an active program for managing stockholders’ equity
and regulatory capital, and maintain 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 stockholders’ equity primarily include retention of earnings
net of dividends, as well as issuances of common and preferred
stock. Retained earnings increased $14.7 billion from
December 31, 2012, predominantly from Wells Fargo net income
of $21.9 billion, less common and preferred stock dividends of
$7.2 billion. During 2013, we issued approximately 115 million
shares of common stock, substantially all of which related to
employee benefit plans. In March 2013, we issued 25 million
Depositary Shares, each representing a 1/1,000th interest in a
share of the Company’s newly issued 5.25% Non-Cumulative
Perpetual Class A Preferred Stock, Series P, for an aggregate
public offering price of $625 million. In July 2013, we issued
69 million Depositary Shares, each representing a 1/1,000th
interest in a share of the Company’s newly issued 5.85% Fixed-
to-Floating Rate Non-Cumulative Perpetual Class A Preferred
Stock, Series Q, for an aggregate public offering price of
$1.7 billion. In December 2013, we issued 34 million Depositary
Shares, each representing a 1/1000th interest in a share of the
Company’s newly issued 6.625% Fixed-to-Floating Rate Non-
Cumulative Perpetual Class A Preferred Stock, Series R, for an
aggregate public offering price of $840 million. During 2013, we
repurchased approximately 124 million shares of common stock
in open market transactions and from employee benefit plans, at
a net cost of $5.1 billion. In addition, the Company entered into
a $500 million forward purchase contract in December 2013
with an unrelated third party that is expected to settle in first
quarter 2014 for approximately 11 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
December 31, 2013, the Company and each of our insured
depository institutions were “well-capitalized” under applicable
regulatory capital adequacy guidelines. See Note 26 (Regulatory
and Agency Capital Requirements) to Financial Statements in
this Report for additional information.
Current regulatory RBC rules are based primarily on broad
credit risk considerations and market-related risks, but do not
take into account other types of risk facing a financial services
company. The RBC rules are based primarily upon the 1988
capital accord of the Basel Committee on Banking Supervision
(BCBS) establishing international guidelines for determining
regulatory capital known as “Basel I.” 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.
Effective January 1, 2013, the Company implemented
changes to the market risk capital rule, commonly referred to as
Basel 2.5, as required by federal banking regulators. Basel 2.5
requires banking organizations with significant trading activities
to adjust their capital requirements to better account for the
market risks of those activities. The market risk capital rule is
reflected in the Company’s calculation of RWA and, upon initial
adoption in first quarter 2013, reduced capital ratios under
Basel I by approximately 25 basis points, but did not impact our
ratio under Basel III, as its impact has historically been included
in our calculations. In December 2013, the FRB approved a final
rule, effective April 1, 2014, revising the market risk capital rule
to, among other things, conform the rule 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
99
Capital Management (continued)
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 financial crisis of 2008 and 2009 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:
x
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.
x
x
x
x
x
x
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 our interpretation
of the final capital rules, we estimate that our CET1 ratio under
the final Basel III capital rules using the advanced approach
method exceeded the fully phased-in minimum of 7.0% by
276 basis points at December 31, 2013. Because the rules were
only recently finalized, the interpretations and assumptions we
use in estimating our calculations are subject to change
depending on our ongoing review of the final capital rules and
any guidance received from our regulators.
Consistent with the Collins Amendment to the Dodd-Frank
Act, banking organizations that have completed their parallel
100
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 July 2013, federal banking regulators introduced
proposals that would enhance the recently finalized
supplementary leverage ratio requirements for large BHCs like
Wells Fargo and their insured depository institutions. Under the
proposals, effective on January 1, 2018, a covered BHC would be
required to maintain a supplementary leverage ratio of at least
5% to avoid restrictions on capital distributions and
discretionary bonus payments. The proposals would 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 proposed requirements for the
holding company and each of our insured depository
institutions. Federal banking regulators, however, have
indicated they may make further changes to the U.S.
supplementary leverage ratio requirements based on revisions to
the Basel III leverage framework proposed by the BCBS in 2013
and finalized 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.
On March 14, 2013, the FRB notified us that it did not object
to our 2013 capital plan included in the 2013 CCAR. Since the
FRB notification, the Company took several capital actions,
including increasing its quarterly common stock dividend rate to
$0.30 per share, redeeming Wachovia Preferred Funding Corp.
preferred securities that will no longer count as Tier 1 capital
under the Dodd-Frank Act and the final Basel III capital
standards, and repurchasing shares of our common stock.
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 is expected to review 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 has indicated that
it will publish its supervisory stress test results as required
under the Dodd-Frank Act, and the related CCAR results taking
into account the Company’s proposed capital actions, in March
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. In October 2012, the FRB
issued final rules regarding stress testing requirements as
required under the Dodd-Frank Act provision imposing
enhanced prudential standards on large BHCs such as Wells
Fargo. The OCC issued and finalized similar rules during 2012
for stress testing of large national banks. The FRB issued interim
final rules in September 2013 clarifying how companies should
incorporate the Basel III capital rules into their capital planning
and stress testing exercises. These stress testing rules, which
became effective for Wells Fargo on November 15, 2012, 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. As required
under the FRB’s stress testing rule, we completed a mid-cycle
stress test based on March 31, 2013, data and scenarios
developed by the Company. We submitted the results of the mid-
cycle stress test to the FRB in July 2013 and disclosed a
summary of the results in September 2013.
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 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. At December 31, 2013, we had remaining
authority under this authorization to purchase approximately
74 million shares, subject to regulatory and legal conditions. For
more information about share repurchases during 2013, 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 Board authorized the repurchase by the Company of up to
$1 billion of the warrants. On May 26, 2010, in an auction by the
U.S. Treasury, we purchased 70,165,963 of the warrants at a
price of $7.70 per warrant. We have purchased an additional
986,426 warrants, all on the open market, since the U.S.
Treasury auction. At December 31, 2013, there were
39,108,864 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 56 and Table 57 provide information regarding the
composition of and change in our risk-based capital,
respectively, under Basel I.
101
Capital Management (continued)
Table 56: Risk-Based Capital Components Under Basel I
(in billions)
Total equity
Noncontrolling interests
Common stockholders' equity
Adjustments:
Preferred stock
Cumulative other comprehensive income
Goodwill and other intangible assets (1)
Investment in certain subsidiaries and other
Tier 1 common equity (2)
Preferred stock
Qualifying hybrid securities and noncontrolling interests
Total Tier 1 capital
Long-term debt and other instruments qualifying as Tier 2
Qualifying allowance for credit losses
Other
Total Tier 2 capital
Total qualifying capital
Risk-weighted assets (RWAs) (3):
Credit risk
Market risk
Total RWAs
Capital Ratios:
Tier 1 common equity to total RWAs
Total capital
December 31,
2013
$
171.0
(0.9)
170.1
(15.2)
(1.4)
(29.6)
(0.4)
2012
158.9
(1.3)
157.6
(12.0)
(5.6)
(30.4)
(0.6)
(A)
123.5
109.0
15.2
2.0
12.0
5.6
140.7
126.6
20.5
14.3
0.7
35.5
17.2
13.6
0.2
31.0
(B)
$
176.2
157.6
$
1,105.2
1,066.2
36.3
10.9
(C)
$
1,141.5
1,077.1
(A)/(C)
(B)/(C)
10.82 %
15.43
10.12
14.63
(1) Goodwill and other intangible assets are net of any associated deferred tax liabilities.
(2) Tier 1 common equity 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 Tier 1 common equity 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.
(3) 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 risk-
weighted assets.
102
Table 57: Analysis of Changes in Capital Under Basel I
(in billions)
Tier 1 common equity at December 31, 2012
Net income
Common stock dividends
Common stock repurchased
Other changes in addition paid in capital
Goodwill and other intangible assets (net of any associated deferred tax liabilities)
Other
Change in Tier 1 common equity
Tier 1 common equity at December 31, 2013
Tier 1 capital at December 31, 2012
Change in Tier 1 common equity
Issuance of noncumulative perpetual preferred
Redemption of trust preferred securities
Other
Change in Tier 1 capital
Tier 1 capital at December 31, 2013
Tier 2 capital at December 31, 2012
Change in long-term debt and other instruments qualifying as Tier 2
Change in qualifying allowance for credit losses
Other
Change in Tier 2 capital
Tier 2 capital at December 31, 2013
Qualifying capital
$
$
$
$
$
109.0
20.9
(6.1)
(2.6)
0.7
0.9
0.7
14.5
123.5
126.6
14.5
3.1
(2.8)
(0.7)
14.1
140.7
31.0
3.3
0.7
0.5
4.5
35.5
(A)
(B)
(A) + (B)
$
176.2
Table 58 presents information on the components of RWAs included within our regulatory capital ratios under Basel I. Additional
information regarding the composition of market risk-weighted assets is provided in Table 59 in this Report.
Table 58: Risk-Weighted Assets Under Basel I
(in millions)
On-balance sheet RWAs
Investment securities
Securities financing transactions (1)
Loans (2)
Market risk
Other
Total on-balance sheet RWAs
Off-balance sheet RWAs
Commitments and guarantees (3)
Derivatives
Other
Total off-balance sheet RWAs
Total RWAs under Basel I
(1) Represents fed 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.
December 31,
2013
2012
$
93,445
10,385
85,205
20,040
680,953
660,724
36,339
91,788
10,947
83,981
912,910
860,897
199,197
180,151
10,545
18,862
13,599
22,503
228,604
216,253
$ 1,141,514 1,077,150
103
Capital Management (continued)
Table 59 presents changes in RWAs for the year ended December 31, 2013.
Table 59: Analysis of Changes in Risk-Weighted Assets Under Basel I
(in millions)
RWAs at December 31, 2012
Net change in on-balance sheet RWAs:
Investment securities
Securities financing transactions
Loans
Market risk
Other
Total change in on-balance sheet RWAs
Net change in off-balance sheet RWAs:
Commitments and guarantees
Derivatives
Other
Total change in off-balance sheet RWAs
RWAs at December 31, 2013
$ 1,077,150
8,240
(9,655)
20,229
25,392
7,807
52,013
19,046
(3,054)
(3,641)
12,351
$ 1,141,514
The increase in on-balance sheet RWAs was primarily due to increased market risk, loan exposure and investment securities. Off-
balance sheet RWAs primarily increased due to newly issued commitments and guarantees.
Table 60 provides information regarding our CET1 calculation as estimated under Basel III using the advanced approach method.
Table 60: Common Equity Tier 1 Under Basel III (1)(2)
(in billions)
Tier 1 common equity under Basel I
Adjustments from Basel I to Basel III (3) (4):
Cumulative other comprehensive income related to AFS securities and defined benefit pension plans
Other
Total adjustments from Basel I to Basel III
Threshold deductions, as defined under Basel III (4) (5)
Common Equity Tier 1 anticipated under Basel III
Total RWAs anticipated under Basel III (6)
Common Equity Tier 1 to total RWAs anticipated under Basel III
December 31, 2013
$
123.5
1.3
1.4
2.7
-
(C)
(D)
$
$
126.2
1,293.4
(C)/(D)
9.76 %
(1) Common Equity Tier 1 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 Common Equity Tier 1 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 Common Equity Tier 1 and RWAs are estimated based on management’s interpretation of 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.
(3) Adjustments from Basel I to Basel III represent reconciling adjustments, primarily certain components of cumulative other comprehensive income deducted for Basel I
purposes, to derive Common Equity Tier 1 under Basel III.
(4) Volatility in interest rates can have a significant impact on the valuation of cumulative other comprehensive income and MSRs and therefore, may impact adjustments from
Basel I to Basel III, and MSRs subject to threshold deductions, as defined under Basel III, in future reporting periods.
(5) Threshold deductions, as defined under Basel III, include individual and aggregate limitations, as a percentage of Common Equity Tier 1, with respect to MSRs (net of related
deferred tax liability, which approximates the MSR book value times the applicable statutory tax rates), deferred tax assets and investments in unconsolidated financial
companies.
(6) 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 as originally defined under Basel II. Under the final rules, we will be subject to the lower of our Common Equity Tier 1 ratio calculated under the
standardized approach and under the advanced approach in the assessment of our capital adequacy. Accordingly, the estimate of RWA reflects management's interpretation
of RWA determined under the advanced approach because management expects RWA to be higher using the advanced approach compared with the standardized approach.
Basel III capital rules adopted by the Federal Reserve Board incorporate different classification of assets, with certain risk weights based on a borrower's credit rating or
Wells Fargo's own models, along with adjustments to address a combination of credit/counterparty, operational and market risks, and other Basel III elements.
104
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 highlights the more significant regulations and
regulatory oversight initiatives that have affected or may affect
our business. For additional information about the regulatory
reform matters discussed below and other regulations and
regulatory oversight matters, see Part I, Item 1 “Regulation and
Supervision” of our 2013 Form 10-K, and the “Capital
Management,” “Forward-Looking Statements” and “Risk
Factors” sections and Note 26 (Regulatory and Agency Capital
Requirements) to Financial Statements in this Report.
Dodd-Frank Act
The Dodd-Frank Act is the most significant financial reform
legislation since the 1930s and is driving much of the current
U.S. regulatory reform efforts. The Dodd-Frank Act and many of
its provisions became effective in July 2010 and July 2011.
However, a number of its provisions still require final
rulemaking or additional guidance and interpretation by
regulatory authorities or will be implemented over time.
Accordingly, in many respects the ultimate impact of the Dodd-
Frank Act and its effects on the U.S. financial system and the
Company remain uncertain. The following provides additional
information on the Dodd-Frank Act, including the current status
of certain of its rulemaking initiatives.
x
Enhanced supervision and regulation of systemically
important firms. The Dodd-Frank Act grants broad
authority to federal banking regulators to establish
enhanced supervisory and regulatory requirements for
systemically important firms. The FRB has finalized a
number of regulations implementing enhanced prudential
requirements for large bank holding companies (BHCs) like
Wells Fargo regarding risk-based capital and leverage, risk
and liquidity management, and stress testing and imposing
debt-to-equity limits on any BHC that regulators determine
poses a grave threat to the financial stability of the United
States. The FRB has also proposed, but not yet finalized,
additional enhanced prudential standards that would
implement single counterparty credit limits and establish
remediation requirements for large BHCs experiencing
financial distress. In addition to the authorization of
enhanced supervisory and regulatory requirements for
systemically important firms, the Dodd-Frank Act also
established the Financial Stability Oversight Council
(FSOC) and the Office of Financial Research, which may
recommend new systemic risk management requirements
and require new reporting of systemic risks. The OCC,
under separate authority, has also recently released for
public comment proposed new guidelines establishing
heightened governance and risk management standards for
large national banks such as Wells Fargo Bank, N.A.
x
x
x
The Collins Amendment. This provision of the Dodd-Frank
Act phases out the benefit of issuing trust preferred
securities by eliminating them from Tier 1 capital over a
three year period that began on January 1, 2013.
Regulation of consumer financial products. The Dodd-
Frank Act established the Consumer Financial Protection
Bureau (CFPB) to ensure consumers receive clear and
accurate disclosures regarding financial products and to
protect them from hidden fees and unfair or abusive
practices. With respect to residential mortgage lending, the
CFPB issued a number of final rules in 2013 implementing
new requirements that generally became effective in
January 2014. These rules include provisions requiring
creditors originating residential mortgage loans to make a
reasonable and good faith determination that each
applicant has a reasonable ability to repay the loan. In
addition, these rules established a definition of “qualified
mortgage” to support a broad access to credit for consumers
coupled with legal protections for lenders and secondary
market purchasers. These rules also impose requirements
on servicers to correct loan information errors, to provide
information in response to borrower requests, and to
provide protection to borrowers in cases of force-placed
insurance. Other rules address policy and procedural
concerns, such as requirements to provide notice or
information regarding certain interest rate adjustments or
payoff information; to evaluate borrower applications for
and to provide delinquent borrowers with information
regarding loss mitigation options; and to establish loan
originator compensation restrictions, high-cost mortgage
requirements, appraisal requirements, and escrow
standards for higher-priced mortgages. In November 2013,
the CFPB also finalized rules integrating disclosures
required of lenders and settlement agents under the Truth
in Lending Act and the Real Estate Settlement Procedures
Act effective August 1, 2015. In addition to these rulemaking
activities, the CFPB is continuing its on-going supervisory
examination activities of the financial services industry with
respect to a number of consumer businesses and products,
including credit card add-on products, fair lending
requirements, and student lending activities. At this time,
the Company cannot predict the full impact of the CFPB’s
rulemaking and supervisory authority on our business
practices or financial results.
Regulators also provided guidance to the financial
services industry regarding the provision of short-term,
small-dollar loans to consumers, such as our direct deposit
advance service. On January 17, 2014, we announced that
we would discontinue our direct deposit advance service.
New consumer checking accounts opened February 1, 2014,
or later will not be eligible to access the service, while
existing customers will be able to access the service until
mid-2014. Discontinuation of the service is not expected to
have a material financial impact on the Company.
Volcker Rule. The Volcker Rule substantially restricts
banking entities from engaging in proprietary trading or
105
Regulatory Reform (continued)
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 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, will be required to report 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. 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 as proprietary
trading is not significant to our financial results. Moreover,
we already have reduced or exited certain businesses in
anticipation of the rule’s compliance date and, although we
expect to have to divest certain investments in non-
conforming funds as a result of the rule, such divestments
will be limited and are not expected to be material to our
financial results.
Regulation of swaps and other derivatives activities. The
Dodd-Frank Act established a comprehensive framework
for regulating over-the-counter derivatives and authorized
the CFTC and the SEC to regulate swaps and security-based
swaps, respectively. The CFTC and SEC jointly adopted new
rules and interpretations that established the compliance
dates for many of their rules implementing the new
regulatory framework, including provisional registration of
our national bank subsidiary, Wells Fargo Bank, N.A., as a
swap dealer, which occurred at the end of 2012. In addition,
the CFTC has adopted final rules that, among other things,
require extensive regulatory and public reporting of swaps,
require certain swaps to be centrally cleared and traded on
exchanges or other multilateral platforms, and require swap
dealers to comply with comprehensive internal and external
business conduct standards. Margin rules for swaps not
centrally cleared have been proposed and, if adopted, may
significantly increase the cost of hedging in the over-the-
counter market. These new rules, as well as others being
considered by regulators in other jurisdictions, may
negatively impact customer demand for over-the-counter
derivatives.
Also included in this regulatory framework are certain
“push-out” provisions affecting U.S. banks acting as dealers
in commodity swaps, equity swaps and certain credit default
swaps, which will require that these activities be conducted
through an affiliate. The “push-out” provision in the Dodd-
Frank Act provided for a July 2013 effective date and
x
106
x
x
x
granted the OCC discretion to provide a transition period of
up to two years for banks to comply with the new
requirements. Wells Fargo Bank, N.A. prepared and filed a
transition period request with the OCC, and the OCC
granted the request providing a twenty-four month
transition period which began on July 16, 2013.
Changes to ABS markets. The Dodd-Frank Act requires
sponsors of ABS to hold at least a 5% ownership stake in the
ABS. Exemptions from the requirement include qualified
residential mortgages (QRMs) and FHA/VA loans. Federal
regulatory agencies proposed initial joint rules in 2011 to
implement this credit risk retention requirement, which
included an exemption for the GSE’s mortgage-backed
securities. The 2011 proposal was subject to extensive public
comment, and the agencies issued a second proposal in
2013. The second proposal revised the definition of QRMs,
which are exempt from the risk retention requirements, to
align the definition with the Consumer Financial Protection
Bureau’s definition of “qualified mortgage.” The second
proposal also addressed the measures for complying with
the risk retention requirement and continued to provide
limited exemptions for qualifying commercial loans,
qualifying commercial real estate loans, and qualifying
automobile loans that meet certain requirements. If
adopted as written, the current proposal may impact our
ability to issue certain asset-backed securities or otherwise
participate in various securitization transactions. Final rules
have not yet been issued.
Enhanced regulation of money market mutual funds.
Citing concerns with perceived risks that money market
mutual funds may pose to the financial stability of the
United States, the FSOC released proposed
recommendations to the SEC for additional regulations
governing these funds. The FSOC’s proposed
recommendations included implementation of floating net
asset value requirements, redemption holdback provisions,
and capital buffer requirements. These proposed
recommendations would be in addition to regulatory
changes with respect to money market mutual funds made
by the SEC in 2010. The FSOC released the proposed
recommendations for public comment but has not yet
adopted final recommendations. Following the FSOC’s
proposal, the SEC issued its own proposed regulatory
changes that would, among other things, require a floating
net asset value for prime institutional money market funds,
or liquidity fees and redemption gates during periods of
stress for non-governmental money market funds, or a
combination of both measures. The SEC’s proposal was
subject to public comment, but the SEC has not yet adopted
any of the proposed regulatory 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 drafts 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 has been stayed pending the appeal. The Court of
Appeals held oral arguments on the appeal in January 2014.
Regulatory Capital Guidelines and Capital Plans
During 2013, federal banking regulators issued final rules that
substantially amended the risk-based capital rules for banking
organizations. The rules implement the Basel III regulatory
capital reforms in the U.S., comply with changes required by the
Dodd-Frank Act, and replace the existing Basel I-based capital
requirements. We were required to begin complying with the
rules on January 1, 2014, subject to phase-in periods that are
scheduled to be fully phased in by January 1, 2022. Federal
banking regulators have also issued proposals to impose a
supplementary leverage ratio on large BHCs like Wells Fargo
and our insured depository institutions and to implement the
Basel III liquidity coverage ratio. For more information on the
final capital rules, the proposed leverage and liquidity rules, and
additional capital requirements under consideration by federal
banking regulators, see the “Capital Management” section in this
Report.
“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
Critical Accounting Policies
Our significant accounting policies (see Note 1 (Summary of
Significant Accounting Policies) to Financial Statements in this
Report) 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:
x
x
x
x
x
x
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.
prepare and periodically revise resolution plans, so called
“living-wills”, that would facilitate their resolution in the event
of material distress or failure. Under the rules, resolution plans
are required to provide strategies for resolution under the
Bankruptcy Code and other applicable insolvency regimes that
can be accomplished in a reasonable period of time and in a
manner that mitigates the risk that failure would have serious
adverse effects on the financial stability of the United States.
Wells Fargo submitted its resolution plan under these rules on
June 29, 2013. If the FRB and FDIC determine that our
resolution plan is deficient, the Dodd-Frank Act authorizes the
FRB and FDIC to impose more stringent capital, leverage or
liquidity requirements on us or restrict our growth or activities
until we submit a plan remedying the deficiencies. If the FRB
and FDIC ultimately determine that we have been unable to
remedy the deficiencies, they could order us to divest assets or
operations in order to facilitate our orderly resolution in the
event of our material distress or failure. 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 the plan on June 29, 2013.
The Dodd-Frank Act also establishes an orderly liquidation
process which allows for the appointment of the FDIC as a
receiver of a systemically important financial institution that is
in default or in danger of default. The FDIC has issued rules to
implement its orderly liquidation authority and recently released
a notice regarding a proposed resolution strategy, known as
“single point of entry,” designed to resolve a large financial
institution in a manner that holds management responsible for
its failure, maintains market stability, and imposes losses on
shareholders and creditors in accordance with statutory
priorities, without imposing a cost on U.S. taxpayers.
Implementation of the strategy would require that institutions
maintain a sufficient amount of available equity and unsecured
debt to absorb losses and recapitalize operating subsidiaries.
The FDIC has requested public comment on this proposed
resolution strategy.
Management has reviewed and approved these critical
accounting policies and has discussed these policies with the
Board’s Audit and Examination Committee.
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, including unfunded credit
commitments, at the balance sheet date, excluding loans carried
at fair value. We develop and document our allowance
methodology at the portfolio segment level. Our loan portfolio
consists of a commercial loan portfolio segment and a consumer
loan portfolio segment.
We employ a disciplined process and methodology to
establish our allowance for credit losses. The total allowance for
107
Critical Accounting Policies (continued)
credit losses considers both impaired and unimpaired loans.
While our methodology attributes portions of the allowance to
specific portfolio segments, the entire allowance for credit losses
is available to absorb credit losses inherent in the total loan
portfolio and unfunded credit commitments. No single statistic
or measurement determines the appropriateness of the
allowance for credit losses.
COMMERCIAL PORTFOLIO SEGMENT The allowance for
credit losses for unimpaired commercial loans is estimated
through the application of loss factors to loans based on credit
risk ratings for each loan. In addition, the allowance for
unfunded credit commitments, including letters of credit, is
estimated by applying these loss factors to loan equivalent
exposures. The loss factors reflect the estimated default
probability and quality of the underlying collateral. The loss
factors used are statistically derived through the observation of
historical losses incurred for loans within each credit risk rating
over a relevant specified period of time. We apply our judgment
to adjust or supplement these loss factors and estimates to reflect
other risks that may be identified from current conditions and
developments in selected portfolios. These risk ratings are
subject to review by an internal team of credit specialists.
The allowance also includes an amount for estimated credit
losses on impaired loans such as nonaccrual loans and loans that
have been modified in a TDR, whether on accrual or nonaccrual
status.
CONSUMER PORTFOLIO SEGMENT Loans are pooled
generally by product type with similar risk characteristics. Losses
are estimated using forecasted losses to represent our best
estimate of inherent loss based on historical experience,
quantitative and other mathematical techniques over the loss
emergence period. Each business group exercises significant
judgment in the determination of the credit loss estimation
model that fits the credit risk characteristics of its portfolio. We
use both internally developed and vendor supplied models in this
process. We often use roll rate or net flow models for near-term
loss projections, and vintage-based models, behavior score
models, and time series or statistical trend models for longer-
term projections. Management must use judgment in
establishing additional input metrics for the modeling processes,
considering further stratification into sub-product, origination
channel, vintage, loss type, geographic location and other
predictive characteristics. In addition, we establish an allowance
for consumer loans modified in a TDR, whether on accrual or
nonaccrual status.
The models used to determine the allowance are validated by
an internal model validation group operating in accordance with
Company policies.
OTHER ACL MATTERS The allowance for credit losses for both
portfolio segments includes an amount for imprecision or
uncertainty that may change from period to period. This amount
represents management’s judgment of risks inherent in the
processes and assumptions used in establishing the allowance.
This imprecision considers economic environmental factors,
modeling assumptions and performance, process risk, and other
108
subjective factors, including industry trends and risk
assessments for our commitments to regulatory and government
agencies regarding settlements of mortgage foreclosure-related
matters.
Impaired loans, which predominantly include nonaccrual
commercial loans and any loans that have been modified in a
TDR have an estimated allowance calculated as the difference, if
any, between the impaired value of the loan and the recorded
investment in the loan. The impaired value of the loan is
generally calculated as the present value of expected future cash
flows from principal and interest, which incorporates expected
lifetime losses, discounted at the loan’s effective interest rate.
The development of these expectations requires significant
management review and judgment. When collateral is the sole
source of repayment for an impaired loan, rather than the
borrower’s income or other sources of repayment, we charge
down to net realizable value which may reduce or eliminate the
need for an allowance. The allowance for an unimpaired loan is
based solely on principal losses without consideration for timing
of those losses. The allowance for an impaired loan that was
modified in a TDR may be lower than the previously established
allowance for that loan due to benefits received through
modification, such as lower probability of default and/or severity
of loss, and the impact of prior charge-offs or charge-offs at the
time of the modification that may reduce or eliminate the need
for an allowance.
Commercial and consumer PCI loans may require an
allowance subsequent to their acquisition. This allowance
requirement is due to probable decreases in expected principal
and interest cash flows (other than due to decreases in interest
rate indices and changes in prepayment assumptions).
SENSITIVITY TO CHANGES Changes in the allowance for credit
losses and, therefore, in the related provision for credit losses
can materially affect net income. In applying the review and
judgment required to determine the allowance for credit losses,
management considers changes in economic conditions,
customer behavior, and collateral value, among other influences.
From time to time, economic factors or business decisions, such
as the addition or liquidation of a loan product or business unit,
may affect the loan portfolio, causing management to provide or
release amounts from the allowance for credit losses.
The allowance for credit losses for commercial loans,
including unfunded credit commitments (individually risk
weighted) is sensitive to credit risk ratings assigned to each
credit exposure. Commercial loan risk ratings are evaluated
based on each situation by experienced senior credit officers and
are subject to periodic review by an internal team of credit
specialists.
The allowance for credit losses for consumer loans
(statistically modeled) is sensitive to economic assumptions and
delinquency trends. Forecasted losses are modeled using a range
of economic scenarios.
Assuming a one risk rating downgrade throughout our
commercial portfolio segment, a more pessimistic economic
outlook for modeled losses on our consumer portfolio segment
and incremental deterioration in our PCI portfolio could imply
an additional allowance requirement of approximately
$8.4 billion.
Assuming a one risk rating upgrade throughout our
commercial portfolio segment and a more optimistic economic
outlook for modeled losses on our consumer portfolio segment
could imply a reduced allowance requirement of approximately
$2.0 billion.
The sensitivity analyses provided are hypothetical scenarios
and are not considered probable. They do not represent
management’s view of inherent losses in the portfolio as of the
balance sheet date. Because significant judgment is used, it is
possible that others performing similar analyses could reach
different conclusions.
See the “Risk Management – Credit Risk Management”
section and Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report for further discussion of our
allowance.
Purchased Credit-Impaired (PCI) Loans
Loans 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. 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. 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.
Substantially all of our PCI loans were acquired in the Wachovia
acquisition on December 31, 2008.
Management evaluates whether there is evidence of credit
quality deterioration as of the purchase date using indicators
such as past due and nonaccrual status, commercial risk ratings,
recent borrower credit scores and recent loan-to-value
percentages.
The fair value at acquisition is based on an estimate of cash
flows, both principal and interest, expected to be collected,
discounted at the prevailing market rate of interest. We estimate
the cash flows expected to be collected at acquisition using our
internal credit risk, interest rate risk and prepayment risk
models, which incorporate our best estimate of current key
assumptions, such as property values, default rates, loss severity
and prepayment speeds.
Substantially all commercial and industrial, CRE and foreign
PCI loans are accounted for as individual loans. Conversely, Pick-
a-Pay and other consumer PCI loans have been aggregated into
pools based on common risk characteristics. Each pool is
accounted for as a single asset with a single composite interest
rate and an aggregate expectation of cash flows.
The excess of cash flows expected to be collected over the
carrying value (estimated fair value at acquisition date) 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 pool of loans, in situations where there is a
reasonable expectation about the timing and amount of cash
flows expected to be collected. The difference between the
contractually required payments and the cash flows expected to
be collected at acquisition, considering the impact of
prepayments, is referred to as the nonaccretable difference.
Subsequent to acquisition, we regularly evaluate our
estimates of cash flows expected to be collected. These
evaluations, performed quarterly, require the continued usage of
key assumptions and estimates, similar to our initial estimate of
fair value. We must apply judgment to develop our estimates of
cash flows for PCI loans given the impact of home price and
property value changes, changing loss severities, modification
activity, and prepayment speeds.
If we have probable decreases in cash flows expected to be
collected (other than due to decreases in interest rate indices and
changes in prepayment assumptions), we charge the provision
for credit losses, resulting in an increase to the allowance for loan
losses. If we have probable and significant increases in cash flows
expected to be collected, we first reverse any previously
established allowance for loan losses and then increase interest
income as a prospective yield adjustment over the remaining life
of the loan, or pool of loans. Estimates of cash flows are impacted
by changes in interest rate indices for variable rate loans and
prepayment assumptions, both of which are treated as
prospective yield adjustments included in interest income.
The amount of cash flows expected to be collected and,
accordingly, the appropriateness of the allowance for loan loss
due to certain decreases in cash flows expected to be collected, is
particularly sensitive to changes in loan credit quality. The
sensitivity of the overall allowance for credit losses, including
PCI loans, is presented in the preceding section, “Critical
Accounting Policies – Allowance for Credit Losses.”
See the “Risk Management – Credit Risk Management”
section and Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report for further discussion of PCI
loans.
Valuation of Residential Mortgage Servicing
Rights
MSRs are assets that represent the rights to service mortgage
loans for others. We recognize MSRs when we purchase servicing
rights from third parties, or retain servicing rights in connection
with the sale or securitization of loans we originate (asset
transfers). We also have MSRs acquired in the past under co-
issuer agreements that provide for us to service loans that were
originated and securitized by third-party correspondents. We
initially measure and carry our MSRs related to residential
mortgage loans at fair value.
At the end of each quarter, we determine the fair value of
MSRs using a valuation model that calculates the present value
of estimated future net servicing income. The model incorporates
assumptions that market participants use in estimating future
net servicing income, including estimates of prepayment speeds
(including housing price volatility), discount rates, default rates,
cost to service (including delinquency and foreclosure costs),
escrow account earnings, contractual servicing fee income,
ancillary income and late fees.
Net servicing income, a component of mortgage banking
noninterest income, includes the changes from period to period
in fair value of both our residential MSRs and the free-standing
derivatives (economic hedges) used to hedge our residential
MSRs. Changes in the fair value of residential MSRs result from
(1) changes in the valuation model inputs or assumptions and
109
Critical Accounting Policies (continued)
(2) other changes, representing changes due to
collection/realization of expected cash flows. Changes in fair
value due to changes in significant model inputs and
assumptions include prepayment speeds (which are influenced
by changes in mortgage interest rates and borrower behavior,
including estimates for borrower default), discount rates, and
servicing and foreclosure costs.
We use a dynamic and sophisticated model to estimate the
value of our MSRs. The model is validated by an internal model
validation group operating in accordance with Company policies.
Senior management reviews all significant assumptions
quarterly. Mortgage loan prepayment speed – a key assumption
in the model – is the annual rate at which borrowers are
forecasted to repay their mortgage loan principal including
estimates for borrower default. The discount rate used to
determine the present value of estimated future net servicing
income – another key assumption in the model – is the required
rate of return investors in the market would expect for an asset
with similar risk. To determine the discount rate, we consider the
risk premium for uncertainties from servicing operations (e.g.,
possible changes in future servicing costs, ancillary income and
earnings on escrow accounts). Both assumptions can, and
generally will, change quarterly as market conditions and
interest rates change. For example, an increase in either the
prepayment speed or discount rate assumption results in a
decrease in the fair value of the MSRs, while a decrease in either
assumption would result in an increase in the fair value of the
MSRs. In recent years, there have been significant market-driven
fluctuations in loan prepayment speeds and the discount rate.
These fluctuations can be rapid and may be significant in the
future. Therefore, estimating prepayment speeds within a range
that market participants would use in determining the fair value
of MSRs requires significant management judgment.
Additionally, in recent years, we have made significant
adjustments to the assumptions for servicing and foreclosure
costs as a result of an increase in the number of defaulted loans
as well as changes in servicing processes associated with default
and foreclosure management. While our current valuation
reflects our best estimate of these costs, future regulatory
changes in servicing standards, as well as changes in individual
state foreclosure legislation, may have an impact on these
assumptions and our MSR valuation in future periods.
The valuation and sensitivity of MSRs is discussed further in
Note 1 (Summary of Significant Accounting Policies), Note 8
(Securitizations and Variable Interest Entities), Note 9
(Mortgage Banking Activities) and Note 17 (Fair Values of Assets
and Liabilities) to Financial Statements in this Report.
Liability for Mortgage Loan Repurchase Losses
We sell residential mortgage loans to various parties, including
(1) GSEs, which include the mortgage loans in GSE-guaranteed
mortgage securitizations, (2) special purpose entities that issue
private label MBS, and (3) other financial institutions that
purchase mortgage loans for investment or private label
securitization. In addition, we pool FHA-insured and VA-
guaranteed mortgage loans, which back securities guaranteed by
GNMA. The agreements under which we sell mortgage loans and
the insurance or guaranty agreements with FHA and VA contain
110
provisions that include various representations and warranties
regarding the origination and characteristics of the mortgage
loans. Although the specific representations and warranties vary
among different sales, insurance or guarantee agreements, they
typically cover ownership of the loan, compliance with loan
criteria set forth in the applicable agreement, validity of the lien
securing the loan, absence of delinquent taxes or liens against
the property securing the loan, compliance with applicable
origination laws, and other matters. For more information about
these loan sales and the related risks that may result in liability
see the “Risk Management – Credit Risk Management – Liability
for Mortgage Loan Repurchase Losses” section in this Report.
We may be required to repurchase mortgage loans, indemnify
the securitization trust, investor or insurer, or reimburse the
securitization trust, investor or insurer for credit losses incurred
on loans (collectively “repurchase”) in the event of a breach of
contractual representations or warranties that is not remedied
within a period (usually 90 days or less) after we receive notice of
the breach. Our loan sale contracts to private investors (non-
GSE) typically contain an additional provision where we would
only be required to repurchase loans if any such breach is
deemed to have a material and adverse effect on the value of the
mortgage loan or to the interests of the investors or interests of
security holders in the mortgage loan. The time periods specified
in our mortgage loan sales contracts to respond to repurchase
requests vary, but are generally 90 days or less. While many
contracts do not include specific remedies if the applicable time
period for a response is not met, contracts for mortgage loan
sales to the GSEs include various types of specific remedies and
penalties that could be applied to inadequate responses to
repurchase requests. Similarly, the agreements under which we
sell mortgage loans require us to deliver various documents to
the securitization trust or investor, and we may be obligated to
repurchase any mortgage loan for which the required documents
are not delivered or are defective. In addition, 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. To the extent 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. Upon receipt of a
repurchase request or a mortgage insurance rescission, we work
with securitization trusts, investors or insurers to arrive at a
mutually agreeable resolution. Repurchase demands are typically
reviewed on an individual loan by loan basis to validate the
claims made by the securitization trust, investor or insurer, and
to determine whether a contractually required repurchase event
occurred. Occasionally, in lieu of conducting a loan level
evaluation, we may negotiate global settlements in order to
resolve a pipeline of demands in lieu of repurchasing the loans.
We manage the risk associated with potential repurchases or
other forms of settlement through our underwriting and quality
assurance practices and by servicing mortgage loans to meet
investor and secondary market standards.
We establish mortgage repurchase liabilities 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. Such factors
include default expectations, expected investor repurchase
demands (influenced by current and expected mortgage loan file
requests and mortgage insurance rescission notices, as well as
estimated levels of origination defects) and appeals success rates
(where the investor rescinds the demand based on a cure of the
defect or acknowledges that the loan satisfies the investor’s
applicable representations and warranties), reimbursement by
correspondent and other third party originators, and projected
loss severity. We establish a liability at the time loans are sold
and continually update our liability estimate during the
remaining life of such loans. Although activity can vary by
investor, investors may demand repurchase at any time and
there is often a lag from the date of default to the time we receive
a repurchase demand. The majority of repurchase demands are
on loans that default in the first 24 to 36 months following
origination of the mortgage loan. The most significant portion of
our repurchases under our representation and warranty
provisions are attributable to borrower misrepresentations and
loan underwriting issues.
To date, repurchase demands from private label MBS have
been more limited than GSE-guaranteed securities; however, it is
possible that requests to repurchase mortgage loans in private
label securitizations may increase in frequency as investors
explore every possible avenue to recover losses on their
securities. We evaluate the validity and materiality of any claim
of breach of representations and warranties in private label MBS
that is brought to our attention and work with securitization
trustees to resolve any repurchase requests. Nevertheless, we
may be subject to legal and other expenses if private label
securitization trustees or investors choose to commence legal
proceedings in the event of disagreements.
The mortgage loan repurchase liability at December 31, 2013,
represents our best estimate of the probable loss that we may
incur for various representations and warranties in the
contractual provisions of our sales of mortgage loans. Because
the level of mortgage loan repurchase losses is dependent on
economic factors, investor demand strategies and other external
conditions that may change over the life of the underlying loans,
the level of the liability for mortgage loan repurchase losses is
difficult to estimate and requires considerable management
judgment. We maintain regular contact with the GSEs and other
significant investors to monitor and address their repurchase
demand practices and concerns. For additional information on
our repurchase liability, including an adverse impact analysis,
see the “Risk Management – Credit Risk Management – Liability
for Mortgage Loan Repurchase Losses” section and Note 9
(Mortgage Banking Activities) to Financial Statements in this
Report.
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. Trading assets, securities available for sale,
derivatives, substantially all residential MHFS, certain loans held
for investment, certain nonmarketable equity investments,
securities sold but not yet purchased (short sale liabilities) and
certain long-term debt instruments are recorded at fair value on
a recurring basis. Additionally, from time to time, we may be
required to record at fair value other assets on a nonrecurring
basis, such as certain MHFS and 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.
Additionally, for certain financial instruments not recorded at
fair value we disclose the estimate of their fair value.
Fair value represents the price that would be received to sell
the financial asset or paid to transfer the financial liability in an
orderly transaction between market participants at the
measurement date.
The accounting provisions for fair value measurements
include a three-level hierarchy for disclosure of assets and
liabilities recorded at fair value. The classification of assets and
liabilities within the hierarchy is based on whether the inputs to
the valuation methodology used for measurement are observable
or unobservable. Observable inputs reflect market-derived or
market-based information obtained from independent sources,
while unobservable inputs reflect our estimates about market
data. For additional information on fair value levels, see Note 17
(Fair Values of Assets and Liabilities) to Financial Statements in
this Report.
When developing fair value measurements, we maximize the
use of observable inputs and minimize the use of unobservable
inputs. When available, we use quoted prices in active markets to
measure fair value. If quoted prices in active markets are not
available, fair value measurement is based upon models that use
primarily market-based or independently sourced market
parameters, including interest rate yield curves, prepayment
speeds, option volatilities and currency rates. However, in
certain cases, when market observable inputs for model-based
valuation techniques are not readily available, we are required to
make judgments about assumptions market participants would
use to estimate fair value.
The degree of management judgment involved in
determining the fair value of a financial instrument is dependent
upon the availability of quoted prices in active markets or
observable market parameters. For financial instruments with
quoted market prices or observable market parameters in active
markets, there is minimal subjectivity involved in measuring fair
value. When quoted prices and observable data in active markets
are not fully available, management judgment is necessary to
estimate fair value. Changes in the market conditions, such as
reduced liquidity in the capital markets or changes in secondary
market activities, may reduce the availability and reliability of
quoted prices or observable data used to determine fair value.
When significant adjustments are required to price quotes or
inputs, it may be appropriate to utilize an estimate based
primarily on unobservable inputs. When an active market for a
financial instrument does not exist, the use of management
estimates that incorporate current market participant
expectations of future cash flows, adjusted for an appropriate
risk premium, is acceptable.
We may use third party pricing services and brokers
(collectively, “pricing vendors”) to obtain fair values (“vendor
111
Critical Accounting Policies (continued)
prices”) which are used to either record the price of an
instrument or to corroborate internally developed prices. We
have processes in place to approve such vendors to ensure
information obtained and valuation techniques used are
appropriate. Once these vendors are approved to provide pricing
information, we monitor and review the results to ensure the fair
values are reasonable and in line with market experience with
similar asset classes. For certain securities, we may use internal
traders to price instruments. Where vendor prices are utilized for
recording the price of an instrument, we determine the most
appropriate and relevant pricing vendor for each security class
and obtain a price from that particular pricing vendor for each
security.
Determination of the fair value of financial instruments using
collateralized loan obligations (CLOs), asset-backed securities,
auction-rate securities, certain derivative contracts such as
interest rate lock loan commitments on residential MHFS and
credit default swaps related to collateralized mortgage obligation
(CMO), CDO and CLO exposures and certain MHFS, certain
loans, and MSRs. For additional information on how we value
MSRs refer to the discussion earlier in this section.
Table 61 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 (before
derivative netting adjustments). 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).
either vendor prices or internally developed prices is subject to
our internal price validation procedures, which include, but are
not limited to, one or a combination of the following procedures:
x
comparison to pricing vendors (for internally developed
prices) or to other pricing vendors (for vendor developed
prices);
variance analysis of prices;
corroboration of pricing by reference to other independent
market data such as secondary broker quotes and relevant
benchmark indices;
review of pricing by Company personnel familiar with
market liquidity and other market-related conditions; and
investigation of prices on a specific instrument-by-
instrument basis.
x
x
x
x
Table 61: Fair Value Level 3 Summary
December 31, 2013
December 31, 2012
Total
balance
Level 3 (1)
balance Level 3 (1)
Total
($ in billions)
Assets carried
at fair value
$
353.1
37.2
358.7
51.9
As a percentage
of total assets
23 %
2
25
4
Liabilities carried
at fair value
$
22.7
3.7
22.4
3.1
As a percentage of
total liabilities
2 %
*
2
*
For instruments where we utilize vendor prices to record the
(1) Before derivative netting adjustments.
* Less than 1%.
price of an instrument, we perform additional procedures. We
evaluate pricing vendors by comparing prices from one vendor to
prices of other vendors for identical or similar instruments and
evaluate the consistency of prices to known market transactions
when determining the level of reliance to be placed on a
particular pricing vendor. Methodologies employed, controls in
place and inputs used by third party pricing vendors are subject
to additional review when such services are provided. This
review may consist of, in part, obtaining and evaluating control
reports issued and pricing methodology materials distributed.
Significant judgment is required to determine whether
certain assets measured at fair value are included in Level 2 or
Level 3. When making this judgment, we consider available
information, including observable market data, indications of
market liquidity and orderliness, and our understanding of the
valuation techniques and significant inputs used. For securities
in inactive markets, we use a predetermined percentage to
evaluate the impact of fair value adjustments derived from
weighting both external and internal indications of value to
determine if the instrument is classified as Level 2 or Level 3.
Otherwise, the classification of Level 2 or Level 3 is based upon
the specific facts and circumstances of each instrument or
instrument category and judgments are made regarding the
significance of the Level 3 inputs to the instruments’ fair value
measurement in its entirety. If Level 3 inputs are considered
significant, the instrument is classified as Level 3.
Our financial assets valued using Level 3 measurements
consist of collateralized debt obligations (CDOs), certain
112
See Note 17 (Fair Values of Assets and Liabilities) to Financial
Statements in this Report for a complete discussion on our fair
valuation of financial instruments, our related measurement
techniques and the impact to our financial statements.
Income Taxes
We are subject to the income tax laws of the U.S., its states and
municipalities and those of the foreign jurisdictions in which we
operate. Our income tax expense consists of current and deferred
income tax expense. Current income tax expense represents our
estimated taxes to be paid or refunded for the current period and
includes income tax expense related to our uncertain tax
positions. We determine deferred income taxes using the balance
sheet method. Under this method, the net deferred tax asset or
liability is based on the tax effects of the differences between the
book and tax bases of assets and liabilities, and recognizes
enacted changes in tax rates and laws in the period in which they
occur. Deferred income tax expense results from changes in
deferred tax assets and liabilities between periods. Deferred tax
assets are recognized subject to management’s judgment that
realization is “more likely than not.” Uncertain tax positions that
meet the more likely than not recognition threshold are
measured to determine the amount of benefit to recognize. An
uncertain tax position is measured at the largest amount of
benefit that management believes has a greater than 50%
likelihood of realization upon settlement. Tax benefits not
meeting our realization criteria represent unrecognized tax
benefits. Our unrecognized tax benefits on uncertain tax
positions are reflected in Note 21 (Income Taxes) to Financial
Statements in this Report. Foreign taxes paid are generally
applied as credits to reduce federal income taxes payable. We
account for interest and penalties as a component of income tax
expense.
The income tax laws of the jurisdictions in which
we operate are complex and subject to different interpretations
by the taxpayer and the relevant government taxing authorities.
In establishing a provision for income tax expense, we must
make judgments and interpretations about the application of
these inherently complex tax laws. We must also make estimates
about when in the future certain items will affect taxable income
in the various tax jurisdictions by the government taxing
authorities, both domestic and foreign. Our interpretations may
be subjected to review during examination by taxing authorities
and disputes may arise over the respective tax positions. We
attempt to resolve these disputes during the tax examination and
audit process and ultimately through the court systems when
applicable.
We monitor relevant tax authorities and revise our estimate of
accrued income taxes due to changes in income tax laws and
their interpretation by the courts and regulatory authorities on a
quarterly basis. Revisions of our estimate of accrued income
taxes also may result from our own income tax planning and
from the resolution of income tax controversies. Such revisions
in our estimates may be material to our operating results for any
given quarter.
See Note 21 (Income Taxes) to Financial Statements in this
Report for a further description of our provision for income taxes
and related income tax assets and liabilities.
113
the criteria are met, a company is permitted to amortize the
initial investment cost in proportion to and over the same period
as the total tax benefits the company expects to receive. The
amortization of the initial investment cost and tax benefits are to
be recorded in the income tax expense line. The Update also
requires new disclosures about all investments in qualified
affordable housing projects regardless of the accounting method
used. These changes are effective for us in first quarter 2015 with
retrospective application. Early adoption is permitted. We are
evaluating the impact this Update will have on our consolidated
financial statements.
ASU 2013-11 is expected to eliminate 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. These changes are effective for us in first quarter 2014
with prospective application applied to all unrecognized tax
benefits that exist at the effective date. Early adoption and
retrospective application are permitted. This Update will 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 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. These changes are
effective for us in first quarter 2014 with prospective application.
Early adoption is not permitted. The Update will not have a
material effect on our consolidated financial statements.
Current Accounting Developments
The following accounting pronouncements have been issued by
the FASB but are not yet effective:
x
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 2014-01, Investments – Equity Method and Joint
Ventures (Topic 323): Accounting for Investments in
Qualified Affordable Housing Projects
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.
x
x
x
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. These changes are
effective for us in first quarter 2015 with prospective application.
Early adoption is permitted. Our adoption of this guidance will
not have a material effect on our consolidated financial
statements.
ASU 2014-01 amends the criteria a company must meet to elect
to account for investments in qualified affordable housing
projects using a method other than the cost or equity methods. If
114
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:
x
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
x
x
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 this Report.
x
x
x
x
x
x
x
x
x
x
x
x
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Forward-Looking Statements (continued)
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.
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 this Report, 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. We discuss below
risk factors that could adversely affect our financial results and
condition, and the value of, and return on, an investment in the
Company.
RISKS RELATED TO THE ECONOMY, FINANCIAL
MARKETS, INTEREST RATES AND LIQUIDITY
As one of the largest lenders in the U.S. and a provider
of financial products and services to consumers and
businesses across the U.S. and internationally, our
financial results have been, and will continue to be,
materially affected by general economic conditions,
particularly unemployment levels and home prices in
the U.S., and a deterioration in economic conditions or
in the financial markets may materially adversely affect
our lending and other businesses and our financial
results and condition. We generate revenue from the interest
and fees we charge on the loans and other products and services
we sell, and a substantial amount of our revenue and earnings
comes from the net interest income and fee income that we earn
from our consumer and commercial lending and banking
businesses, including our mortgage banking business where we
currently are the largest mortgage originator in the U.S. These
businesses have been, and will continue to be, materially affected
by the state of the U.S. economy, particularly unemployment
levels and home prices. Although the U.S. economy has
continued to gradually improve from the depressed levels of
2008 and early 2009, economic growth has been slow and
uneven. In addition, the negative effects and continued
uncertainty stemming from U.S. fiscal and political matters,
including concerns about deficit levels, taxes and U.S. debt
ratings, have impacted and may continue to impact the
continuing global economic recovery. For example, the U.S.
government experienced a temporary closure in October 2013
due to the government’s inability to reach a budget agreement,
and, although a temporary agreement was reached, the risk of
future closures or even a U.S. government default exists if further
agreements cannot be achieved. A prolonged period of slow
growth in the global economy, particularly in the U.S., or any
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deterioration in general economic conditions and/or the
financial markets resulting from the above matters or any other
events or factors that may disrupt or dampen the global
economic recovery, could materially adversely affect our
financial results and condition.
The improvement in the U.S. economy as well as higher home
prices contributed to our strengthened credit performance and
allowed us to release amounts from our allowance for credit
losses, however there is no guarantee we will have allowance
releases in the future. If unemployment levels worsen or if home
prices fall we would expect to incur elevated charge-offs and
provision expense from increases in our allowance for credit
losses. These conditions may adversely affect not only consumer
loan performance but also commercial and CRE loans, especially
for those business borrowers that rely on the health of industries
that may experience deteriorating economic conditions. The
ability of these and other borrowers to repay their loans may
deteriorate, causing us, as one of the largest commercial lenders
and the largest CRE lender in the U.S., to incur significantly
higher credit losses. In addition, weak or deteriorating economic
conditions make it more challenging for us to increase our
consumer and commercial loan portfolios by making loans to
creditworthy borrowers at attractive yields. Although we have
significant capacity to add loans to our balance sheet, loan
demand, especially consumer loan demand, has been soft
resulting in our retaining a much higher amount of lower
yielding liquid assets on our balance sheet. If economic
conditions do not continue to improve or if the economy worsens
and unemployment rises, which also would likely result in a
decrease in consumer and business confidence and spending, the
demand for our credit products, including our mortgages, may
fall, reducing our interest and noninterest income and our
earnings.
A deterioration in business and economic conditions, which
may erode consumer and investor confidence levels, and/or
increased volatility of financial markets, also could adversely
affect financial results for our fee-based businesses, including
our investment advisory, mutual fund, securities brokerage,
wealth management, and investment banking businesses. In
2013, approximately 25% of our revenue was fee income, which
included trust and investment fees, card fees and other fees. We
earn fee income from managing assets for others and providing
brokerage and other investment advisory and wealth
management services. Because investment management fees are
often based on the value of assets under management, a fall in
the market prices of those assets could reduce our fee income.
Changes in stock market prices could affect the trading activity of
investors, reducing commissions and other fees we earn from our
brokerage business. The U.S. stock market experienced all-time
highs in 2013 and there is no guarantee that those price levels
will continue. Poor economic conditions and volatile or unstable
financial markets also can negatively affect our debt and equity
underwriting and advisory businesses, as well as our trading and
venture capital businesses. Any deterioration in global financial
markets and economies, including as a result of any international
political unrest or disturbances, may adversely affect the
revenues and earnings of our international operations,
particularly our global financial institution and correspondent
banking services.
For more information, refer to the “Risk Management –
Asset/Liability Management” and “– Credit Risk Management”
sections in this Report.
Changes in interest rates and financial market values
could reduce our net interest income and earnings,
including as a result of recognizing losses or OTTI on
the securities that we hold in our portfolio or trade for
our customers. Our net interest income is the interest we earn
on loans, debt securities and other assets we hold less the
interest we pay on our deposits, long-term and short-term debt,
and other liabilities. Net interest income is a measure of both our
net interest margin – the difference between the yield we earn on
our assets and the interest rate we pay for deposits and our other
sources of funding – and the amount of earning assets we hold.
Changes in either our net interest margin or the amount or mix
of earning assets we hold could affect our net interest income
and our earnings. Changes in interest rates can affect our net
interest margin. Although the yield we earn on our assets and
our funding costs tend to move in the same direction in response
to changes in interest rates, one can rise or fall faster than the
other, causing our net interest margin to expand or contract. Our
liabilities tend to be shorter in duration than our assets, so they
may adjust faster in response to changes in interest rates. When
interest rates rise, our funding costs may rise faster than the
yield we earn on our assets, causing our net interest margin to
contract until the asset yield increases.
The amount and type of earning assets we hold can affect our
yield and net interest margin. We hold earning assets in the form
of loans and investment securities, among other assets. As noted
above, if the economy worsens we may see lower demand for
loans by creditworthy customers, reducing our net interest
income and yield. In addition, our net interest income and net
interest margin can be negatively affected by a prolonged low
interest rate environment, which as noted below is currently
being experienced as a result of economic conditions and FRB
monetary policies, as it may result in us holding short-term lower
yielding loans and securities on our balance sheet, particularly if
we are unable to replace the maturing higher yielding assets,
including the loans in our non-strategic and liquidating loan
portfolio, with similar higher yielding assets. Increases in
interest rates, however, may negatively affect loan demand and
could result in higher credit losses as borrowers may have more
difficulty making higher interest payments. As described below,
changes in interest rates also affect our mortgage business,
including the value of our MSRs.
Changes in the slope of the “yield curve” – or the spread
between short-term and long-term interest rates – could also
reduce our net interest margin. Normally, the yield curve is
upward sloping, meaning short-term rates are lower than long-
term rates. Because our liabilities tend to be shorter in duration
than our assets, when the yield curve flattens, as is the case in the
current interest rate environment, or even inverts, our net
interest margin could decrease as our cost of funds increases
relative to the yield we can earn on our assets.
The interest we earn on our loans may be tied to U.S.-
denominated interest rates such as the federal funds rate while
the interest we pay on our debt may be based on international
rates such as LIBOR. If the federal funds rate were to fall without
a corresponding decrease in LIBOR, we might earn less on our
loans without any offsetting decrease in our funding costs. This
could lower our net interest margin and our net interest income.
We assess our interest rate risk by estimating the effect on
our earnings under various scenarios that differ based on
assumptions about the direction, magnitude and speed of
interest rate changes and the slope of the yield curve. We hedge
some of that interest rate risk with interest rate derivatives. We
also rely on the “natural hedge” that our mortgage loan
originations and servicing rights can provide.
We generally do not hedge all of our interest rate risk. There
is always the risk that changes in interest rates could reduce our
net interest income and our earnings in material amounts,
especially if actual conditions turn out to be materially different
than what we assumed. For example, if interest rates rise or fall
faster than we assumed or the slope of the yield curve changes,
we may incur significant losses on debt securities we hold as
investments. To reduce our interest rate risk, we may rebalance
our investment and loan portfolios, refinance our debt and take
other strategic actions. We may incur losses when we take such
actions.
We hold securities in our investment securities portfolio,
including U.S. Treasury and federal agency securities and federal
agency MBS, securities of U.S. states and political subdivisions,
residential and commercial MBS, corporate debt securities, other
asset-backed securities and marketable equity securities,
including securities relating to our venture capital activities. We
analyze securities held in our investment securities portfolio for
OTTI on at least a quarterly basis. The process for determining
whether impairment is other than temporary usually requires
difficult, subjective judgments about the future financial
performance of the issuer and any collateral underlying the
security in order to assess the probability of receiving contractual
principal and interest payments on the security. Because of
changing economic and market conditions, as well as credit
ratings, affecting issuers and the performance of the underlying
collateral, we may be required to recognize OTTI in future
periods. Our net income also is exposed to changes in interest
rates, credit spreads, foreign exchange rates, equity and
commodity prices in connection with our trading activities,
which are conducted primarily to accommodate our customers in
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Risk Factors (continued)
the management of their market price risk, as well as when we
take positions based on market expectations or to benefit from
differences between financial instruments and markets. The
securities held in these activities are carried at fair value with
realized and unrealized gains and losses recorded in noninterest
income. As part of our business to support our customers, we
trade public securities and these securities also are subject to
market fluctuations with gains and losses recognized in net
income when realized and periodically include OTTI charges.
Although we have processes in place to measure and monitor the
risks associated with our trading activities, including stress
testing and hedging strategies, there can be no assurance that
our processes and strategies will be effective in avoiding losses
that could have a material adverse effect on our financial results.
The value of our public and private equity investments can
fluctuate from quarter to quarter. Certain of these investments
are carried under the cost or equity method, while others are
carried at fair value with unrealized gains and losses reflected in
earnings. Earnings from our equity investments may be volatile
and hard to predict, and may have a significant effect on our
earnings from period to period. When, and if, we recognize gains
may depend on a number of factors, including general economic
and market conditions, the prospects of the companies in which
we invest, when a company goes public, the size of our position
relative to the public float, and whether we are subject to any
resale restrictions.
Our venture capital investments could result in significant
OTTI losses for those investments carried under the cost or
equity method. Our assessment for OTTI is based on a number of
factors, including the then current market value of each
investment compared with its carrying value. If we determine
there is OTTI for an investment, we write-down the carrying
value of the investment, resulting in a charge to earnings. The
amount of this charge could be significant.
For more information, refer to the “Risk Management –
Asset/Liability Management – Interest Rate Risk”, “– Market
Risk – Equity Investments”, and “– Market Risk – Trading
Activities” and the “Balance Sheet Analysis – Investment
Securities” sections in this Report and Note 5 (Investment
Securities) to Financial Statements in this Report.
Effective liquidity management, which ensures that we
can meet customer loan requests, customer deposit
maturities/withdrawals and other cash commitments,
including principal and interest payments on our debt,
efficiently under both normal operating conditions and
other unpredictable circumstances of industry or
financial market stress, is essential for the operation of
our business, and our financial results and condition
could be materially adversely affected if we do not
effectively manage our liquidity. Our liquidity is essential
for the operation of our business. We primarily rely on bank
deposits to be a low cost and stable source of funding for the
loans we make and the operation of our business. Core customer
deposits, which include noninterest-bearing deposits, interest-
bearing checking, savings certificates, certain market rate and
other savings, and certain foreign deposits, have historically
provided us with a sizeable source of relatively stable and low-
118
cost funds. In addition to customer deposits, our sources of
liquidity include investments in our securities portfolio, our
ability to sell or securitize loans in secondary markets and to
pledge loans to access secured borrowing facilities through the
FHLB and the FRB, and our ability to raise funds in domestic
and international money through capital markets.
Our liquidity and our ability to fund and run our business
could be materially adversely affected by a variety of conditions
and factors, including financial and credit market disruption and
volatility or a lack of market or customer confidence in financial
markets in general similar to what occurred during the financial
crisis in 2008 and early 2009, which may result in a loss of
customer deposits or outflows of cash or collateral and/or our
inability to access capital markets on favorable terms. Market
disruption and volatility could impact our credit spreads, which
are the amount in excess of the interest rate of U.S. Treasury
securities, or other benchmark securities, of the same maturity
that we need to pay to our funding providers. Increases in
interest rates and our credit spreads could significantly increase
our funding costs. Other conditions and factors that could
materially adversely affect our liquidity and funding include a
lack of market or customer confidence in the Company or
negative news about the Company or the financial services
industry generally which also may result in a loss of deposits
and/or negatively affect our ability to access the capital markets;
our inability to sell or securitize loans or other assets, and, as
described below, reductions in one or more of our credit ratings.
Many of the above conditions and factors may be caused by
events over which we have little or no control. While market
conditions have continued to improve since the financial crisis,
there can be no assurance that significant disruption and
volatility in the financial markets will not occur in the future. For
example, the U.S. government’s temporary closure in October
2013 and continued concerns over the government’s ability to
reach a budget agreement caused financial market volatility. In
addition, concerns regarding the potential failure to raise the
U.S. government debt limit and any associated downgrade of
U.S. government debt ratings may cause uncertainty and
volatility as well. A failure to raise the U.S. debt limit in the
future and/or additional downgrades of the sovereign debt
ratings of the U.S. government or the debt ratings of related
institutions, agencies or instrumentalities, as well as other fiscal
or political events could, in addition to causing economic and
financial market disruptions, materially adversely affect the
market value of the U.S. government securities that we hold, the
availability of those securities as collateral for borrowing, and
our ability to access capital markets on favorable terms, as well
as have other material adverse effects on the operation of our
business and our financial results and condition.
As noted above, we rely heavily on bank deposits for our
funding and liquidity. We compete with banks and other
financial services companies for deposits. If our competitors
raise the rates they pay on deposits our funding costs may
increase, either because we raise our rates to avoid losing
deposits or because we lose deposits and must rely on more
expensive sources of funding. Higher funding costs reduce our
net interest margin and net interest income. Checking and
savings account balances and other forms of customer deposits
may decrease when customers perceive alternative investments,
such as the stock market, as providing a better risk/return
tradeoff. When customers move money out of bank deposits and
into other investments, we may lose a relatively low cost source
of funds, increasing our funding costs and negatively affecting
our liquidity.
If we are unable to continue to fund our assets through
customer bank deposits or access capital markets on favorable
terms or if we suffer an increase in our borrowing costs or
otherwise fail to manage our liquidity effectively, our liquidity,
net interest margin, financial results and condition may be
materially adversely affected. As we did during the financial
crisis, we may also need, or be required by our regulators, to
raise additional capital through the issuance of common stock,
which could dilute the ownership of existing stockholders, or
reduce or even eliminate our common stock dividend to preserve
capital or in order to raise additional capital.
For more information, refer to the “Risk Management –
Asset/Liability Management” section in this Report.
Adverse changes in our credit ratings could have a
material adverse effect on our liquidity, cash flows,
financial results and condition. Our borrowing costs and
ability to obtain funding are influenced by our credit ratings.
Reductions in one or more of our credit ratings could adversely
affect our ability to borrow funds and raise the costs of our
borrowings substantially and could cause creditors and business
counterparties to raise collateral requirements or take other
actions that could adversely affect our ability to raise funding.
Credit ratings and credit ratings agencies’ outlooks are based on
the ratings agencies’ analysis of many quantitative and
qualitative factors, such as our capital adequacy, liquidity, asset
quality, business mix, the level and quality of our earnings, rating
agency assumptions regarding the probability and extent of
federal financial assistance or support, and other rating agency
specific criteria. In addition to credit ratings, our borrowing costs
are affected by various other external factors, including market
volatility and concerns or perceptions about the financial
services industry generally.
On October 8, 2013, Fitch Ratings affirmed all the ratings of
the Parent and its rated subsidiaries. On October 25, 2013,
Standard & Poor’s Ratings Services (S&P) affirmed all the ratings
of the Parent and its rated subsidiaries, and on
November 14, 2013, Moody’s Investors Service (Moody’s)
confirmed all of the ratings of the Parent and its rated
subsidiaries. This ratings confirmation by Moody’s followed
completion of their review regarding whether to continue
incorporating the possibility of federal support in ratings
applicable to certain bank holding companies in light of recent
regulatory developments related to the Title II Orderly
Liquidation Authority of the Dodd-Frank Act. Moody’s decided
to eliminate any assumption of federal support for the impacted
holding companies, including the Parent. However, Moody’s also
concluded that the same regulatory developments were likely to
reduce the severity of losses for bank holding company creditors
in the event of default, reflecting the potential benefits of a more
orderly resolution of bank holding companies and their related
banks. The net result of these offsetting conclusions was the
confirmation of our ratings. S&P is likewise reviewing their
support assumptions for certain bank holding companies in light
of the same regulatory developments. That review is ongoing and
S&P has not specified a timeframe for completion of their review.
There can be no assurance that we will maintain our credit
ratings and outlooks and that credit ratings downgrades in the
future would not materially affect our ability to borrow funds and
borrowing costs.
Downgrades in our credit ratings also may trigger additional
collateral or funding obligations which could negatively affect
our liquidity, including as a result of credit-related contingent
features in certain of our derivative contracts. Although a one or
two notch downgrade in our current credit ratings would not be
expected to trigger a material increase in our collateral or
funding obligations, a more severe credit rating downgrade of
our long-term and short-term credit ratings could increase our
collateral or funding obligations and the effect on our liquidity
could be material. For information regarding additional
collateral and funding obligations required of certain derivative
instruments in the event our credit ratings were to fall below
investment grade, see Note 16 (Derivatives) to Financial
Statements in this Report.
We rely on dividends from our subsidiaries for
liquidity, and federal and state law can limit those
dividends. Wells Fargo & Company, the parent holding
company, is a separate and distinct legal entity from its
subsidiaries. It receives a significant portion of its funding and
liquidity from dividends and other distributions from its
subsidiaries. We generally use these dividends and distributions,
among other things, to pay dividends on our common and
preferred stock and interest and principal on our debt. Federal
and state laws limit the amount of dividends and distributions
that our bank and some of our nonbank subsidiaries, including
our broker-dealer subsidiaries, may pay to our parent holding
company. Also, our right to participate in a distribution of assets
upon a subsidiary’s liquidation or reorganization is subject to the
prior claims of the subsidiary’s creditors.
For more information, refer to the “Regulation and
Supervision – Dividend Restrictions” and “– Holding Company
Structure” sections in our 2013 Form 10-K and to Note 3 (Cash,
Loan and Dividend Restrictions) and Note 26 (Regulatory and
Agency Capital Requirements) to Financial Statements in this
Report.
RISKS RELATED TO FINANCIAL REGULATORY
REFORM AND OTHER LEGISLATION AND
REGULATIONS
Enacted legislation and regulation, including the Dodd-
Frank Act, as well as future legislation and/or
regulation, could require us to change certain of our
business practices, reduce our revenue and earnings,
impose additional costs on us or otherwise adversely
affect our business operations and/or competitive
position. Our parent company, our subsidiary banks and many
of our nonbank subsidiaries such as those related to our
brokerage and mutual fund businesses, are subject to significant
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Risk Factors (continued)
regulation under state and federal laws in the U.S., as well as the
applicable laws of the various jurisdictions outside of the U.S.
where we conduct business. These regulations protect
depositors, federal deposit insurance funds, consumers,
investors and the banking and financial system as a whole, not
necessarily our stockholders. Economic, market and political
conditions during the past few years have led to a significant
amount of new legislation and regulation in the U.S. and abroad,
as well as heightened expectations and scrutiny of financial
services companies from banking regulators. These laws and
regulations may affect the manner in which we do business and
the products and services that we provide, affect or restrict our
ability to compete in our current businesses or our ability to
enter into or acquire new businesses, reduce or limit our revenue
in businesses or impose additional fees, assessments or taxes on
us, intensify the regulatory supervision of us and the financial
services industry, and adversely affect our business operations or
have other negative consequences.
On July 21, 2010, the Dodd-Frank Act, the most significant
financial reform legislation since the 1930s, became law. The
Dodd-Frank Act, among other things, (i) established the
Financial Stability Oversight Council to monitor systemic risk
posed by financial firms and imposes additional and enhanced
FRB regulations, including capital and liquidity requirements, on
certain large, interconnected bank holding companies such as
Wells Fargo and systemically significant nonbanking firms
intended to promote financial stability; (ii) creates a liquidation
framework for the resolution of covered financial companies, the
costs of which would be paid through assessments on surviving
covered financial companies; (iii) makes significant changes to
the structure of bank and bank holding company regulation and
activities in a variety of areas, including prohibiting proprietary
trading and private fund investment activities, subject to certain
exceptions; (iv) creates a new framework for the regulation of
over-the-counter derivatives and new regulations for the
securitization market and strengthens the regulatory oversight of
securities and capital markets by the SEC; (v) established the
Consumer Financial Protection Bureau (CFPB) within the FRB,
which has sweeping powers to administer and enforce a new
federal regulatory framework of consumer financial regulation;
(vi) may limit the existing pre-emption of state laws with respect
to the application of such laws to national banks, makes federal
pre-emption no longer applicable to operating subsidiaries of
national banks, and gives state authorities, under certain
circumstances, the ability to enforce state laws and federal
consumer regulations against national banks; (vii) provides for
increased regulation of residential mortgage activities; (viii)
revised the FDIC's assessment base for deposit insurance by
changing from an assessment base defined by deposit liabilities
to a risk-based system based on total assets; (ix) phases out over
three years beginning January 2013 the Tier 1 capital treatment
of trust preferred securities; (x) permitted banks to pay interest
on business checking accounts beginning on July 1, 2011; (xi)
authorized the FRB under the Durbin Amendment to adopt
regulations that limit debit card interchange fees received by
debit card issuers; and (xii) includes several corporate
governance and executive compensation provisions and
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requirements, including mandating an advisory stockholder vote
on executive compensation.
The Dodd-Frank Act and many of its provisions became
effective in July 2010 and July 2011. However, a number of its
provisions still require final rulemaking, guidance, and
interpretation by regulatory authorities. Accordingly, in many
respects the ultimate impact of the Dodd-Frank Act and its
effects on the U.S. financial system and the Company still remain
uncertain. Nevertheless, the Dodd-Frank Act, including current
and future rules implementing its provisions and the
interpretation of those rules, could result in a loss of revenue,
require us to change certain of our business practices, limit our
ability to pursue certain business opportunities, increase our
capital requirements and impose additional assessments and
costs on us and otherwise adversely affect our business
operations and have other negative consequences.
Our consumer businesses, including our mortgage, credit
card and other consumer lending and non-lending businesses,
may be negatively affected by the activities of the CFPB, which
has broad rulemaking powers and supervisory authority over
consumer financial products and services. Although the full
impact of the CFPB on our businesses is uncertain, the CFPB’s
activities may increase our compliance costs and require changes
in our business practices as a result of new regulations and
requirements which could limit or negatively affect the products
and services that we currently offer our customers. For example,
in 2013, the CFPB issued a number of new rules impacting
residential mortgage lending practices. As a result of greater
regulatory scrutiny of our consumer businesses, we also may
become subject to more or expanded regulatory examinations
and/or investigations, which also could result in increased costs
and harm to our reputation in the event of a failure to comply
with the increased regulatory requirements.
The Dodd-Frank Act’s proposed prohibitions or limitations
on proprietary trading and private fund investment activities,
known as the “Volcker Rule,” also may reduce our revenue and
earnings, although proprietary trading has not been significant
to our financial results. Rules to implement the requirements of
the Volcker Rule were first proposed in 2011, and final rules were
issued in December 2013. Pursuant to an order of the FRB,
banking entities are required to make good faith planning efforts
to come into compliance with the Volcker Rule’s restrictions by
July 21, 2015, subject to potential limited further extensions of
the compliance period that may be granted at the discretion of
the FRB. Companies with $50 billion or more in trading assets
and liabilities such as Wells Fargo will be required to report
trading metrics beginning June 30, 2014. Under the final rule,
Wells Fargo will also be subject to enhanced compliance program
requirements. Because we continue to evaluate the final rule and
assess its requirements, the ultimate impact of the final Volcker
Rule on our investment activities, including our venture capital
business, is uncertain.
The Dodd-Frank Act also imposes changes on the ABS
markets by requiring sponsors of ABS to hold at least a 5%
ownership stake in the ABS. Exemptions from the requirement
include qualified residential mortgages and FHA/VA loans.
Federal regulatory agencies have proposed rules to implement
this credit risk retention requirement, which have only included
limited exemptions. If adopted as written, the current proposal
may impact our ability to issue certain ABS or otherwise
participate in various securitization transactions.
Money market mutual fund reform is also currently being
evaluated. The Financial Stability Oversight Council (FSOC)
released for public comment proposed recommendations for new
SEC regulations to address the perceived risks that money
market mutual funds may pose to the financial stability of the
United States. These proposed recommendations include
implementation of floating net asset value requirements,
redemption holdback provisions, and capital buffer requirements
and would be in addition to regulatory changes with respect to
money market mutual funds made by the SEC in 2010. The
FSOC has not yet adopted final recommendations. Following the
FSOC’s proposals, the SEC issued its own proposed regulatory
changes that would, among other things, require a floating net
asset value for prime institutional money market funds, or
liquidity fees and redemption gates during periods of stress for
non-governmental money market funds, or a combination of
both measures. The SEC has not issued final regulations. Until
final regulations are adopted, the ultimate effect on our business
and financial results remains uncertain.
Federal banking regulators also continue to implement the
provisions of the Dodd-Frank Act addressing the risks to the
financial system posed by the failure of a systemically important
financial institution. Pursuant to rules adopted by the FRB and
the FDIC, Wells Fargo has prepared and filed a resolution plan, a
so called “living will,” that would facilitate our resolution in the
event of material distress or failure. If the FRB and FDIC
determine that our plan is deficient, the Dodd-Frank Act
authorizes the FRB and FDIC to impose more stringent capital,
leverage or liquidity requirements on us or restrict our growth or
activities until we submit a plan remedying the deficiencies. If
the FRB and FDIC ultimately determine that we have been
unable to remedy the deficiencies, they could order us to divest
assets or operations in order to facilitate our orderly resolution
in the event of our material distress or failure. Our national bank
subsidiary, Wells Fargo Bank, N.A., is also required to prepare
and submit a resolution plan to the FDIC under separate
regulatory authority.
The Dodd-Frank Act also establishes an orderly liquidation
process which allows for the appointment of the FDIC as a
receiver of a systemically important financial institution that is in
default or in danger of default. The FDIC has issued rules to
implement its orderly liquidation authority and recently released
a notice regarding a proposed resolution strategy, known as
“single point of entry,” designed to resolve a large financial
institution in a manner that would, among other things, impose
losses on shareholders and creditors in accordance with statutory
priorities, without imposing a cost on U.S. taxpayers.
Implementation of the strategy would require that institutions
maintain a sufficient amount of available equity and unsecured
debt to absorb losses and recapitalize operating subsidiaries.
Other future regulatory initiatives that could significantly
affect our business include proposals to reform the housing
finance market in the United States. These proposals, among
other things, consider winding down the GSEs and reducing or
eliminating over time the role of the GSEs in guaranteeing
mortgages and providing funding for mortgage loans, as well as
the implementation of reforms relating to borrowers, lenders,
and investors in the mortgage market, including reducing the
maximum size of a loan that the GSEs can guarantee, phasing in
a minimum down payment requirement for borrowers,
improving underwriting standards, and increasing accountability
and transparency in the securitization process. Congress also
may consider the adoption of legislation to reform the mortgage
financing market in an effort to assist borrowers experiencing
difficulty in making mortgage payments or refinancing their
mortgages. The extent and timing of any regulatory reform or the
adoption of any legislation regarding the GSEs and/or the home
mortgage market, as well as any effect on the Company’s
business and financial results, are uncertain.
Any other future legislation and/or regulation, if adopted,
also could significantly change our regulatory environment and
increase our cost of doing business, limit the activities we may
pursue or affect the competitive balance among banks, savings
associations, credit unions, and other financial services
companies, and have a material adverse effect on our financial
results and condition.
For more information, refer to the “Regulatory Reform”
section in this Report and the “Regulation and Supervision”
section in our 2013 Form 10-K.
Bank regulations, including Basel capital and liquidity
standards and FRB guidelines and rules, may require
higher capital and liquidity levels, limiting our ability to
pay common stock dividends, repurchase our common
stock, invest in our business or provide loans to our
customers. Federal banking regulators continually monitor the
capital position of banks and bank holding companies. In
December 2010, the Basel Committee on Banking Supervision
(BCBS) finalized a set of international guidelines for determining
regulatory capital known as Basel III. These guidelines are
designed to address many of the weaknesses identified in the
previous Basel standards and in the banking sector as
contributing to the financial crisis of 2008 and 2009 by, among
other things, increasing minimum capital requirements,
increasing the quality of capital, increasing the risk coverage of
the capital framework, increasing liquidity buffers, and
increasing standards for the supervisory review process and
public disclosure. When fully phased in, the Basel III guidelines
require bank holding companies to maintain a minimum ratio of
Common Equity Tier 1 (CET1) to risk-weighted assets of at least
7.0%. The BCBS has also proposed certain liquidity coverage and
funding ratios. The BCBS liquidity framework was initially
proposed in 2010 and included a liquidity coverage ratio (LCR)
to measure the stock of high-quality liquid assets to total net cash
outflows over the next 30 calendar day period. The BCBS
recently published revisions to the LCR, including revisions to
the definitions of high quality liquid assets and net cash outflows.
As originally proposed, the LCR would be introduced on
January 1, 2015, but the revisions provided for phased-in
implementation over a four year period beginning
January 1, 2015, with full phase-in on January 1, 2019.
In June 2011, the BCBS also proposed additional CET1
surcharge requirements for global systemically important banks
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Risk Factors (continued)
(G-SIBs) ranging from 1.0% to 3.5% depending on the bank’s
systemic importance to be determined based on certain factors.
This new capital surcharge, which would be phased in beginning
in January 2016 and become fully effective on January 1, 2019,
would be in addition to the Basel III 7.0% CET1 requirement
proposed in December 2010. The Financial Stability Board
(FSB), in an updated list published in November 2013 based on
year-end 2012 data, identified the Company as one of 29 G-SIBs
and provisionally determined that the Company’s surcharge
would be 1%. The FSB may revise the list of G-SIBs and their
required surcharges prior to implementation based on additional
or future data.
U.S. regulatory authorities have been considering the BCBS
capital guidelines and related proposals, and in July 2013, U.S.
banking regulators approved final and interim final rules to
implement the Basel III capital guidelines for U.S. banks. These
final capital rules, among other things:
x
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 CET1 ratio of 4.5% and a capital conservation
buffer of 2.5% (for a total minimum CET 1 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 risk-weighted assets to
enhance risk sensitivity under a standardized approach;
modify the existing Basel II advanced approaches rules for
calculating risk-weighted assets 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 mortgage servicing rights, 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 risk-based capital rules over a
five-year phase in period beginning in 2014; and
comply with the Dodd-Frank Act provision prohibiting the
reliance on external credit ratings.
x
x
x
x
x
x
The final capital rules became effective for Wells Fargo in
January 2014, with certain provisions subject to phase-in
periods. The final rules did not implement the capital surcharge
proposals for G-SIBs or the proposed Basel III liquidity
standards. Federal banking regulators did issue a proposal that
has not yet been finalized that would enhance the supplementary
leverage ratio requirements provided in the final capital rules for
large BHCs like Wells Fargo and their insured depository
institutions. The proposal would be effective January 1, 2018 and
would require covered BHCs to maintain a supplementary
leverage ratio of at least 5% to avoid restrictions on capital
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distributions and discretionary bonus payments and require that
its insured depository institutions maintain a supplementary
leverage ratio of 6% to be considered well capitalized. Federal
banking regulators have indicated additional changes to the
proposal could be made in light of changes to the Basel III
leverage framework recently finalized by the BCBS. Federal
banking regulators have also recently proposed rules
implementing the Basel III LCR. The U.S. proposal to implement
the LCR was substantially similar to the LCR agreed to by the
BCBS, 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 indicated it is in the process of considering new
rules to implement the G-SIB capital surcharge, to address the
amount of equity and unsecured debt certain large BHCs must
hold in order to facilitate their orderly resolution, and to address
risks related to banking organizations that are substantially
reliant on short-term wholesale funding. The ultimate impact of
all of these finalized and proposed or contemplated rules on our
capital and liquidity requirements will depend on final
rulemaking and regulatory interpretation of the rules as we,
along with our regulatory authorities, apply the final rules during
the implementation process.
As part of its obligation to impose enhanced capital and risk-
management standards on large financial firms pursuant to the
Dodd-Frank Act, the FRB issued a final capital plan rule that
became effective December 30, 2011. The final capital plan rule
requires top-tier BHCs, including the Company, to submit
annual capital plans for review and to obtain regulatory approval
before making capital distributions. There can be no assurance
that the FRB would respond favorably to the Company’s future
capital plans. The FRB has also finalized a number of regulations
implementing enhanced prudential requirements for large BHCs
like Wells Fargo regarding risk-based capital and leverage, risk
and liquidity management, and stress testing. The FRB has also
proposed, but not yet finalized, remediation requirements for
large BHCs experiencing financial distress that would restrict
capital distributions upon the occurrence of capital, stress test,
or risk and liquidity management triggers.
The Basel standards and FRB regulatory capital and liquidity
requirements may limit or otherwise restrict how we utilize our
capital, including common stock dividends and stock
repurchases, and may require us to increase our capital and/or
liquidity. Any requirement that we increase our regulatory
capital, regulatory capital ratios or liquidity could require us to
liquidate assets or otherwise change our business and/or
investment plans, which may negatively affect our financial
results. Although not currently anticipated, the proposed Basel
capital requirements and/or our regulators may require us to
raise additional capital in the future. Issuing additional common
stock may dilute the ownership of existing stockholders.
For more information, refer to the “Capital Management” and
“Regulatory Reform” sections in this Report and the “Regulation
and Supervision” section of our 2013 Form 10-K.
FRB policies, including policies on interest rates, can
significantly affect business and economic conditions
and our financial results and condition. The FRB
regulates the supply of money in the United States. Its policies
determine in large part our cost of funds for lending and
investing and the return we earn on those loans and investments,
both of which affect our net interest income and net interest
margin. The FRB’s interest rate policies also can materially affect
the value of financial instruments we hold, such as debt
securities and MSRs. In addition, its policies can affect our
borrowers, potentially increasing the risk that they may fail to
repay their loans. Changes in FRB policies are beyond our
control and can be hard to predict. As a result of the FRB’s
concerns regarding, among other things, continued slow
economic growth, the FRB recently reaffirmed that it intends to
keep the target range for the federal funds rate near zero until
the unemployment rate falls to at least 6.5% and inflation
expectations remain within FRB targets. However, the FRB has
indicated that it will consider other factors, such as additional
labor market and financial market conditions, before deciding to
increase the federal funds target rate. Although the amount of
monthly purchases has been tapered recently, the FRB also has
continued its purchases of U.S. government and mortgage-
backed securities and may take further actions in an effort to
reduce or maintain low long-term interest rates. As noted above,
a declining or low interest rate environment and a flattening
yield curve which may result from the FRB’s actions could
negatively affect our net interest income and net interest margin
as it may result in us holding lower yielding loans and
investment securities on our balance sheet.
RISKS RELATED TO CREDIT AND OUR MORTGAGE
BUSINESS
As one of the largest lenders in the U.S., increased
credit risk, including as a result of a deterioration in
economic conditions, could require us to increase our
provision for credit losses and allowance for credit
losses and could have a material adverse effect on our
results of operations and financial condition. When we
loan money or commit to loan money we incur credit risk, or the
risk of losses if our borrowers do not repay their loans. As one of
the largest lenders in the U.S., the credit performance of our loan
portfolios significantly affects our financial results and condition.
As noted above, if the current economic environment were to
deteriorate, more of our customers may have difficulty in
repaying their loans or other obligations which could result in a
higher level of credit losses and provision for credit losses. We
reserve for credit losses by establishing an allowance through a
charge to earnings. The amount of this allowance is based on our
assessment of credit losses inherent in our loan portfolio
(including unfunded credit commitments). The process for
determining the amount of the allowance is critical to our
financial results and condition. It requires difficult, subjective
and complex judgments about the future, including forecasts of
economic or market conditions that might impair the ability of
our borrowers to repay their loans. We might increase the
allowance because of changing economic conditions, including
falling home prices and higher unemployment, or other factors.
For example, the regulatory environment or external factors,
such as natural disasters, also can influence recognition of credit
losses in the portfolio and our allowance for credit losses.
Reflecting the continued improved credit performance in our
loan portfolios, our provision for credit losses was $2.2 billion
and $1.8 billion less than net charge-offs in 2013 and 2012,
respectively, which had a positive effect on our earnings. Given
current favorable conditions, we continue to expect future
allowance releases, absent a significant deterioration in the
economy. While we believe that our allowance for credit losses
was appropriate at December 31, 2013, there is no assurance that
it will be sufficient to cover future credit losses, especially if
housing and employment conditions worsen. In the event of
significant deterioration in economic conditions, we may be
required to build reserves in future periods, which would reduce
our earnings.
For more information, refer to the “Risk Management –
Credit Risk Management” and “Critical Accounting Policies –
Allowance for Credit Losses” sections in this Report.
We may have more credit risk and higher credit losses
to the extent our loans are concentrated by loan type,
industry segment, borrower type, or location of the
borrower or collateral. Our credit risk and credit losses can
increase if our loans are concentrated to borrowers engaged in
the same or similar activities or to borrowers who as a group may
be uniquely or disproportionately affected by economic or
market conditions. We experienced the effect of concentration
risk in 2009 and 2010 when we incurred greater than expected
losses in our residential real estate loan portfolio due to a
housing slowdown and greater than expected deterioration in
residential real estate values in many markets, including the
Central Valley California market and several Southern California
metropolitan statistical areas. As California is our largest
banking state in terms of loans and deposits, deterioration in real
estate values and underlying economic conditions in those
markets or elsewhere in California could result in materially
higher credit losses. In addition, deterioration in macro-
economic conditions generally across the country could result in
materially higher credit losses, including for our residential real
estate loan portfolio. We may experience higher delinquencies
and higher loss rates as our consumer real estate secured lines of
credit reach their contractual end of draw period and begin to
amortize. Additionally, we may experience higher delinquencies
and higher loss rates as borrowers in our consumer Pick-a-Pay
portfolio reach their recast trigger, particularly if interest rates
increase significantly which may cause more borrowers to
experience a payment increase of more than 7.5% upon recast.
We are currently the largest CRE lender in the U.S. A
deterioration in economic conditions that negatively affects the
business performance of our CRE borrowers, including increases
in interest rates and/or declines in commercial property values,
could result in materially higher credit losses and have a material
adverse effect on our financial results and condition.
Challenging economic conditions in Europe have increased
our foreign credit risk. Although our foreign loan exposure
represented only approximately 6% of our total consolidated
outstanding loans and 3% of our total assets at
December 31, 2013, continued European economic difficulties
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Risk Factors (continued)
could indirectly have a material adverse effect on our credit
performance and results of operations and financial condition to
the extent it negatively affects the U.S. economy and/or our
borrowers who have foreign operations.
For more information, refer to the “Risk Management –
Credit Risk Management” section and Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report.
We may incur losses on loans, securities and other
acquired assets of Wachovia that are materially greater
than reflected in our fair value adjustments. We
accounted for the Wachovia merger under the purchase method
of accounting, recording the acquired assets and liabilities of
Wachovia at fair value. All PCI loans acquired in the merger were
recorded at fair value based on the present value of their
expected cash flows. We estimated cash flows using internal
credit, interest rate and prepayment risk models using
assumptions about matters that are inherently uncertain. We
may not realize the estimated cash flows or fair value of these
loans. In addition, although the difference between the pre-
merger carrying value of the credit-impaired loans and their
expected cash flows – the “nonaccretable difference” – is
available to absorb future charge-offs, we may be required to
increase our allowance for credit losses and related provision
expense because of subsequent additional credit deterioration in
these loans.
For more information, refer to the “Critical Accounting
Policies – Purchased Credit-Impaired (PCI) Loans” and “Risk
Management – Credit Risk Management” sections in this Report.
Our mortgage banking revenue can be volatile from
quarter to quarter, including as a result of changes in
interest rates and the value of our MSRs and MHFS,
and we rely on the GSEs to purchase our conforming
loans to reduce our credit risk and provide liquidity to
fund new mortgage loans. We were the largest mortgage
originator and residential mortgage servicer in the U.S. as of
December 31, 2013, and we earn revenue from fees we receive for
originating mortgage loans and for servicing mortgage loans. As
a result of our mortgage servicing business, we have a sizeable
portfolio of MSRs. An MSR is the right to service a mortgage loan
– collect principal, interest and escrow amounts – for a fee. We
acquire MSRs when we keep the servicing rights after we sell or
securitize the loans we have originated or when we purchase the
servicing rights to mortgage loans originated by other lenders.
We initially measure and carry all our residential MSRs using the
fair value measurement method. Fair value is the present value
of estimated future net servicing income, calculated based on a
number of variables, including assumptions about the likelihood
of prepayment by borrowers. Changes in interest rates can affect
prepayment assumptions and thus fair value. When interest rates
fall, borrowers are usually more likely to prepay their mortgage
loans by refinancing them at a lower rate. As the likelihood of
prepayment increases, the fair value of our MSRs can decrease.
Each quarter we evaluate the fair value of our MSRs, and any
decrease in fair value reduces earnings in the period in which the
decrease occurs. We also measure at fair value MHFS for which
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an active secondary market and readily available market prices
exist. In addition, we measure at fair value certain other interests
we hold related to residential loan sales and securitizations.
Similar to other interest-bearing securities, the value of these
MHFS and other interests may be negatively affected by changes
in interest rates. For example, if market interest rates increase
relative to the yield on these MHFS and other interests, their fair
value may fall.
When rates rise, the demand for mortgage loans usually tends
to fall, reducing the revenue we receive from loan originations.
Under the same conditions, revenue from our MSRs can increase
through increases in fair value. When rates fall, mortgage
originations usually tend to increase and the value of our MSRs
usually tends to decline, also with some offsetting revenue effect.
Even though they can act as a “natural hedge,” the hedge is not
perfect, either in amount or timing. For example, the negative
effect on revenue from a decrease in the fair value of residential
MSRs is generally immediate, but any offsetting revenue benefit
from more originations and the MSRs relating to the new loans
would generally accrue over time. It is also possible that, because
of economic conditions and/or a weak or deteriorating housing
market, even if interest rates were to fall or remain low,
mortgage originations may also fall or any increase in mortgage
originations may not be enough to offset the decrease in the
MSRs value caused by the lower rates.
We typically use derivatives and other instruments to hedge
our mortgage banking interest rate risk. We may not hedge all of
our risk, and we may not be successful in hedging any of the risk.
Hedging is a complex process, requiring sophisticated models
and constant monitoring, and is not a perfect science. We may
use hedging instruments tied to U.S. Treasury rates, LIBOR or
Eurodollars that may not perfectly correlate with the value or
income being hedged. We could incur significant losses from our
hedging activities. There may be periods where we elect not to
use derivatives and other instruments to hedge mortgage
banking interest rate risk.
We rely on GSEs to purchase mortgage loans that meet their
conforming loan requirements and on other capital markets
investors to purchase loans that do not meet those requirements
– referred to as “nonconforming” loans. During the past few
years investor demand for nonconforming loans has fallen,
thereby reducing the liquidity for those loans. In response to the
reduced liquidity in the capital markets, we may retain more
nonconforming loans. When we retain a loan not only do we
forgo fee revenue and keep the credit risk of the loan but we also
do not receive any sale proceeds that could be used to generate
new loans. Continued lack of liquidity could limit our ability to
fund – and thus originate – new mortgage loans, reducing the
fees we earn from originating and servicing loans. In addition,
we cannot assure that GSEs will not materially limit their
purchases of conforming loans, including because of capital
constraints, or change their criteria for conforming loans (e.g.,
maximum loan amount or borrower eligibility). Each of the GSEs
is currently in conservatorship, with its primary regulator, the
Federal Housing Agency acting as conservator. We cannot
predict if, when or how the conservatorship will end, or any
associated changes to the GSEs business structure and
operations that could result. As noted above, there are various
proposals to reform the housing finance market in the U.S.,
including the role of the GSEs in the housing finance market. The
extent and timing of any such regulatory reform regarding the
housing finance market and the GSEs, including whether the
GSEs will continue to exist in their current form, as well as any
effect on the Company’s business and financial results, are
uncertain.
For more information, refer to the “Risk Management –
Asset/Liability Management – Mortgage Banking Interest Rate
and Market Risk” and “Critical Accounting Policies” sections in
this Report.
We may be required to repurchase mortgage loans or
reimburse investors and others as a result of breaches
in contractual representations and warranties. We sell
residential mortgage loans to various parties, including GSEs,
SPEs that issue private label MBS, and other financial
institutions that purchase mortgage loans for investment or
private label securitization. We may also pool FHA-insured and
VA-guaranteed mortgage loans which back securities guaranteed
by GNMA. The agreements under which we sell mortgage loans
and the insurance or guaranty agreements with the FHA and VA
contain various representations and warranties regarding the
origination and characteristics of the mortgage loans, including
ownership of the loan, compliance with loan criteria set forth in
the applicable agreement, validity of the lien securing the loan,
absence of delinquent taxes or liens against the property securing
the loan, and compliance with applicable origination laws. We
may be required to repurchase mortgage loans, indemnify the
securitization trust, investor or insurer, or reimburse the
securitization trust, investor or insurer for credit losses incurred
on loans in the event of a breach of contractual representations
or warranties that is not remedied within a period (usually
90 days or less) after we receive notice of the breach. Contracts
for mortgage loan sales to the GSEs include various types of
specific remedies and penalties that could be applied to
inadequate responses to repurchase requests. Similarly, the
agreements under which we sell mortgage loans require us to
deliver various documents to the securitization trust or investor,
and we may be obligated to repurchase any mortgage loan as to
which the required documents are not delivered or are defective.
We may negotiate global settlements in order to resolve a
pipeline of demands in lieu of repurchasing the loans. We
establish a mortgage repurchase liability related to the various
representations and warranties that reflect management’s
estimate of losses for loans which we have a repurchase
obligation. Our mortgage repurchase liability represents
management’s best estimate of the probable loss that we may
expect to incur for the representations and warranties in the
contractual provisions of our sales of mortgage loans. Because
the level of mortgage loan repurchase losses depends upon
economic factors, investor demand strategies and other external
conditions that may change over the life of the underlying loans,
the level of the liability for mortgage loan repurchase losses is
difficult to estimate and requires considerable management
judgment. As a result 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. If economic conditions and the
housing market do not continue to improve or future investor
repurchase demand and our success at appealing repurchase
requests differ from past experience, we could continue to have
increased repurchase obligations and increased loss severity on
repurchases, requiring material additions to the repurchase
liability.
For more information, refer to the “Risk Management –
Credit Risk Management – Liability for Mortgage Loan
Repurchase Losses” section in this Report.
We may be terminated as a servicer or master servicer,
be required to repurchase a mortgage loan or
reimburse investors for credit losses on a mortgage
loan, or incur costs, liabilities, fines and other
sanctions if we fail to satisfy our servicing obligations,
including our obligations with respect to mortgage loan
foreclosure actions. We act as servicer and/or master
servicer for mortgage loans included in securitizations and for
unsecuritized mortgage loans owned by investors. As a servicer
or master servicer for those loans we have certain contractual
obligations to the securitization trusts, investors or other third
parties, including, in our capacity as a servicer, foreclosing on
defaulted mortgage loans or, to the extent consistent with the
applicable securitization or other investor agreement,
considering alternatives to foreclosure such as loan
modifications or short sales and, in our capacity as a master
servicer, overseeing the servicing of mortgage loans by the
servicer. If we commit a material breach of our obligations as
servicer or master servicer, we may be subject to termination if
the breach is not cured within a specified period of time
following notice, which can generally be given by the
securitization trustee or a specified percentage of security
holders, causing us to lose servicing income. In addition, we may
be required to indemnify the securitization trustee against losses
from any failure by us, as a servicer or master servicer, to
perform our servicing obligations or any act or omission on our
part that involves wilful misfeasance, bad faith or gross
negligence. For certain investors and/or certain transactions, we
may be contractually obligated to repurchase a mortgage loan or
reimburse the investor for credit losses incurred on the loan as a
remedy for servicing errors with respect to the loan. If we have
increased repurchase obligations because of claims that we did
not satisfy our obligations as a servicer or master servicer, or
increased loss severity on such repurchases, we may have a
significant reduction to net servicing income within mortgage
banking noninterest income.
We may incur costs if we are required to, or if we elect to, re-
execute or re-file documents or take other action in our capacity
as a servicer in connection with pending or completed
foreclosures. We may incur litigation costs if the validity of a
foreclosure action is challenged by a borrower. If a court were to
overturn a foreclosure because of errors or deficiencies in the
foreclosure process, we may have liability to the borrower and/or
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Risk Factors (continued)
to any title insurer of the property sold in foreclosure if the
required process was not followed. These costs and liabilities
may not be legally or otherwise reimbursable to us, particularly
to the extent they relate to securitized mortgage loans. In
addition, if certain documents required for a foreclosure action
are missing or defective, we could be obligated to cure the defect
or repurchase the loan. We may incur liability to securitization
investors relating to delays or deficiencies in our processing of
mortgage assignments or other documents necessary to comply
with state law governing foreclosures. The fair value of our MSRs
may be negatively affected to the extent our servicing costs
increase because of higher foreclosure costs. We may be subject
to fines and other sanctions imposed by Federal or state
regulators as a result of actual or perceived deficiencies in our
foreclosure practices or in the foreclosure practices of other
mortgage loan servicers. Any of these actions may harm our
reputation or negatively affect our residential mortgage
origination or servicing business. In April 2011, we entered into
consent orders with the OCC and the FRB following a joint
interagency horizontal examination of foreclosure processing at
large mortgage servicers, including the Company. These orders
incorporate remedial requirements for identified deficiencies
and require the Company to, among other things, take certain
actions with respect to our mortgage servicing and foreclosure
operations, including submitting various action plans to ensure
that our mortgage servicing and foreclosure operations comply
with legal requirements, regulatory guidance and the consent
orders. As noted above, any increase in our servicing costs from
changes in our foreclosure and other servicing practices,
including resulting from the consent orders, negatively affects
the fair value of our MSRs.
On February 9, 2012, a federal/state settlement was
announced among the DOJ, HUD, the Department of the
Treasury, the Department of Veterans Affairs, the Federal Trade
Commission (FTC), the Executive Office of the U.S. Trustee, the
Consumer Financial Protection Bureau, a task force of Attorneys
General representing 49 states, Wells Fargo, and four other
servicers related to investigations of mortgage industry servicing
and foreclosure practices. While Oklahoma did not participate in
the larger settlement, it settled separately with the five servicers
under a simplified agreement. Under the terms of the larger
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:
x
x
x
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.
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As part of the settlement, the Company was released from
claims and allegations relating to servicing, modification and
foreclosure practices; however, the settlement does not release
the Company from any claims arising out of securitization
activities, including representations made to investors respecting
mortgage-backed securities; criminal claims; repurchase
demands from the GSEs; and inquiries into MERS, among other
items. Any investigations or litigation relating to any of the
Company’s mortgage servicing and foreclosure practices that are
not covered or released by the settlement could result in material
fines, penalties, equitable remedies, or other enforcement
actions.
For more information, refer to the “Risk Management –
Liability for Mortgage Loan Repurchase Losses” and “– Risks
Relating to Servicing Activities,” and “Critical Accounting
Policies – Valuation of Residential Mortgage Servicing Rights”
sections and Note 14 (Guarantees, Pledged Assets and Collateral)
and Note 15 (Legal Actions) to Financial Statements in this
Report.
Financial difficulties or credit downgrades of mortgage
and bond insurers may negatively affect our servicing
and investment portfolios. Our servicing portfolio includes
certain mortgage loans that carry some level of insurance from
one or more mortgage insurance companies. To the extent that
any of these companies experience financial difficulties or credit
downgrades, we may be required, as servicer of the insured loan
on behalf of the investor, to obtain replacement coverage with
another provider, possibly at a higher cost than the coverage we
would replace. We may be responsible for some or all of the
incremental cost of the new coverage for certain loans depending
on the terms of our servicing agreement with the investor and
other circumstances, although we do not have an additional risk
of repurchase loss associated with claim amounts for loans sold
to third-party investors. Similarly, some of the mortgage loans
we hold for investment or for sale carry mortgage insurance. If a
mortgage insurer is unable to meet its credit obligations with
respect to an insured loan, we might incur higher credit losses if
replacement coverage is not obtained. For example, in
October 2011, PMI Mortgage Insurance Co. (PMI), one of our
providers of mortgage insurance, was seized by its regulator. We
previously utilized PMI to provide mortgage insurance on certain
loans originated and held in our portfolio and on loans
originated and sold to third-party investors. We also hold a small
amount of residential MBS, which are backed by mortgages with
a limited amount of insurance provided by PMI. PMI has
announced that it will pay 50% of insurance claim amounts in
cash with the rest deferred. Although we do not expect PMI’s
situation to have a material adverse effect on our financial results
because of the limited amount of loans and securities held in our
portfolios with PMI insurance support, we cannot be certain that
any such future events involving one of our other mortgage
insurance company providers will not materially adversely affect
our mortgage business and/or financial results. We also have
investments in municipal bonds that are guaranteed against loss
by bond insurers. The value of these bonds and the payment of
principal and interest on them may be negatively affected by
financial difficulties or credit downgrades experienced by the
bond insurers.
For more information, refer to the “Earnings Performance –
Balance Sheet Analysis – Investment Securities” and “Risk
Management – Credit Risk Management– Liability for Mortgage
Loan Repurchase Losses” sections in this Report.
OPERATIONAL AND LEGAL RISK
A failure in or breach of our operational or security
systems or infrastructure, or those of our third party
vendors and other service providers, including as a
result of cyber attacks, could disrupt our businesses,
result in the disclosure or misuse of confidential or
proprietary information, damage our reputation,
increase our costs and cause losses. As a large financial
institution that serves over 70 million customers through over
9,000 locations, 12,000 ATMs, the Internet and other
distribution channels across the U.S. and internationally, we
depend on our ability to process, record and monitor a large
number of customer transactions on a continuous basis. As our
customer base and locations have expanded throughout the U.S.
and internationally, and as customer, public, legislative and
regulatory expectations regarding operational and information
security have increased, our operational systems and
infrastructure must continue to be safeguarded and monitored
for potential failures, disruptions and breakdowns. Our business,
financial, accounting, data processing systems or other operating
systems and facilities may stop operating properly or become
disabled or damaged as a result of a number of factors including
events that are wholly or partially beyond our control. For
example, there could be sudden increases in customer
transaction volume; electrical or telecommunications outages;
degradation or loss of public internet domain; climate change
related impacts and natural disasters such as earthquakes,
tornados, and hurricanes; disease pandemics; events arising
from local or larger scale political or social matters, including
terrorist acts; and, as described below, cyber attacks. Although
we have business continuity plans and other safeguards in place,
our business operations may be adversely affected by significant
and widespread disruption to our physical infrastructure or
operating systems that support our businesses and customers.
Information security risks for large financial institutions such
as Wells Fargo have generally increased in recent years in part
because of the proliferation of new technologies, the use of the
Internet and telecommunications technologies to conduct
financial transactions, and the increased sophistication and
activities of organized crime, hackers, terrorists, activists, and
other external parties, including foreign state-sponsored parties.
Those parties also may attempt to fraudulently induce
employees, customers, or other users of our systems to disclose
confidential information in order to gain access to our data or
that of our customers. As noted above, our operations rely on the
secure processing, transmission and storage of confidential
information in our computer systems and networks. Our
banking, brokerage, investment advisory, and capital markets
businesses rely on our digital technologies, computer and email
systems, software, and networks to conduct their operations. In
addition, to access our products and services, our customers may
use personal smartphones, tablet PC’s, and other mobile devices
that are beyond our control systems. Although we believe we
have robust information security procedures and controls, our
technologies, systems, networks, and our customers’ devices may
become the target of cyber attacks or information security
breaches that could result in the unauthorized release, gathering,
monitoring, misuse, loss or destruction of Wells Fargo’s or our
customers’ confidential, proprietary and other information, or
otherwise disrupt Wells Fargo’s or its customers’ or other third
parties’ business operations. For example, various retailers have
recently reported they were victims of cyber attacks in which
large amounts of their customers’ data, including debit and
credit card information, was obtained. In these situations we
generally incur costs to replace compromised cards and address
fraudulent transaction activity affecting our customers.
Third parties with which we do business or that facilitate our
business activities, including exchanges, clearing houses,
financial intermediaries or vendors that provide services or
security solutions for our operations, could also be sources of
operational and information security risk to us, including from
breakdowns or failures of their own systems or capacity
constraints.
To date we have not experienced any material losses relating
to cyber attacks or other information security breaches, but there
can be no assurance that we will not suffer such losses in the
future. Our risk and exposure to these matters remains
heightened because of, among other things, the evolving nature
of these threats, the prominent size and scale of Wells Fargo and
its role in the financial services industry, our plans to continue to
implement our Internet banking and mobile banking channel
strategies and develop additional remote connectivity solutions
to serve our customers when and how they want to be served, our
expanded geographic footprint and international presence, the
outsourcing of some of our business operations, and the current
global economic and political environment. For example, Wells
Fargo and reportedly other financial institutions continue to be
the target of various evolving and adaptive denial-of-service or
other cyber attacks as part of what appears to be a coordinated
effort to disrupt the operations of financial institutions and
potentially test their cybersecurity capabilities. As a result,
cybersecurity and the continued development and enhancement
of our controls, processes and systems designed to protect our
networks, computers, software and data from attack, damage or
unauthorized access remain a priority for Wells Fargo. As cyber
threats continue to evolve, we may be required to expend
significant additional resources to continue to modify or enhance
our protective measures or to investigate and remediate any
information security vulnerabilities.
Disruptions or failures in the physical infrastructure or
operating systems that support our businesses and customers, or
cyber attacks or security breaches of the networks, systems or
devices that our customers use to access our products and
services could result in customer attrition, financial losses, the
inability of our customers to transact business with us, violations
of applicable privacy and other laws, regulatory fines, penalties
or intervention, reputational damage, reimbursement or other
compensation costs, and/or additional compliance costs, any of
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Risk Factors (continued)
which could materially adversely affect our results of operations
or financial condition.
Our framework for managing risks may not be effective
in mitigating risk and loss to us. Our risk management
framework seeks to mitigate risk and loss to us. We have
established processes and procedures intended to identify,
measure, monitor, report and analyze the types of risk to which
we are subject, including liquidity risk, credit risk, market risk,
interest rate risk, operational risk, legal and compliance risk, and
reputational risk, among others. However, as with any risk
management framework, there are inherent limitations to our
risk management strategies as there may exist, or develop in the
future, risks that we have not appropriately anticipated or
identified. In certain instances, we rely on models to measure,
monitor and predict risks, such as market and interest rate risks,
however there is no assurance that these models will
appropriately capture all relevant risks or accurately predict
future events or exposures. The recent financial and credit crisis
and resulting regulatory reform highlighted both the importance
and some of the limitations of managing unanticipated risks, and
our regulators remain focused on ensuring that financial
institutions build and maintain robust risk management policies.
If our risk management framework proves ineffective, we could
suffer unexpected losses which could materially adversely affect
our results of operations or financial condition.
We may incur fines, penalties and other negative
consequences from regulatory violations, possibly even
inadvertent or unintentional violations. We maintain
systems and procedures designed to ensure that we comply with
applicable laws and regulations. However, some legal/regulatory
frameworks provide for the imposition of fines or penalties for
noncompliance even though the noncompliance was inadvertent
or unintentional and even though there was in place at the time
systems and procedures designed to ensure compliance. For
example, we are subject to regulations issued by the Office of
Foreign Assets Control (OFAC) that prohibit financial
institutions from participating in the transfer of property
belonging to the governments of certain foreign countries and
designated nationals of those countries. OFAC may impose
penalties for inadvertent or unintentional violations even if
reasonable processes are in place to prevent the violations. There
may be other negative consequences resulting from a finding of
noncompliance, including restrictions on certain activities. Such
a finding may also damage our reputation as described below
and could restrict the ability of institutional investment
managers to invest in our securities.
Under the Iran Threat Reduction and Syria Human Rights
Act of 2012, we are required to make certain disclosures in our
periodic reports filed with the SEC relating to certain activities
that we or our worldwide affiliates knowingly engaged in
involving Iran during the quarterly period covered by the report.
If we or an affiliate were to engage in a reportable transaction, we
must also file a separate notice regarding the activity with the
SEC, which the SEC will make publicly available on its website.
The SEC will be required to forward the report to the President,
the Senate Committees on Foreign Relations and Banking,
128
Housing and Urban Affairs, and the House of Representatives
Committees on Foreign Affairs and Financial Services. The
President will then be required to initiate an investigation into
the reported activity and within 180 days make a determination
as to whether to impose sanctions on us. The scope of the
reporting requirement is broad and covers any domestic or
foreign entity or person that may be deemed to be an affiliate of
ours. The potential sanctions and reputational harm for engaging
in a reportable activity may be significant.
Negative publicity, including as a result of protests,
could damage our reputation and business. Reputation
risk, or the risk to our business, earnings and capital from
negative public opinion, is inherent in our business and has
increased substantially because of the financial crisis and our
size and profile in the financial services industry. The reputation
of the financial services industry in general has been damaged as
a result of the financial crisis and other matters affecting the
financial services industry, and negative public opinion about the
financial services industry generally or Wells Fargo specifically
could adversely affect our ability to keep and attract customers.
Negative public opinion could result from our actual or alleged
conduct in any number of activities, including mortgage lending
practices, servicing and foreclosure activities, corporate
governance, regulatory compliance, mergers and acquisitions,
and disclosure, sharing or inadequate protection of customer
information, and from actions taken by government regulators
and community or other organizations in response to that
conduct. Because we conduct most of our businesses under the
“Wells Fargo” brand, negative public opinion about one business
could affect our other businesses and also could negatively affect
our “cross-sell” strategy. The proliferation of social media
websites utilized by Wells Fargo and other third parties, as well
as the personal use of social media by our team members and
others, including personal blogs and social network profiles, also
may increase the risk that negative, inappropriate or
unauthorized information may be posted or released publicly
that could harm our reputation or have other negative
consequences, including as a result of our team members
interacting with our customers in an unauthorized manner in
various social media outlets.
As a result of the financial crisis, Wells Fargo and other
financial institutions have been targeted from time to time by
protests and demonstrations, which have included disrupting the
operation of our retail banking stores and have resulted in
negative public commentary about financial institutions,
including the fees charged for various products and services.
There can be no assurance that continued protests and negative
publicity for the Company or large financial institutions
generally will not harm our reputation and adversely affect our
business and financial results.
Risks Relating to Legal Proceedings. Wells Fargo and
some of its subsidiaries are involved in judicial, regulatory and
arbitration proceedings or investigations concerning matters
arising from our business activities. Although we believe we have
a meritorious defense in all material significant litigation
pending against us, there can be no assurance as to the ultimate
outcome. We establish reserves for legal claims when payments
associated with the claims become probable and the costs can be
reasonably estimated. We may still incur legal costs for a matter
even if we have not established a reserve. In addition, the actual
cost of resolving a legal claim may be substantially higher than
any amounts reserved for that matter. The ultimate resolution of
a pending legal proceeding, depending on the remedy sought and
granted, could materially adversely affect our results of
operations and financial condition.
For more information, refer to Note 15 (Legal Actions) to
Financial Statements in this Report.
RISKS RELATED TO OUR INDUSTRY’S COMPETITIVE
OPERATING ENVIRONMENT
We face significant and increasing competition in the
rapidly evolving financial services industry. We compete
with other financial institutions in a highly competitive industry
that is undergoing significant changes as a result of financial
regulatory reform and increased public scrutiny stemming from
the financial crisis and continued challenging economic
conditions. Wells Fargo generally competes on the basis of the
quality of our customer service, the wide variety of products and
services that we can offer our customers and the ability of those
products and services to satisfy our customers’ needs, the pricing
of our products and services, the extensive distribution channels
available for our customers, our innovation, and our reputation.
Continued and increased competition in any one or all of these
areas may negatively affect our market share and results of
operations and/or cause us to increase our capital investment in
our businesses in order to remain competitive. Given the current
economic, regulatory, and political environment for large
financial institutions such as Wells Fargo, and possible public
backlash to bank fees, there is increased competitive pressure to
provide products and services at current or lower prices.
Consequently, our ability to reposition or reprice our products
and services from time to time may be limited and could be
influenced significantly by the actions of our competitors who
may or may not charge similar fees for their products and
services. Any changes in the types of products and services that
we offer our customers and/or the pricing for those products and
services could result in a loss of customers and market share and
could materially adversely affect our results of operations.
Continued technological advances and the growth of e-
commerce have made it possible for non-depository institutions
to offer products and services that traditionally were banking
products, and for financial institutions and other companies to
provide electronic and internet-based financial solutions,
including electronic payment solutions. We may not respond
effectively to these competitive threats from existing and new
competitors and may be forced to increase our investment in our
business to modify or adapt our existing products and services or
develop new products and services to respond to our customers’
needs.
Our “cross-selling” efforts to increase the number of
products our customers buy from us and offer them all
of the financial products that fulfill their needs is a key
part of our growth strategy, and our failure to execute
this strategy effectively could have a material adverse
effect on our revenue growth and financial results.
Selling more products to our customers – “cross-selling” – is
very important to our business model and key to our ability to
grow revenue and earnings especially during the current
environment of slow economic growth and regulatory reform
initiatives. Many of our competitors also focus on cross-selling,
especially in retail banking and mortgage lending. This can limit
our ability to sell more products to our customers or influence us
to sell our products at lower prices, reducing our net interest
income and revenue from our fee-based products. It could also
affect our ability to keep existing customers. New technologies
could require us to spend more to modify or adapt our products
to attract and retain customers. Our cross-sell strategy also is
dependent on earning more business from our Wachovia
customers, and increasing our cross-sell ratio – or the average
number of products sold to existing customers – may become
more challenging and we might not attain our goal of selling an
average of eight products to each customer.
Our ability to attract and retain qualified team
members is critical to the success of our business and
failure to do so could adversely affect our business
performance, competitive position and future
prospects. The success of Wells Fargo is heavily dependent on
the talents and efforts of our team members, and in many areas
of our business, including the commercial banking, brokerage,
investment advisory, and capital markets businesses, the
competition for highly qualified personnel is intense. In order to
attract and retain highly qualified team members, we must
provide competitive compensation. As a large financial
institution we may be subject to limitations on compensation by
our regulators that may adversely affect our ability to attract and
retain these qualified team members. Some of our competitors
may not be subject to these same compensation limitations,
which may further negatively affect our ability to attract and
retain highly qualified team members.
RISKS RELATED TO OUR FINANCIAL STATEMENTS
Changes in accounting policies or accounting
standards, and changes in how accounting standards
are interpreted or applied, could materially affect how
we report our financial results and condition. Our
accounting policies are fundamental to determining and
understanding our financial results and condition. As described
below, some of these policies require use of estimates and
assumptions that may affect the value of our assets or liabilities
and financial results. Any changes in our accounting policies
could materially affect our financial statements.
From time to time the FASB and the SEC change the financial
accounting and reporting standards that govern the preparation
of our external financial statements. In addition, accounting
standard setters and those who interpret the accounting
standards (such as the FASB, SEC, banking regulators and our
outside auditors) may change or even reverse their previous
interpretations or positions on how these standards should be
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Risk Factors (continued)
applied. Changes in financial accounting and reporting standards
and changes in current interpretations may be beyond our
control, can be hard to predict and could materially affect how
we report our financial results and condition. We may be
required to apply a new or revised standard retroactively or apply
an existing standard differently, also retroactively, in each case
potentially resulting in our restating prior period financial
statements in material amounts.
Our financial statements are based in part on
assumptions and estimates which, if wrong, could cause
unexpected losses in the future, and our financial
statements depend on our internal controls over
financial reporting. Pursuant to U.S. GAAP, we are required
to use certain assumptions and estimates in preparing our
financial statements, including in determining credit loss
reserves, reserves for mortgage repurchases, reserves related to
litigation and the fair value of certain assets and liabilities,
among other items. Several of our accounting 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. For a description of these policies, refer to
the “Critical Accounting Policies” section in this Report. If
assumptions or estimates underlying our financial statements
are incorrect, we may experience material losses.
Certain of our financial instruments, including trading assets
and liabilities, investment securities, certain loans, MSRs,
private equity investments, structured notes and certain
repurchase and resale agreements, among other items, require a
determination of their fair value in order to prepare our financial
statements. Where quoted market prices are not available, we
may make fair value determinations based on internally
developed models or other means which ultimately rely to some
degree on management judgment, and there is no assurance that
our models will capture or appropriately reflect all relevant
inputs required to accurately determine fair value. Some of these
and other assets and liabilities may have no direct observable
price levels, making their valuation particularly subjective, being
based on significant estimation and judgment. In addition,
sudden illiquidity in markets or declines in prices of certain loans
and securities may make it more difficult to value certain balance
sheet items, which may lead to the possibility that such
valuations will be subject to further change or adjustment and
could lead to declines in our earnings.
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) requires
our management to evaluate the Company’s disclosure controls
and procedures and its internal control over financial reporting
and requires our auditors to issue a report on our internal
control over financial reporting. We are required to disclose, in
our annual report on Form 10-K, the existence of any “material
weaknesses” in our internal controls. We cannot assure that we
will not identify one or more material weaknesses as of the end of
any given quarter or year, nor can we predict the effect on our
stock price of disclosure of a material weakness. Sarbanes-Oxley
also limits the types of non-audit services our outside auditors
may provide to us in order to preserve their independence from
130
us. If our auditors were found not to be “independent” of us
under SEC rules, we could be required to engage new auditors
and re-file financial statements and audit reports with the SEC.
We could be out of compliance with SEC rules until new financial
statements and audit reports were filed, limiting our ability to
raise capital and resulting in other adverse consequences.
RISKS RELATED TO ACQUISITIONS
Acquisitions could reduce our stock price upon
announcement and reduce our earnings if we overpay
or have difficulty integrating them. We regularly explore
opportunities to acquire companies in the financial services
industry. We cannot predict the frequency, size or timing of our
acquisitions, and we typically do not comment publicly on a
possible acquisition until we have signed a definitive agreement.
When we do announce an acquisition, our stock price may fall
depending on the size of the acquisition, the type of business to
be acquired, the purchase price, and the potential dilution to
existing stockholders or our earnings per share if we issue
common stock in connection with the acquisition.
We generally must receive federal regulatory approvals before
we can acquire a bank, bank holding company or certain other
financial services businesses depending on the size of the
financial services business to be acquired. In deciding whether to
approve a proposed acquisition, federal bank regulators will
consider, among other factors, the effect of the acquisition on
competition and the risk to the stability of the U.S. banking or
financial system, our financial condition and future prospects
including current and projected capital ratios and levels, the
competence, experience, and integrity of management and
record of compliance with laws and regulations, the convenience
and needs of the communities to be served, including our record
of compliance under the Community Reinvestment Act, and our
effectiveness in combating money laundering. As a result of the
Dodd-Frank Act and concerns regarding the large size of
financial institutions such as Wells Fargo, the regulatory process
for approving acquisitions has become more complex and
regulatory approvals may be more difficult to obtain. We cannot
be certain when or if, or on what terms and conditions, any
required regulatory approvals will be granted. We might be
required to sell banks, branches and/or business units or assets
or issue additional equity as a condition to receiving regulatory
approval for an acquisition. In addition, federal bank regulations
prohibit FRB regulatory approval of any transaction that would
create an institution holding more than 10% of total U.S. insured
deposits, or of any transaction (whether or not subject to FRB
approval) that would create a financial company with more than
10% of the liabilities of all financial companies in the U.S. As of
September 30, 2013, we believe we already held more than 10%
of total U.S. insured deposits. As a result, our size may limit our
bank acquisition opportunities in the future.
Difficulty in integrating an acquired company may cause us
not to realize expected revenue increases, cost savings, increases
in geographic or product presence, and other projected benefits
from the acquisition. The integration could result in higher than
expected deposit attrition, loss of key team members, disruption
of our business or the business of the acquired company, or
otherwise harm our ability to retain customers and team
members or achieve the anticipated benefits of the acquisition.
Time and resources spent on integration may also impair our
ability to grow our existing businesses. Also, the negative effect
of any divestitures required by regulatory authorities in
acquisitions or business combinations may be greater than
expected. Many of the foregoing risks may be increased if the
acquired company operates internationally or in a geographic
location where we do not already have significant business
operations and/or team members.
Controls and Procedures
Disclosure Controls and Procedures
* * *
Any factor described in this Report or in any of our other SEC
filings could by itself, or together with other factors, adversely
affect our financial results and condition. Refer to our quarterly
reports on Form 10-Q filed with the SEC in 2014 for material
changes to the above discussion of risk factors. There are factors
not discussed above or elsewhere in this Report that could
adversely affect our financial results and condition.
The Company’s management evaluated the effectiveness, as of December 31, 2013, 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 December 31, 2013.
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:
x
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.
x
x
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 any quarter in
2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s report on internal control over financial reporting is set forth below and should be read with these limitations in mind.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the
Company. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013,
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control –
Integrated Framework (1992). Based on this assessment, management concluded that as of December 31, 2013, the Company’s internal
control over financial reporting was effective.
KPMG LLP, the independent registered public accounting firm that audited the Company’s financial statements included in this
Annual Report, issued an audit report on the Company’s internal control over financial reporting. KPMG’s audit report appears o n the
following page.
131
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Wells Fargo & Company:
We have audited Wells Fargo & Company and Subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control ov er
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating ef fectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted acc ounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statem ents in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) 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. Also, 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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as of December 31, 2013 and 2012, and the related consolidated statements of income,
comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and
our report dated February 26, 2014, expressed an unqualified opinion on those consolidated financial statements.
San Francisco, California
February 26, 2014
132
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Income
(in millions, except per share amounts)
Interest income
Trading assets
Investment securities
Mortgages held for sale
Loans held for sale
Loans
Other interest income
Total interest income
Interest expense
Deposits
Short-term borrowings
Long-term debt
Other interest expense
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Service charges on deposit accounts
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains from trading activities
Net gains (losses) on debt securities (1)
Net gains from equity investments (2)
Lease income
Other
Total noninterest income
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Other
Total noninterest expense
Income before income tax expense
Income tax expense
Net income before noncontrolling interests
Less: Net income from noncontrolling interests
Wells Fargo net income
Less: Preferred stock dividends and other
Wells Fargo net income applicable to common stock
Per share information
Earnings per common share
Diluted earnings per common share
Dividends declared per common share
Average common shares outstanding
Diluted average common shares outstanding
Year ended December 31,
2013
2012
2011
$
1,376
8,116
1,290
13
35,571
723
47,089
1,337
60
2,585
307
4,289
42,800
2,309
40,491
5,023
13,430
3,191
4,340
8,774
1,814
1,623
(29)
1,472
663
679
40,980
15,152
9,951
5,033
1,984
2,895
1,504
961
11,362
48,842
32,629
10,405
22,224
346
$
21,878
$
$
989
20,889
3.95
3.89
1.15
5,287.3
5,371.2
1,358
8,098
1,825
41
36,482
587
48,391
1,727
79
3,110
245
5,161
43,230
7,217
36,013
4,683
11,890
2,838
4,519
11,638
1,850
1,707
(128)
1,485
567
1,807
42,856
14,689
9,504
4,611
2,068
2,857
1,674
1,356
13,639
50,398
28,471
9,103
19,368
471
18,897
898
17,999
3.40
3.36
0.88
5,287.6
5,351.5
1,440
8,475
1,644
58
37,247
548
49,412
2,275
80
3,978
316
6,649
42,763
7,899
34,864
4,280
11,304
3,653
4,193
7,832
1,960
1,014
54
1,482
524
1,889
38,185
14,462
8,857
4,348
2,283
3,011
1,880
1,266
13,286
49,393
23,656
7,445
16,211
342
15,869
844
15,025
2.85
2.82
0.48
5,278.1
5,323.4
(1) Total other-than-temporary impairment (OTTI) losses (gains) were $39 million, $3 million and $349 million for the year ended December 31, 2013, 2012 and 2011,
respectively. Of total OTTI, losses of $158 million, $240 million and $423 million were recognized in earnings, and gains of $(119) million, $(237) million and $(74) million
were recognized as non-credit-related OTTI in other comprehensive income for the year ended December 31, 2013, 2012 and 2011, respectively.
(2) Includes OTTI losses of $186 million, $176 million and $288 million for the year ended December 31, 2013, 2012 and 2011, respectively.
The accompanying notes are an integral part of these statements.
133
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Comprehensive Income
(in millions)
Wells Fargo net income
Other comprehensive income (loss), before tax:
Investment securities:
Net unrealized gains (losses) arising during the period
Reclassification of net gains to net income
Derivatives and hedging activities:
Net unrealized gains (losses) arising during the period
Reclassification of net gains on cash flow hedges to net income
Defined benefit plans adjustments:
Net actuarial gains (losses) arising during the period
Amortization of net actuarial loss, settlements and other to net income
Foreign currency translation adjustments:
Net unrealized losses arising during the period
Reclassification of net gains to net income
Other comprehensive income (loss), before tax
Income tax (expense) benefit related to other comprehensive income
Other comprehensive income (loss), net of tax
Less: Other comprehensive income (loss) from noncontrolling interests
Year ended December 31,
2013
2012
2011
$
21,878
18,897
15,869
(7,661)
(285)
5,143
(271)
(588)
(696)
190
(571)
(1,079)
99
(37)
-
52
(388)
(775)
144
(6)
(10)
3,889
(1,442)
(2,682)
1,139
2,447
(1,543)
4
(12)
(32)
(296)
1,533
276
(44)
(12)
(6,521)
2,524
(3,997)
267
Wells Fargo other comprehensive income (loss), net of tax
(4,264)
2,443
(1,531)
Wells Fargo comprehensive income
Comprehensive income from noncontrolling interests
Total comprehensive income
The accompanying notes are an integral part of these statements.
17,614
613
21,340
14,338
475
330
$
18,227
21,815
14,668
134
Wells Fargo & Company and Subsidiaries
Consolidated Balance Sheet
(in millions, except shares)
Assets
Cash and due from banks
Federal funds sold, securities purchased under resale agreements and other short-term investments
Trading assets
Investment securities:
Available-for-sale, at fair value
Held-to-maturity, at cost (fair value $12,247 and $0)
Mortgages held for sale (includes $13,879 and $42,305 carried at fair value) (1)
Loans held for sale (includes $1 and $6 carried at fair value) (1)
Loans (includes $5,995 and $6,206 carried at fair value) (1)
Allowance for loan losses
Net loans
Mortgage servicing rights:
Measured at fair value
Amortized
Premises and equipment, net
Goodwill
Other assets (includes $1,386 and $0 carried at fair value) (1)
Total assets (2)
Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt (includes $0 and $1 carried at fair value) (1)
Total liabilities (3)
Equity
Wells Fargo stockholders' equity:
Preferred stock
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
Additional paid-in capital
Retained earnings
Cumulative other comprehensive income
Treasury stock – 224,648,769 shares and 215,497,298 shares
Unearned ESOP shares
Total Wells Fargo stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
December 31,
2013
2012
$
19,919
213,793
62,813
21,860
137,313
57,482
252,007
235,199
12,346
16,763
133
-
47,149
110
825,799
(14,502)
799,574
(17,060)
811,297
782,514
15,580
1,229
9,156
25,637
86,342
11,538
1,160
9,428
25,637
93,578
$
1,527,015
1,422,968
$
288,117
791,060
288,207
714,628
1,079,177
1,002,835
53,883
69,949
152,998
57,175
76,668
127,379
1,356,007
1,264,057
16,267
12,883
9,136
60,296
92,361
1,386
(8,104)
(1,200)
170,142
866
9,136
59,802
77,679
5,650
(6,610)
(986)
157,554
1,357
171,008
158,911
$
1,527,015
1,422,968
(1) Parenthetical amounts represent assets and liabilities for which we have elected the fair value option.
(2) Our consolidated assets at December 31, 2013 and December 31, 2012, 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, $165 million and $260 million; Trading assets, $162 million and $114 million; Investment Securities, $1.4 billion and
$2.8 billion; Mortgages held for sale, $38 million and $469 million; Net loans, $6.0 billion and $10.6 billion; Other assets, $347 million and $457 million, and Total assets,
$8.1 billion and $14.6 billion, respectively.
(3) Our consolidated liabilities at December 31, 2013 and December 31, 2012, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells
Fargo: Short-term borrowings, $29 million and $0 million; Accrued expenses and other liabilities, $90 million and $134 million; Long-term debt, $2.3 billion and $3.5 billion;
and Total liabilities, $2.4 billion and $3.6 billion, respectively.
The accompanying notes are an integral part of these statements.
135
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity
(in millions, except shares)
Balance December 31, 2010
Balance January 1, 2011
Net income
Other comprehensive loss, net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased (1)
Preferred stock issued to ESOP
Preferred stock released by ESOP
Preferred stock converted to common shares
Common stock warrants repurchased
Preferred stock issued
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
Balance December 31, 2011
Cumulative effect of fair value election for certain
residential mortgage servicing rights
Balance January 1, 2012
Net income
Other comprehensive income, net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased (1)
Preferred stock issued to ESOP
Preferred stock released by ESOP
Preferred stock converted to common shares
Common stock warrants repurchased
Preferred stock issued
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
Balance December 31, 2012
Pre
ferred
stock
Co
mmon
stock
Shares
Amount
Shares
10,185,303
$
10,185,303
8,689
8,689
5,262,283,228
$
5,262,283,228
Amount
8,787
8,787
52,906,564
(85,779,031)
1,200,000
1,200
(959,623)
(959)
33,200,875
25,010
2,501
88
56
265,387
2,742
328,408
144
10,450,690
$
11,431
5,262,611,636
$
8,931
10,450,690
11,431
5,262,611,636
8,931
940,000
940
97,267,538
(119,586,873)
162
(887,825)
(888)
26,021,875
43
56,000
1,400
108,175
1,452
3,702,540
205
10,558,865
$
12,883
5,266,314,176
$
9,136
(1) For the year ended December 31, 2012, includes $200 million related to a private forward repurchase transaction entered into in fourth quarter 2012 that settled in first
quarter 2013 for 6 million shares of common stock. For the year ended December 31, 2011, includes $150 million related to a private forward repurchase transaction
entered into in fourth quarter 2011 that settled in first quarter 2012 for 6 million shares of common stock.
The accompanying notes are an integral part of these statements.
(continued on following pages)
136
Additional
paid-in
capital
53,426
53,426
Retained
earnings
51,918
51,918
15,869
co
Cumulative
other
mprehensive
income
4,738
4,738
(1,531)
Wells Fargo stockholders' equity
Treasury
stock
(487)
(487)
(2,266)
Unearned
ESOP
shares
(663)
(663)
(1,302)
1,039
(37)
1,208
(150)
102
(80)
903
(2)
21
78
529
(41)
2,531
55,957
55,957
(16)
2,326
(50)
88
(80)
845
(1)
(23)
55
230
560
(89)
3,845
59,802
(2,558)
(844)
12,467
64,385
2
64,387
18,897
(4,713)
(892)
(1,531)
3,207
9
(2,257)
(2,744)
(263)
(926)
3,207
(2,744)
(926)
2,443
(3,868)
(1,028)
968
13,292
77,679
2,443
5,650
2
(3,866)
(6,610)
(60)
(986)
Total
Wells Fargo
stockholders'
equity
126,408
126,408
15,869
(1,531)
(37)
1,296
(2,416)
-
959
-
(2)
2,501
(2,537)
(844)
78
529
(32)
13,833
140,241
2
140,243
18,897
2,443
(16)
2,488
(3,918)
-
888
-
(1)
1,377
(4,658)
(892)
230
560
(87)
17,311
157,554
Noncontrolling
interests
1,481
1,481
342
(12)
(365)
(35)
1,446
1,446
471
4
(564)
(89)
1,357
Total
equity
127,889
127,889
16,211
(1,543)
(402)
1,296
(2,416)
-
959
-
(2)
2,501
(2,537)
(844)
78
529
(32)
13,798
141,687
2
141,689
19,368
2,447
(580)
2,488
(3,918)
-
888
-
(1)
1,377
(4,658)
(892)
230
560
(87)
17,222
158,911
137
(continued from previous pages)
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity
(in millions, except shares)
Balance December 31, 2012
Balance January 1, 2013
Net income
Other comprehensive loss, net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased (1)
Preferred stock issued to ESOP
Preferred stock released by ESOP
Preferred stock converted to common shares
Common stock warrants repurchased
Preferred stock issued
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
Balance December 31, 2013
Shares
10,558,865
10,558,865
Preferred stock
$
Amount
12,883
12,883
Common stock
Shares
5,266,314,176
5,266,314,176
Amount
9,136
$
9,136
89,392,517
(124,179,383)
1,200,000
1,200
(1,005,270)
(1,006)
25,635,395
127,600
3,190
322,330
3,384
(9,151,471)
-
10,881,195
$
16,267
5,257,162,705
$
9,136
(1) For the year ended December 31, 2013, includes $500 million related to a private forward repurchase transaction entered into in fourth quarter 2013 that is expected to
settle in first quarter 2014 for an estimated 11 million shares of common stock. See Note 1 for additional information.
The accompanying notes are an integral part of these statements.
138
Cumulative
other
comprehensive
income
Treasury
stock
Wells Fargo stockholders' equity
Total
Wells Fargo
stockholders'
equity
Unearned
ESOP
shares
Noncontrolling
interests
Total
equity
Retained
earnings
77,679
77,679
21,878
(10)
(6,169)
(1,017)
Additional
paid-in
capital
59,802
59,802
28
(2)
(300)
108
(88)
191
(45)
83
269
725
(475)
494
60,296
5,650
5,650
(6,610)
(6,610)
(986)
(986)
(4,264)
2,745
(5,056)
815
(1,308)
1,094
1,357
1,357
346
267
(1,104)
157,554
157,554
21,878
(4,264)
28
2,733
(5,356)
-
1,006
-
-
3,145
(6,086)
(1,017)
269
725
(473)
14,682
92,361
(4,264)
1,386
2
(1,494)
(8,104)
(214)
(1,200)
12,588
170,142
(491)
866
158,911
158,911
22,224
(3,997)
(1,076)
2,733
(5,356)
-
1,006
-
-
3,145
(6,086)
(1,017)
269
725
(473)
12,097
171,008
139
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Cash Flows
(in millions)
Cash flows from operating activities:
Net income before noncontrolling interests
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
Changes in fair value of MSRs, MHFS and LHFS carried at fair value
Depreciation and amortization
Other net losses (gains)
Stock-based compensation
Excess tax benefits related to stock incentive compensation
Originations of MHFS
Proceeds from sales of and principal collected on mortgages originated for sale
Originations of LHFS
Proceeds from sales of and principal collected on LHFS
Purchases of LHFS
Net change in:
Trading assets
Deferred income taxes
Accrued interest receivable
Accrued interest payable
Other assets
Other accrued expenses and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Net change in:
2013
Year ended December 31,
2011
2012
$
22,224
19,368
16,211
2,309
(3,229)
3,293
(9,384)
1,920
(271)
(317,054)
311,431
-
575
(291)
43,638
4,977
(13)
(32)
4,693
(7,145)
57,641
7,217
(2,307)
2,807
(3,661)
1,698
(226)
(483,835)
421,623
(15)
9,383
(7,975)
105,440
(1,297)
293
(84)
2,064
(11,953)
58,540
7,899
(295)
2,208
3,273
1,488
(79)
(345,099)
298,524
(5)
11,833
(11,723)
35,149
3,573
(401)
(362)
(11,529)
3,000
13,665
Federal funds sold, securities purchased under resale agreements
and other short-term investments
(78,184)
(92,946)
36,270
Available-for-sale securities:
Sales proceeds
Prepayments and maturities
Purchases
Held-to-maturity securities:
Paydowns and maturities
Purchases
Nonmarketable equity investments:
Sales proceeds
Purchases
Loans:
Loans originated by banking subsidiaries, net of principal collected
Proceeds from sales (including participations) of loans originated for investment
Purchases (including participations) of loans
Principal collected on nonbank entities’ loans
Loans originated by nonbank entities
Net cash paid for acquisitions
Proceeds from sales of foreclosed assets and short sales
Net cash from purchases and sales of MSRs
Other, net
Net cash used by investing activities
Cash flows from financing activities:
Net change in:
Deposits
Short-term borrowings
Long-term debt:
Proceeds from issuance
Repayment
Preferred stock:
Proceeds from issuance
Cash dividends paid
Common stock:
Proceeds from issuance
Repurchased
Cash dividends paid
Common stock warrants repurchased
Excess tax benefits related to stock incentive compensation
Net change in noncontrolling interests
Other, net
Net cash provided by financing activities
Net change in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
Supplemental cash flow disclosures:
Cash paid for interest
Cash paid for income taxes
The accompanying notes are an integral part of these statements. See Note 1 for noncash activities.
140
5,210
59,712
(64,756)
23,062
52,618
(121,235)
2,837
50,737
(89,474)
30
(5,782)
2,577
(3,273)
(43,744)
7,694
(11,563)
19,955
(17,311)
-
11,021
407
581
(153,492)
-
-
2,279
(2,619)
(53,381)
6,811
(9,040)
25,080
(23,555)
(4,322)
12,690
116
(1,169)
(139,890)
76,342
(3,390)
82,762
7,699
53,227
(25,423)
27,695
(28,093)
3,145
(1,017)
2,224
(5,356)
(5,953)
-
271
(296)
136
93,910
(1,941)
21,860
19,919
4,321
7,132
$
$
1,377
(892)
2,091
(3,918)
(4,565)
(1)
226
(611)
-
83,770
2,420
19,440
21,860
5,245
8,024
-
-
2,424
(2,656)
(38,526)
6,555
(8,878)
9,782
(7,522)
(353)
13,495
(155)
75
(35,044)
72,128
(6,231)
11,687
(50,555)
2,501
(844)
1,296
(2,416)
(2,537)
(2)
79
(331)
-
24,775
3,396
16,044
19,440
7,011
4,875
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. 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 6), valuations of residential mortgage servicing rights
(MSRs) (Notes 8 and 9) and financial instruments (Note 17),
liability for mortgage loan repurchase losses (Note 9) and
income taxes (Note 21). Actual results could differ from those
estimates.
Accounting Standards Adopted in 2013
In first quarter 2013, we adopted the following new accounting
guidance:
x
Accounting Standards Update (ASU or Update) 2011-11,
Disclosures about Offsetting Assets and Liabilities;
ASU 2013-01, Clarifying the Scope of Disclosures about
Offsetting Assets and Liabilities; and
ASU 2013-02, Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income.
x
x
ASU 2011-11 expands the disclosure requirements for certain
financial instruments and derivatives that are subject to
enforceable master netting agreements or similar arrangements.
The disclosures are required regardless of whether the
instruments have been offset (or netted) in the balance sheet.
Under ASU 2011-11, companies must describe the nature of
offsetting arrangements and provide quantitative information
about those agreements, including the gross and net amounts of
financial instruments that are recognized on the balance sheet.
In January 2013, the FASB issued ASU 2013-01, which clarifies
the scope of ASU 2011-11 by limiting the disclosures to
derivatives, repurchase agreements, and securities lending
transactions to the extent they are subject to an enforceable
master netting or similar arrangement. We adopted this
guidance in first quarter 2013 with retrospective application.
These Updates did not affect our consolidated financial results
since they amend only the disclosure requirements for offsetting
financial instruments. See Notes 14 and 16 for the new
disclosures.
ASU 2013-02 requires companies to disclose the effect on net
income line items from significant amounts reclassified out of
accumulated other comprehensive income (OCI) and entirely
into net income. If reclassifications are partially or entirely
capitalized on the balance sheet, then companies must provide a
cross-reference to disclosures that provide information about the
effect of the reclassifications. We adopted this guidance in first
quarter 2013 with retrospective application. This Update did not
affect our consolidated financial results as it amends only the
disclosure requirements for accumulated other comprehensive
income. See Note 23 for expanded disclosures on reclassification
adjustments.
In third quarter 2013, we adopted the following new accounting
guidance:
x ASU 2013-10, Derivatives and Hedging (Topic 815):
Inclusion of the Fed Funds Effective Swap Rate (or
Overnight Index Swap Rate) as a Benchmark Interest Rate
for Hedge Accounting Purposes
ASU 2013-10 permits the Fed Funds Effective Swap Rate
(Overnight Index Swap Rate) to be used as a U.S. benchmark
interest rate for hedge accounting purposes, in addition to
LIBOR and U.S. Treasury. The Update also removes the
restriction on using different benchmark rates for similar
hedges. Our adoption of this guidance with prospective
application did not affect our consolidated financial statements.
Consolidation
Our consolidated financial statements include the accounts of
the Parent and our majority-owned subsidiaries and variable
interest entities (VIEs) (defined below) in which we are the
primary beneficiary. Significant intercompany accounts and
transactions are eliminated in consolidation. When we have
significant influence over operating and financing decisions for a
company but do not own a majority of the voting equity
interests, we account for the investment using the equity method
of accounting (we recognize a proportionate share of the
company’s earnings). If we do not have significant influence, we
recognize the investment at cost except for (1) marketable equity
securities, which we recognize at fair value with changes in fair
value included in OCI, and (2) nonmarketable equity
investments for which we have elected the fair value option.
Investments accounted for under the equity or cost method are
included in other assets.
141
Note 1: Summary of Significant Accounting Policies (continued)
We are a variable interest holder in certain special-purpose
entities (SPEs) in which equity investors do not have the
characteristics of a controlling financial interest or where the
entity does not have enough equity at risk to finance its activities
without additional subordinated financial support from other
parties (referred to as VIEs). Our variable interest arises from
contractual, ownership or other monetary interests in the entity,
which change with fluctuations in the fair value of the entity's
net assets. We consolidate a VIE if we are the primary
beneficiary, defined as the party that has both the power to
direct the activities that most significantly impact the VIE and a
variable interest that could potentially be significant to the VIE.
To determine whether or not a variable interest we hold could
potentially be significant to the VIE, we consider both qualitative
and quantitative factors regarding the nature, size and form of
our involvement with the VIE. We assess whether or not we are
the primary beneficiary of a VIE on an on-going basis.
Cash and Due From Banks
Cash and cash equivalents include cash on hand, cash items in
transit, and amounts due from the Federal Reserve Bank and
other depository institutions.
Trading Assets
Trading assets are primarily securities, including corporate debt,
U.S. government agency obligations and other securities that we
acquire for short-term appreciation or other trading purposes,
and the fair value of derivatives primarily held for customer
accommodation purposes or risk mitigation and hedging.
Interest-only strips and other retained interests in
securitizations that can be contractually prepaid or otherwise
settled in a way that the holder would not recover substantially
all of its recorded investment are classified as trading assets.
Trading assets are carried at fair value, with interest and
dividend income recorded in interest income and realized and
unrealized gains and losses recorded in noninterest income.
Periodic cash settlements on derivatives and other trading assets
are recorded in noninterest income.
Investments
AVAILABLE-FOR-SALE SECURITIES Debt securities that we
might not hold until maturity and marketable equity securities
are classified as available-for-sale securities and reported at fair
value. Unrealized gains and losses, after applicable income taxes,
are reported in cumulative OCI.
We conduct other-than-temporary impairment (OTTI)
analysis on a quarterly basis or more often if a potential loss-
triggering event occurs. The initial indicator of OTTI for both
debt and equity securities is a decline in fair market value below
the amount recorded for an investment and the severity and
duration of the decline.
For a debt security for which there has been a decline in the
fair value below amortized cost basis, we recognize OTTI if we
(1) have the intent to sell the security, (2) it is more likely than
not that we will be required to sell the security before recovery of
its amortized cost basis, or (3) we do not expect to recover the
entire amortized cost basis of the security.
142
Estimating recovery of the amortized cost basis of a debt
security is based upon an assessment of the cash flows expected
to be collected. If the present value of cash flows expected to be
collected, discounted at the security’s effective yield, is less than
amortized cost, OTTI is considered to have occurred. In
performing an assessment of the cash flows expected to be
collected, we consider all relevant information including:
x
the length of time and the extent to which the fair value has
been less than the amortized cost basis;
the historical and implied volatility of the fair value of the
security;
the cause of the price decline, such as the general level of
interest rates or adverse conditions specifically related to
the security, an industry or a geographic area;
the issuer's financial condition, near-term prospects and
ability to service the debt;
the payment structure of the debt security and the
likelihood of the issuer being able to make payments that
increase in the future;
for asset-backed securities, the credit performance of the
underlying collateral, including delinquency rates, level of
non-performing assets, cumulative losses to date, collateral
value and the remaining credit enhancement compared with
expected credit losses;
any change in rating agencies' credit ratings at evaluation
date from acquisition date and any likely imminent action;
independent analyst reports and forecasts, sector credit
ratings and other independent market data; and
recoveries or additional declines in fair value subsequent to
the balance sheet date.
x
x
x
x
x
x
x
x
If we intend to sell the security, or if it is more likely than not
we will be required to sell the security before recovery, an OTTI
write-down is recognized in earnings equal to the entire
difference between the amortized cost basis and fair value of the
security. For debt securities that are considered other-than-
temporarily impaired that we do not intend to sell or it is more
likely than not that we will not be required to sell before
recovery, the OTTI write-down is separated into an amount
representing the credit loss, which is recognized in earnings, and
the amount related to all other factors, which is recognized in
OCI. The measurement of the credit loss component is equal to
the difference between the debt security's amortized cost basis
and the present value of its expected future cash flows
discounted at the security's effective yield. The remaining
difference between the security’s fair value and the present value
of future expected cash flows is due to factors that are not credit-
related and, therefore, is recognized in OCI. We believe that we
will fully collect the carrying value of securities on which we have
recorded a non-credit-related impairment in OCI.
We hold investments in perpetual preferred securities (PPS)
that are structured in equity form, but have many of the
characteristics of debt instruments, including periodic cash flows
in the form of dividends, call features, ratings that are similar to
debt securities and pricing like long-term callable bonds.
Because of the hybrid nature of these securities, we evaluate
PPS for OTTI using a model similar to the model we use for debt
securities as described above. Among the factors we consider in
our evaluation of PPS are whether there is any evidence of
deterioration in the credit of the issuer as indicated by a decline
in cash flows or a rating agency downgrade to below investment
grade and the estimated recovery period. Additionally, in
determining if there was evidence of credit deterioration, we
evaluate: (1) the severity of decline in market value below cost,
(2) the period of time for which the decline in fair value has
existed, and (3) the financial condition and near-term prospects
of the issuer, including any specific events which may influence
the operations of the issuer. We consider PPS to be other-than-
temporarily impaired if cash flows expected to be collected are
insufficient to recover our investment or if we no longer believe
the security will recover within the estimated recovery period.
OTTI write-downs of PPS are recognized in earnings equal to the
difference between the cost basis and fair value of the security.
Based upon the factors considered in our OTTI evaluation, we
believe our investments in PPS currently rated investment grade
will be fully realized and, accordingly, have not recognized OTTI
on such securities.
For marketable equity securities other than PPS, OTTI
evaluations focus on whether evidence exists that supports
recovery of the unrealized loss within a timeframe consistent
with temporary impairment. This evaluation considers the
severity of and length of time fair value is below cost, our intent
and ability to hold the security until forecasted recovery of the
fair value of the security, and the investee's financial condition,
capital strength, and near-term prospects.
The securities portfolio is an integral part of our
asset/liability management process. We manage these
investments to provide liquidity, manage interest rate risk and
maximize portfolio yield within capital risk limits approved by
management and the Board of Directors and monitored by the
Corporate Asset/Liability Management Committee (Corporate
ALCO). We recognize realized gains and losses on the sale of
these securities in noninterest income using the specific
identification method.
Unamortized premiums and discounts are recognized in
interest income over the contractual life of the security using the
interest method. As principal repayments are received on
securities (i.e., primarily mortgage-backed securities (MBS)) a
proportionate amount of the related premium or discount is
recognized in income so that the effective interest rate on the
remaining portion of the security continues unchanged.
HELD-TO-MATURITY SECURITIES Debt securities for which
the Company has the positive intent and ability to hold to
maturity are reported at historical cost adjusted for amortization
of premiums and accretion of discounts. We recognize OTTI
when there is a decline in fair market value and we do not expect
to recover the entire amortized cost basis of the debt security.
The amortized cost is written-down to fair value with the credit
loss component recorded to earnings and the remaining
component recognized in OCI. The OTTI assessment related to
whether we expect recovery of the amortized cost basis and
determination of any credit loss component recognized in
earnings for held-to-maturity securities is the same as described
for available-for-sale securities. Security transfers to the held-to-
maturity classification are accounted for at fair value. Unrealized
gains or losses from the transfer of available for sale securities
continue to be reported in cumulative OCI and are amortized
into earnings over the remaining life of the security using the
effective interest method.
NONMARKETABLE EQUITY INVESTMENTS Nonmarketable
equity investments include low income housing tax credit
investments, equity securities that are not publicly traded and
securities acquired for various purposes, such as to meet
regulatory requirements (for example, Federal Reserve Bank and
Federal Home Loan Bank (FHLB) stock). We elected the fair
value option for certain of these investments. The rest of these
investments are accounted for under the cost or equity method.
All nonmarketable equity investments are included in other
assets. We review those assets accounted for under the cost or
equity method at least quarterly for possible OTTI. Our review
typically includes an analysis of the facts and circumstances of
each investment, the expectations for the investment's cash
flows and capital needs, the viability of its business model and
our exit strategy. We reduce the asset value when we consider
declines in value to be other than temporary. We recognize the
estimated loss as a loss from equity investments in noninterest
income.
Securities Purchased and Sold Agreements
Securities purchased under resale agreements and securities sold
under repurchase agreements are accounted for as collateralized
financing transactions and are recorded at the acquisition or sale
price plus accrued interest. It is our policy to take possession of
securities purchased under resale agreements, which are
primarily U.S. Government and Government agency securities.
We monitor the market value of securities purchased and sold,
and obtain collateral from or return it to counterparties when
appropriate. These financing transactions do not create material
credit risk given the collateral provided and the related
monitoring process.
Mortgages and Loans Held for Sale
Mortgages held for sale (MHFS) include commercial and
residential mortgages originated for sale and securitization in
the secondary market, which is our principal market, or for sale
as whole loans. We elect the fair value option for substantially all
residential MHFS (see Note 17). The remaining residential
MHFS are held at the lower of cost or market value (LOCOM),
and are valued on an aggregate portfolio basis. Commercial
MHFS are held at LOCOM and are valued on an individual loan
basis.
Loans held for sale (LHFS) are carried at LOCOM or at fair
value. Generally, consumer loans are valued on an aggregate
portfolio basis, and commercial loans are valued on an
individual loan basis.
Gains and losses on MHFS are recorded in mortgage banking
noninterest income. Gains and losses on LHFS are recorded in
other noninterest income. Direct loan origination costs and fees
for MHFS and LHFS under the fair value option are recognized
in income at origination. For MHFS and LHFS recorded at
LOCOM, loan costs and fees are deferred at origination and are
recognized in income at time of sale. Interest income on MHFS
143
Note 1: Summary of Significant Accounting Policies (continued)
and LHFS is calculated based upon the note rate of the loan and
is recorded to interest income.
Our lines of business are authorized to originate held-for-
investment loans that meet or exceed established loan product
profitability criteria, including minimum positive net interest
margin spreads in excess of funding costs. When a
determination is made at the time of commitment to originate
loans as held for investment, it is our intent to hold these loans
to maturity or for the “foreseeable future,” subject to periodic
review under our corporate asset/liability management process.
In determining the “foreseeable future” for these loans,
management considers (1) the current economic environment
and market conditions, (2) our business strategy and current
business plans, (3) the nature and type of the loan receivable,
including its expected life, and (4) our current financial
condition and liquidity demands. Consistent with our core
banking business of managing the spread between the yield on
our assets and the cost of our funds, loans are periodically re-
evaluated to determine if our minimum net interest margin
spreads continue to meet our profitability objectives. If
subsequent changes in interest rates significantly impact the
ongoing profitability of certain loan products, we may
subsequently change our intent to hold these loans, and we
would take actions to sell such loans in response to the
Corporate ALCO directives to reposition our balance sheet
because of the changes in interest rates. These directives identify
both the type of loans to be sold and the weighted average
coupon rate of such loans no longer meeting our ongoing
investment criteria. Upon the issuance of such directives, we
immediately transfer these loans to the MHFS portfolio at
LOCOM.
Loans
Loans are reported at their outstanding principal balances net of
any unearned income, cumulative charge-offs, unamortized
deferred fees and costs on originated loans and unamortized
premiums or discounts on purchased loans. PCI loans are
reported net of any remaining purchase accounting adjustments.
See the “Purchased Credit-Impaired Loans” section in this Note
for our accounting policy for PCI loans.
Unearned income, deferred fees and costs, and discounts and
premiums are amortized to interest income over the contractual
life of the loan using the interest method. Loan commitment fees
are generally deferred and amortized into noninterest income on
a straight-line basis over the commitment period.
Loans also include direct financing leases that are recorded at
the aggregate of minimum lease payments receivable plus the
estimated residual value of the leased property, less unearned
income. Leveraged leases, which are a form of direct financing
leases, are recorded net of related nonrecourse debt. Leasing
income is recognized as a constant percentage of outstanding
lease financing balances over the lease terms in interest income.
NONACCRUAL AND PAST DUE LOANS We generally place
loans on nonaccrual status when:
x
the full and timely collection of interest or principal
becomes uncertain (generally based on an assessment of the
144
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.
x
x
x
x
PCI loans are written down at acquisition to fair value using
an estimate of cash flows deemed to be collectible. Accordingly,
such loans are no longer classified as nonaccrual even though
they may be contractually past due because we expect to fully
collect the new carrying values of such loans (that is, the new
cost basis arising out of purchase accounting).
When we place a loan on nonaccrual status, we reverse the
accrued unpaid interest receivable against interest income and
amortization of any net deferred fees is suspended. If the
ultimate collectability of the recorded loan balance is in doubt on
a nonaccrual loan, the cost recovery method is used and cash
collected is applied to first reduce the carrying value of the loan.
Otherwise, interest income may be recognized to the extent cash
is received. Generally, we return a loan to accrual status when all
delinquent interest and principal become current under the
terms of the loan agreement and collectability of remaining
principal and interest is no longer doubtful.
For modified loans, we re-underwrite at the time of a
restructuring to determine if there is sufficient evidence of
sustained repayment capacity based on the borrower’s financial
strength, including documented income, debt to income ratios
and other factors. 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. When a loan classified as a troubled debt restructuring
(TDR) performs in accordance with its modified terms, the loan
either continues to accrue interest (for performing loans) or will
return to accrual status after the borrower demonstrates a
sustained period of performance (generally six consecutive
months of payments, or equivalent, inclusive of consecutive
payments made prior to the modification). Loans will be placed
on nonaccrual status and a corresponding charge-off is recorded
if we believe it is probable that principal and interest
contractually due under the modified terms of the agreement
will not be collectible.
Our loans are considered past due when contractually
required principal or interest payments have not been made on
the due dates.
LOAN CHARGE-OFF POLICIES For commercial loans, we
generally fully charge off or charge down to net realizable value
(fair value of collateral, less estimated costs to sell) for loans
secured by collateral when:
x
x
management judges the loan to be uncollectible;
repayment is deemed to be protracted beyond reasonable
time frames;
the loan has been classified as a loss by either our internal
loan review process or our banking regulatory agencies;
the customer has filed bankruptcy and the loss becomes
evident owing to a lack of assets; or
the loan is 180 days past due unless both well-secured and
in the process of collection.
x
x
x
For consumer loans, we fully charge off or charge down to net
realizable value when deemed uncollectible due to bankruptcy
discharge or other factors, or no later than reaching a defined
number of days past due, as follows:
x
1-4 family first and junior lien mortgages – We generally
charge down to net realizable value when the loan is
180 days past due.
Auto loans – We generally fully charge off when the loan is
120 days past due.
Credit card loans – We generally fully charge off when the
loan is 180 days past due.
Unsecured loans (closed end) – We generally fully charge
off when the loan is 120 days past due.
Unsecured loans (open end) – We generally fully charge off
when the loan is 180 days past due.
Other secured loans – We generally fully or partially charge
down to net realizable value when the loan is 120 days past
due.
x
x
x
x
x
IMPAIRED LOANS We consider a loan to be impaired when,
based on current information and events, we determine that we
will not be able to collect all amounts due according to the loan
contract, including scheduled interest payments. This evaluation
is generally based on delinquency information, an assessment of
the borrower’s financial condition and the adequacy of collateral,
if any. Our impaired loans predominantly include loans on
nonaccrual status for commercial and industrial, commercial
real estate (CRE), foreign loans and any loans modified in a
TDR, on both accrual and nonaccrual status.
When we identify a loan as impaired, we generally measure
the impairment, if any, based on the difference between the
recorded investment in the loan (net of previous charge-offs,
deferred loan fees or costs and unamortized premium or
discount) and the present value of expected future cash flows,
discounted at the loan’s effective interest rate. When the value of
an impaired loan is calculated by discounting expected cash
flows, interest income is recognized using the loan’s effective
interest rate over the remaining life of the loan. When collateral
is the sole source of repayment for the impaired loan, rather
than the borrower’s income or other sources of repayment, we
charge down to net realizable value.
TROUBLED DEBT RESTRUCTURINGS In situations where, 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 the borrower that we would not otherwise
consider, the related loan is classified as a TDR. These modified
terms may include rate reductions, principal forgiveness, term
extensions, payment forbearance and other actions intended to
minimize our economic loss and to avoid foreclosure or
repossession of the collateral. For modifications where we
forgive principal, the entire amount of such principal forgiveness
is immediately charged off. Loans classified as TDRs, including
loans in trial payment periods (trial modifications), are
considered impaired loans. 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.
PURCHASED CREDIT-IMPAIRED LOANS Loans 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. 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. Some loans that otherwise meet the definition as
credit-impaired are specifically excluded from the PCI loan
portfolios, such as revolving loans where the borrower still has
revolving privileges.
Evidence of credit quality deterioration as of the purchase
date may include statistics such as past due and nonaccrual
status, commercial risk ratings, recent borrower credit scores
and recent loan-to-value percentages. Generally, acquired loans
that meet our definition for nonaccrual status are considered to
be credit-impaired.
Substantially all commercial and industrial, CRE and foreign
PCI loans are accounted for as individual loans. Conversely,
consumer PCI loans have been aggregated into pools based on
common risk characteristics. Each pool is accounted for as a
single asset with a single composite interest rate and an
aggregate expectation of cash flows.
Accounting for PCI loans involves estimating fair value, at
acquisition, using the principal and interest cash flows expected
to be collected discounted at the prevailing market rate of
interest. The excess of cash flows expected to be collected over
the carrying value (estimated fair value at acquisition date) 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 pool of loans, in situations where there is a
reasonable expectation about the timing and amount of cash
flows to be collected. The difference between contractually
required payments and the cash flows expected to be collected at
acquisition, considering the impact of prepayments, is referred
to as the nonaccretable difference.
Subsequent to acquisition, we regularly evaluate our
estimates of cash flows expected to be collected. If we have
probable decreases in cash flows expected to be collected (other
than due to decreases in interest rate indices and changes in
prepayment assumptions), we charge the provision for credit
losses, resulting in an increase to the allowance for loan losses. If
we have probable and significant increases in cash flows
expected to be collected, we first reverse any previously
established allowance for loan losses and then increase interest
145
Note 1: Summary of Significant Accounting Policies (continued)
income as a prospective yield adjustment over the remaining life
of the loan, or pool of loans. Estimates of cash flows are
impacted by changes in interest rate indices for variable rate
loans and prepayment assumptions, both of which are treated as
prospective yield adjustments included in interest income.
Resolutions of loans may include sales of loans to third
parties, receipt of payments in settlement with the borrower, or
foreclosure of the collateral. For individual PCI loans, gains or
losses on sales to third parties are included in noninterest
income, and gains or losses as a result of a settlement with the
borrower are included in interest income. Our policy is to
remove an individual loan from a pool based on comparing the
amount received from its resolution with its contractual amount.
Any difference between these amounts is absorbed by the
nonaccretable difference for the entire pool. This removal
method assumes that the amount received from resolution
approximates pool performance expectations. The remaining
accretable yield balance is unaffected and any material change in
remaining effective yield caused by this removal method is
addressed by our quarterly cash flow evaluation process for each
pool. For loans that are resolved by payment in full, there is no
release of the nonaccretable difference for the pool because there
is no difference between the amount received at resolution and
the contractual amount of the loan. Modified PCI loans are not
removed from a pool even if those loans would otherwise be
deemed TDRs. Modified PCI loans that are accounted for
individually are considered TDRs, and removed from PCI
accounting if there has been a concession granted in excess of
the original nonaccretable difference. We include these TDRs in
our impaired loans.
FORECLOSED ASSETS Foreclosed assets obtained through our
lending activities primarily include real estate. Generally, loans
have been written down to their net realizable value prior to
foreclosure. Any further reduction to their net realizable value is
recorded with a charge to the allowance for credit losses at
foreclosure. We allow up to 90 days after foreclosure to finalize
determination of net realizable value. Thereafter, changes in net
realizable value are recorded to noninterest expense. The net
realizable value of these assets is reviewed and updated
periodically depending on the type of property.
ALLOWANCE FOR CREDIT LOSSES (ACL) The allowance for
credit losses is management’s estimate of credit losses inherent
in the loan portfolio, including unfunded credit commitments, at
the balance sheet date. We have an established process to
determine the appropriateness of the allowance for credit losses
that assesses the losses inherent in our portfolio and related
unfunded credit commitments. While we attribute portions of
the allowance to our respective commercial and consumer
portfolio segments, the entire allowance is available to absorb
credit losses inherent in the total loan portfolio and unfunded
credit commitments.
Our process involves procedures to appropriately consider
the unique risk characteristics of our commercial and consumer
loan portfolio segments. For each portfolio segment, losses are
estimated collectively for groups of loans with similar
characteristics, individually or pooled for impaired loans or, for
146
PCI loans, based on the changes in cash flows expected to be
collected.
Our allowance levels are influenced by loan volumes, loan
grade migration or delinquency status, historic loss experience
influencing loss factors, and other conditions influencing loss
expectations, such as economic conditions.
COMMERCIAL PORTFOLIO SEGMENT ACL METHODOLOGY
Generally, commercial loans are assessed for estimated losses by
grading each loan using various risk factors as identified through
periodic reviews. We apply historic grade-specific loss factors to
the aggregation of each funded grade pool. These historic loss
factors are also used to estimate losses for unfunded credit
commitments. In the development of our statistically derived
loan grade loss factors, we observe historical losses over a
relevant period for each loan grade. These loss estimates are
adjusted as appropriate based on additional analysis of long-
term average loss experience compared to previously forecasted
losses, external loss data or other risks identified from current
economic conditions and credit quality trends.
The allowance also includes an amount for the estimated
impairment on nonaccrual commercial loans and commercial
loans modified in a TDR, whether on accrual or nonaccrual
status.
CONSUMER PORTFOLIO SEGMENT ACL METHODOLOGY
For consumer loans that are not identified as a TDR, we
determine the allowance predominantly on a collective basis
utilizing forecasted losses to represent our best estimate of
inherent loss. We pool loans, generally by product types with
similar risk characteristics, such as residential real estate
mortgages and credit cards. As appropriate and to achieve
greater accuracy, we may further stratify selected portfolios by
sub-product, origination channel, vintage, loss type, geographic
location and other predictive characteristics. Models designed
for each pool are utilized to develop the loss estimates. We use
assumptions for these pools in our forecast models, such as
historic delinquency and default, loss severity, home price
trends, unemployment trends, and other key economic variables
that may influence the frequency and severity of losses in the
pool.
In determining the appropriate allowance attributable to our
residential mortgage portfolio, we take into consideration
portfolios determined to be at elevated risk, such as junior lien
mortgages behind delinquent first lien mortgages and junior lien
lines of credit subject to near term significant payment increases.
We incorporate the default rates and high severity of loss for
these higher risk portfolios, including the impact of our
established loan modification programs. When modifications
occur or are probable to occur, our allowance considers the
impact of these modifications, taking into consideration the
associated credit cost, including re-defaults of modified loans
and projected loss severity. Accordingly, the loss content
associated with the effects of existing and probable loan
modifications and higher risk portfolios has been captured in our
allowance methodology.
We separately estimate impairment for consumer loans that
have been modified in a TDR (including trial modifications),
whether on accrual or nonaccrual status.
OTHER ACL MATTERS The allowance for credit losses for both
portfolio segments includes an amount for imprecision or
uncertainty that may change from period to period. This amount
represents management’s judgment of risks inherent in the
processes and assumptions used in establishing the allowance.
This imprecision considers economic environmental factors,
modeling assumptions and performance, process risk, and other
subjective factors, including industry trends and risk
assessments for our commitments to regulatory and government
agencies regarding settlements of mortgage foreclosure-related
matters.
Securitizations and Beneficial Interests
In certain asset securitization transactions that meet the
applicable criteria to be accounted for as a sale, assets are sold to
an entity referred to as an SPE, which then issues beneficial
interests in the form of senior and subordinated interests
collateralized by the assets. In some cases, we may retain
beneficial interests issued by the entity. Additionally, from time
to time, we may also re-securitize certain assets in a new
securitization transaction.
The assets and liabilities transferred to an SPE are excluded
from our consolidated balance sheet if the transfer qualifies as a
sale and we are not required to consolidate the SPE.
For transfers of financial assets recorded as sales, we
recognize and initially measure at fair value all assets obtained
(including beneficial interests) and liabilities incurred. We
record a gain or loss in noninterest income for the difference
between the carrying amount and the fair value of the assets
sold. Fair values are based on quoted market prices, quoted
market prices for similar assets, or if market prices are not
available, then the fair value is estimated using discounted cash
flow analyses with assumptions for credit losses, prepayments
and discount rates that are corroborated by and verified against
market observable data, where possible. Retained interests and
liabilities incurred from securitizations with off-balance sheet
entities, including SPEs and VIEs, where we are not the primary
beneficiary, are classified as investment securities, trading
account assets, loans, MSRs or other liabilities (including
liabilities for mortgage repurchase losses) and are accounted for
as described herein.
Mortgage Servicing Rights (MSRs)
We recognize the rights to service mortgage loans for others, or
MSRs, as assets whether we purchase the MSRs or the MSRs
result from a sale or securitization of loans we originate (asset
transfers). We initially record all of our MSRs at fair value.
Subsequently, residential loan MSRs are carried at fair value. All
of our MSRs related to our commercial mortgage loans are
subsequently measured at LOCOM.
We base the fair value of MSRs on the present value of
estimated future net servicing income cash flows. We estimate
future net servicing income cash flows with assumptions that
market participants would use to estimate fair value, including
estimates of prepayment speeds (which are influenced by
changes in mortgage interest rates and borrower behavior,
including estimates for borrower default), discount rates, cost to
service (including delinquency and foreclosure costs), escrow
account earnings, contractual servicing fee income, ancillary
income and late fees. Our valuation approach is validated by our
internal valuation model validation group, and our valuation
estimates are benchmarked to third party appraisals on a
quarterly basis.
Changes in the fair value of MSRs occur primarily due to the
collection/realization of expected cash flows, as well as changes
in valuation inputs and assumptions. For MSRs carried at fair
value, changes in fair value are reported in noninterest income in
the period in which the change occurs. MSRs subsequently
measured at LOCOM are amortized in proportion to, and over
the period of, estimated net servicing income. The amortization
of MSRs is reported in noninterest income, analyzed monthly
and adjusted to reflect changes in prepayment speeds, as well as
other factors.
MSRs accounted for at LOCOM are periodically evaluated for
impairment based on the fair value of those assets. For purposes
of impairment evaluation and measurement, we stratify MSRs
based on the predominant risk characteristics of the underlying
loans, including investor and product type. If, by individual
stratum, the carrying amount of these MSRs exceeds fair value, a
valuation reserve is established. The valuation reserve is
adjusted as the fair value changes.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Capital leases, where we are the
lessee, are included in premises and equipment at the capitalized
amount less accumulated amortization.
We primarily use the straight-line method of depreciation
and amortization. Estimated useful lives range up to 40 years for
buildings, up to 10 years for furniture and equipment, and the
shorter of the estimated useful life (up to 8 years) or the lease
term for leasehold improvements. We amortize capitalized
leased assets on a straight-line basis over the lives of the
respective leases.
Goodwill and Identifiable Intangible Assets
Goodwill is recorded in business combinations under the
purchase method of accounting when the purchase price is
higher than the fair value of net assets, including identifiable
intangible assets.
We assess goodwill for impairment at a reporting unit level
on an annual basis or more frequently in certain circumstances.
We have determined that our reporting units are one level below
the operating segments. We have the option of performing a
qualitative assessment of goodwill. We may also elect to bypass
the qualitative test and proceed directly to a quantitative test.
We initially perform a qualitative assessment of goodwill to test
for impairment. If, based on our qualitative review, we conclude
that more likely than not a reporting unit’s fair value is less than
its carrying amount, then we complete quantitative steps as
described below to determine if there is goodwill impairment. If
we conclude that a reporting unit’s fair value is not less than its
147
Note 1: Summary of Significant Accounting Policies (continued)
carrying amount, quantitative tests are not required. We assess
goodwill for impairment on a reporting unit level and apply
various quantitative valuation methodologies when required to
compare the estimated fair value to the carrying value of each
reporting unit. Valuation methodologies include discounted cash
flow and earnings multiple approaches. If the fair value is less
than the carrying amount, an additional test is required to
measure the amount of impairment. We recognize impairment
losses as a charge to noninterest expense (unless related to
discontinued operations) and an adjustment to the carrying
value of the goodwill asset. Subsequent reversals of goodwill
impairment are prohibited.
We amortize core deposit and other customer relationship
intangibles on an accelerated basis over useful lives not
exceeding 10 years. We review such intangibles for impairment
whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Impairment is
indicated if the sum of undiscounted estimated future net cash
flows is less than the carrying value of the asset. Impairment is
permanently recognized by writing down the asset to the extent
that the carrying value exceeds the estimated fair value.
Operating Lease Assets
Operating lease rental income for leased assets is recognized in
other income on a straight-line basis over the lease term. Related
depreciation expense is recorded on a straight-line basis over the
estimated useful life, considering the estimated residual value of
the leased asset. The useful life may be adjusted to the term of
the lease depending on our plans for the asset after the lease
term. On a periodic basis, leased assets are reviewed for
impairment. Impairment loss is recognized if the carrying
amount of leased assets exceeds fair value and is not recoverable.
The carrying amount of leased assets is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to
result from the lease payments and the estimated residual value
upon the eventual disposition of the equipment.
Liability for Mortgage Loan Repurchase Losses
We sell residential mortgage loans to various parties, including
(1) government-sponsored entities (GSEs) Federal Home Loan
Mortgage Corporation (FHLMC) and Federal National Mortgage
Association (FNMA) who include the mortgage loans in GSE-
guaranteed mortgage securitizations, (2) SPEs that issue private
label MBS, and (3) other financial institutions that purchase
mortgage loans for investment or private label securitization. In
addition, we pool Federal Housing Administration (FHA)-
insured and Department of Veterans Affairs (VA)-guaranteed
mortgage loans, which back securities guaranteed by the
Government National Mortgage Association (GNMA).
We may be required to repurchase mortgage loans,
indemnify the securitization trust, investor or insurer, or
reimburse the securitization trust, investor or insurer for credit
losses incurred on loans (collectively “repurchase”) in the event
of a breach of specified contractual representations or warranties
that are not remedied within a period (usually 90 days or less)
after we receive notice of the breach. Our loan sale contracts to
private investors (non-GSE) typically contain an additional
provision where we would only be required to repurchase
148
securitized loans if a breach is deemed to have a material and
adverse effect on the value of the mortgage loan or to the
investors or interests of security holders in the mortgage loan.
We establish 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. Such
factors include default expectations, expected investor
repurchase demands (influenced by current and expected
mortgage loan file requests and mortgage insurance rescission
notices, as well as estimated levels of origination defects) and
appeals success rates (where the investor rescinds the demand
based on a cure of the defect or acknowledges that the loan
satisfies the investor’s applicable representations and
warranties), reimbursement by correspondent and other third
party originators, and projected loss severity. We continually
update our mortgage repurchase liability estimate during the life
of the loans. Although activity can vary by investor, investors
may demand repurchase at any time and there is often a lag from
the date of default to the time we receive a repurchase demand.
The majority of repurchase demands are on loans that default in
the first 24 to 36 months following origination of the mortgage
loan.
The liability for mortgage loan repurchase losses is included
in other liabilities. For additional information on our repurchase
liability, see Note 9.
Pension Accounting
We account for our defined benefit pension plans using an
actuarial model. Two principal assumptions in determining net
periodic pension cost are the discount rate and the expected long
term rate of return on plan assets.
A discount rate is used to estimate the present value of our
future pension benefit obligations. We use a consistent
methodology to determine the discount rate based upon the
yields on multiple portfolios of bonds with maturity dates that
closely match the estimated timing and amounts of the expected
benefit payments for our plans. Such portfolios are derived from
a broad-based universe of high quality corporate bonds as of the
measurement date.
Our determination of the reasonableness of our expected
long-term rate of return on plan assets is highly quantitative by
nature. We evaluate the current asset allocations and expected
returns under two sets of conditions: projected returns using
several forward-looking capital market assumptions, and
historical returns for the main asset classes dating back to 1970
or the earliest period for which historical data was readily
available for the asset classes included. Using long term
historical data allows us to capture multiple economic
environments, which we believe is relevant when using historical
returns. We place greater emphasis on the forward-looking
return and risk assumptions than on historical results. We use
the resulting projections to derive a base line expected rate of
return and risk level for the Cash Balance Plan’s prescribed asset
mix. We evaluate the portfolio based on: (1) the established
target asset allocations over short term (one-year) and longer
term (ten-year) investment horizons, and (2) the range of
potential outcomes over these horizons within specific standard
deviations. We perform the above analyses to assess the
reasonableness of our expected long-term rate of return on plan
assets. We consider the expected rate of return to be a long-term
average view of expected returns. The use of an expected long
term rate of return on plan assets may cause us to recognize
pension income returns that are greater or less than the actual
returns of plan assets in any given year. Differences between
expected and actual returns in each year, if any, are included in
our net actuarial gain or loss amount, which is recognized in
OCI. We generally amortize net actuarial gain or loss in excess of
a 5% corridor from accumulated OCI into net periodic pension
cost over the estimated average remaining participation period,
which at December 31, 2013, is 16 years. See Note 20 for
additional information on our pension accounting.
Income Taxes
We file consolidated and separate company federal income tax
returns, foreign tax returns and various combined and separate
company state tax returns.
We evaluate two components of income tax expense: current
and deferred. Current income tax expense represents our
estimated taxes to be paid or refunded for the current period and
includes income tax expense related to our uncertain tax
positions. We determine deferred income taxes using the
balance sheet method. Under this method, the net deferred tax
asset or liability is based on the tax effects of the differences
between the book and tax bases of assets and liabilities, and
recognizes enacted changes in tax rates and laws in the period in
which they occur. Deferred income tax expense results from
changes in deferred tax assets and liabilities between periods.
Deferred tax assets are recognized subject to management's
judgment that realization is “more likely than not.” Uncertain tax
positions that meet the more likely than not recognition
threshold are measured to determine the amount of benefit to
recognize. An uncertain tax position is measured at the largest
amount of benefit that management believes has a greater than
50% likelihood of realization upon settlement. Tax benefits not
meeting our realization criteria represent unrecognized tax
benefits. Foreign taxes paid are generally applied as credits to
reduce federal income taxes payable. We account for interest and
penalties as a component of income tax expense.
Stock-Based Compensation
We have stock-based employee compensation plans as more
fully discussed in Note 19. Our Long-Term Incentive
Compensation Plan provides for awards of incentive and
nonqualified stock options, stock appreciation rights, restricted
shares, restricted share rights (RSRs), performance share awards
(PSAs) and stock awards without restrictions. For most awards,
we measure the cost of employee services received in exchange
for an award of equity instruments, such as stock options, RSRs
or PSAs, based on the fair value of the award on the grant date.
The cost is normally recognized in our income statement over
the vesting period of the award; awards with graded vesting are
expensed on a straight line method. Awards that continue to vest
after retirement are expensed over the shorter of the period of
time between the grant date and the final vesting period or
between the grant date and when a team member becomes
retirement eligible; awards to team members who are retirement
eligible at the grant date are subject to immediate expensing
upon grant.
In 2013, certain RSRs and all PSAs granted include
discretionary performance based vesting conditions and are
subject to variable accounting. For these awards, the associated
compensation expense fluctuates with changes in our stock
price. For PSAs, compensation expense also fluctuates based on
the estimated outcome of meeting the performance conditionsǤ
Earnings Per Common Share
We compute earnings per common share by dividing net income
(after deducting dividends on preferred stock) by the average
number of common shares outstanding during the year. We
compute diluted earnings per common share by dividing net
income (after deducting dividends and related accretion on
preferred stock) by the average number of common shares
outstanding during the year, plus the effect of common stock
equivalents (for example, stock options, restricted share rights,
convertible debentures and warrants) that are dilutive.
Fair Value of Financial Instruments
We use fair value measurements in our fair value disclosures and
to record certain assets and liabilities at fair value on a recurring
basis, such as trading assets, or on a nonrecurring basis such as
measuring impairment on assets carried at amortized cost.
DETERMINATION OF FAIR VALUE We base our fair values on
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. These fair value
measurements are based on exit prices and determined by
maximizing the use of observable inputs. However, for certain
instruments we must utilize unobservable inputs in determining
fair value due to the lack of observable inputs in the market,
which requires greater judgment in measuring fair value.
In instances where there is limited or no observable market
data, fair value measurements for assets and liabilities are based
primarily upon our own estimates or combination of our own
estimates and third-party vendor or broker pricing, and the
measurements are often calculated based on current pricing for
products we offer or issue, the economic and competitive
environment, the characteristics of the asset or liability and
other such factors. As with any valuation technique used to
estimate fair value, changes in underlying assumptions used,
including discount rates and estimates of future cash flows,
could significantly affect the results of current or future values.
Accordingly, these fair value estimates may not be realized in an
actual sale or immediate settlement of the asset or liability.
We incorporate lack of liquidity into our fair value
measurement based on the type of asset or liability measured
and the valuation methodology used. For example, for certain
residential MHFS and certain securities where the significant
inputs have become unobservable due to illiquid markets and
vendor or broker pricing is not used, we use a discounted cash
flow technique to measure fair value. This technique
incorporates forecasting of expected cash flows (adjusted for
149
Note 1: Summary of Significant Accounting Policies (continued)
credit loss assumptions and estimated prepayment speeds)
discounted at an appropriate market discount rate to reflect the
lack of liquidity in the market that a market participant would
consider. For other securities where vendor or broker pricing is
used, we use either unadjusted broker quotes or vendor prices or
vendor or broker prices adjusted by weighting them with
internal discounted cash flow techniques to measure fair value.
These unadjusted vendor or broker prices inherently reflect any
lack of liquidity in the market, as the fair value measurement
represents an exit price from a market participant viewpoint.
Where markets are inactive and transactions are not orderly,
transaction or quoted prices for assets or liabilities in inactive
markets may require adjustment due to the uncertainty of
whether the underlying transactions are orderly. For items that
use price quotes in inactive markets, we analyze the degree of
market inactivity and distressed transactions to determine the
appropriate adjustment to the price quotes.
We continually assess the level and volume of market activity
in our investment security classes in determining adjustments, if
any, to price quotes. Given market conditions can change over
time, our determination of which securities markets are
considered active or inactive can change. If we determine a
market to be inactive, the degree to which price quotes require
adjustment, can also change. See Note 17 for discussion of the
fair value hierarchy and valuation methodologies applied to
financial instruments to determine fair value.
Derivatives and Hedging Activities
We recognize all derivatives on the balance sheet at fair value.
On the date we enter into a derivative contract, we designate the
derivative as (1) a hedge of the fair value of a recognized asset or
liability, including hedges of foreign currency exposure (“fair
value hedge”), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a
recognized asset or liability (“cash flow hedge”), or (3) held for
trading, customer accommodation or asset/liability risk
management purposes, including economic hedges not
qualifying for hedge accounting. For a fair value hedge, we
record changes in the fair value of the derivative and, to the
extent that it is effective, changes in the fair value of the hedged
asset or liability attributable to the hedged risk, in current period
earnings in the same financial statement category as the hedged
item. For a cash flow hedge, we record changes in the fair value
of the derivative to the extent that it is effective in OCI, with any
ineffectiveness recorded in current period earnings. We
subsequently reclassify these changes in fair value to net income
in the same period(s) that the hedged transaction affects net
income in the same financial statement category as the hedged
item. For free-standing derivatives, we report changes in the fair
values in current period noninterest income.
For fair value and cash flow hedges qualifying for hedge
accounting, we formally document at inception the relationship
between hedging instruments and hedged items, our risk
management objective, strategy and our evaluation of
effectiveness for our hedge transactions. This includes linking all
derivatives designated as fair value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific
forecasted transactions. Periodically, as required, we also
150
formally assess whether the derivative we designated in each
hedging relationship is expected to be and has been highly
effective in offsetting changes in fair values or cash flows of the
hedged item using the regression analysis method or, in limited
cases, the dollar offset method.
We discontinue hedge accounting prospectively when (1) a
derivative is no longer highly effective in offsetting changes in
the fair value or cash flows of a hedged item, (2) a derivative
expires or is sold, terminated or exercised, (3) we elect to
discontinue the designation of a derivative as a hedge, or (4) in a
cash flow hedge, a derivative is de-designated because it is not
probable that a forecasted transaction will occur.
When we discontinue fair value hedge accounting, we no
longer adjust the previously hedged asset or liability for changes
in fair value, and cumulative adjustments to the hedged item are
accounted for in the same manner as other components of the
carrying amount of the asset or liability. If the derivative
continues to be held after fair value hedge accounting ceases, we
carry the derivative on the balance sheet at its fair value with
changes in fair value included in earnings.
When we discontinue cash flow hedge accounting and it is
not probable that the forecasted transaction will not occur, the
accumulated amount reported in OCI at the de-designation date
continues to be reported in OCI until the forecasted transaction
affects earnings. If cash flow hedge accounting is discontinued
and it is probable the forecasted transaction will not occur, the
accumulated amount reported in OCI at the de-designation date
is immediately recognized in earnings. If the derivative
continues to be held after cash flow hedge accounting ceases, we
carry the derivative on the balance sheet at its fair value with
future changes in fair value included in earnings.
We occasionally purchase or originate financial instruments
that contain an embedded derivative. At inception of the
financial instrument, we assess (1) if the economic
characteristics of the embedded derivative are not clearly and
closely related to the economic characteristics of the financial
instrument (host contract), (2) if the financial instrument that
embodies both the embedded derivative and the host contract is
not measured at fair value with changes in fair value reported in
earnings, and (3) if a separate instrument with the same terms as
the embedded instrument would meet the definition of a
derivative. If the embedded derivative meets all of these
conditions, we separate it from the host contract by recording
the bifurcated derivative at fair value and the remaining host
contract at the difference between the basis of the hybrid
instrument and the fair value of the bifurcated derivative. The
bifurcated derivative is carried as a free-standing derivative at
fair value with changes recorded in current period earnings.
By using derivatives, we are exposed to counterparty credit
risk, which is the risk that 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
derivatives subject to master netting arrangements meet the
applicable requirements, including determining the legal
enforceability of the arrangement, it is our policy to present
derivatives balances and related cash collateral amounts net on
the balance sheet. Counterparty credit risk related to derivatives
is considered in determining fair value and our assessment of
hedge effectiveness.
Private Share Repurchases
During 2013 and 2012, we repurchased approximately
40 million shares and 36 million shares, respectively, under
private forward repurchase contracts. We enter into these
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 2013
Comprehensive Capital Analysis and Review (CCAR), and to
provide an economic benefit to the Company.
Our payments to the counterparties for these private share
repurchase 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 2013 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.
In December 2013, we entered into a private forward
repurchase contract and paid $500 million to an unrelated third
party. This contract is expected to settle in first quarter 2014. At
December 31, 2012, we had a $200 million private forward
repurchase contract outstanding that settled in first quarter 2013
for 6 million shares of common stock. Our total number of
outstanding shares of common stock is not reduced until
settlement of the private share repurchase contract.
151
Note 1: Summary of Significant Accounting Policies (continued)
SUPPLEMENTAL CASH FLOW INFORMATION Noncash activities are presented below, including information on transfers affecting
MHFS, LHFS, and MSRs.
(in millions)
Transfers from trading assets to available-for-sale securities
Transfers from (to) loans to (from) available-for-sale securities
Trading assets retained from securitizations of MHFS
Capitalization of MSRs from sale of MHFS
Transfers from MHFS to foreclosed assets
Transfers from loans to MHFS
Transfers from loans to LHFS
Transfers from loans to foreclosed assets (1)
Transfers from available-for-sale to held-to-maturity securities
Transfers from noncontrolling interests to other liabilities
Changes in consolidations (deconsolidations) of variable interest entities:
Trading assets
Available-for-sale securities
Loans
Long-term debt
Consolidation of reverse mortgages previously sold:
Loans
Long-term debt
$
2013
-
(77)
47,198
3,616
127
7,610
274
4,470
6,042
750
1,950
-
(2,268)
(354)
-
-
Year ended December 31,
2012
-
921
85,108
4,988
223
7,584
143
6,114
-
-
-
(40)
(245)
(293)
-
-
2011
47
2,822
61,599
4,089
224
6,305
129
7,594
-
-
-
7
(599)
(628)
5,483
5,425
(1) Includes $2.7 billion, $3.5 billion and $3.4 billion in transfers of government insured/guaranteed loans for the years ended December 31, 2013, 2012 and 2011, respectively.
Prior years have been revised to correct previously reported amounts.
SUBSEQUENT EVENTS We have evaluated the effects of events
that have occurred subsequent to December 31, 2013, and there
have been no material events that would require recognition in
our 2013 consolidated financial statements or disclosure in the
Notes to the consolidated financial statements.
152
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 14.
We did not complete any acquisitions of businesses during
2013. Business combinations completed in 2012 and 2011 are
presented below. Additionally, we had no pending business
combinations as of December 31, 2013.
(in millions)
2012
Date
Assets
EverKey Global Partners Limited / EverKey Global Management LLC /
EverKey Global Partners (GP), LLC / EverKey Global Focus (GP), LLC – Bahamas/New York, New York
January 1
$
Burdale Financial Holdings Limited / Certain Assets of Burdale Capital Finance, Inc. – England/Stamford, Connecticut
Energy Lending Business of BNP Paribas, SA – Houston, Texas
February 1
April 20
7
874
3,639
Merlin Securities, LLC / Merlin Canada LTD. / Certain Assets and Liabilities
of Merlin Group Holdings, LLC – San Francisco, California/Toronto, Ontario
2011
CP Equity, LLC – Denver, Colorado
Certain assets of Foreign Currency Exchange Corp – Orlando, Florida
LaCrosse Holdings, LLC – Minneapolis, Minnesota
Other (1)
(1) Consists of seven acquisitions of insurance brokerage businesses.
August 1
281
$
4,801
July 1
$
August 1
November 30
Various
$
389
46
116
37
588
153
Note 3: Cash, Loan and Dividend Restrictions
Federal Reserve Board (FRB) regulations require that each of
our subsidiary banks maintain reserve balances on deposit with
the Federal Reserve Banks. The average required reserve balance
was $11.8 billion in 2013 and $9.1 billion in 2012.
Federal law restricts the amount and the terms of both credit
and non-credit transactions between a bank and its nonbank
affiliates. They may not exceed 10% of the bank's capital and
surplus (which for this purpose represents Tier 1 and Tier 2
capital, as calculated under the risk-based capital (RBC)
guidelines, plus the balance of the allowance for credit losses
excluded from Tier 2 capital) with any single nonbank affiliate
and 20% of the bank's capital and surplus with all its nonbank
affiliates. Transactions that are extensions of credit may require
collateral to be held to provide added security to the bank. For
further discussion of RBC, see Note 26 in this Report.
Dividends paid by our subsidiary banks are subject to various
federal and state regulatory limitations. Dividends that may be
paid by a national bank without the express approval of the
Office of the Comptroller of the Currency (OCC) are limited to
that bank's retained net profits for the preceding two calendar
years plus retained net profits up to the date of any dividend
declaration in the current calendar year. Retained net profits, as
defined by the OCC, consist of net income less dividends
declared during the period.
We also have a state-chartered subsidiary bank that is subject
to state regulations that limit dividends. Under these provisions
and regulatory limitations, our national and state-chartered
subsidiary banks could have declared additional dividends of
$5.1 billion at December 31, 2013, without obtaining prior
regulatory approval. We have elected to retain capital at our
national and state-chartered subsidiary banks to meet new
regulatory requirements associated with the implementation of
Basel III. Our nonbank subsidiaries are also limited by certain
federal and state statutory provisions and regulations covering
the amount of dividends that may be paid in any given year.
Based on retained earnings at December 31, 2013, our nonbank
subsidiaries could have declared additional dividends of
$7.7 billion at December 31, 2013, without obtaining prior
approval.
The FRB published clarifying supervisory guidance in first
quarter 2009, SR 09-4 Applying Supervisory Guidance and
Regulations on the Payment of Dividends, Stock Redemptions,
and Stock Repurchases at Bank Holding Companies, pertaining
to FRB's criteria, assessment and approval process for
reductions in capital. The FRB supplemented this guidance with
the Capital Plan Rule issued in fourth quarter 2011 (codified at
12 CFR 225.8 of Regulation Y) that establishes capital planning
and prior notice and approval requirements for capital
distributions including dividends by certain bank holding
companies. The effect of this guidance is to require the approval
of the FRB (or specifically under the Capital Plan Rule, a notice
of non-objection) for the Company to repurchase or redeem
common or perpetual preferred stock as well as to raise the per
share quarterly dividend from its current level of $0.30 per
share as declared by the Company’s Board of Directors on
January 28, 2014, payable on March 1, 2014.
Note 4: 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 December 31, 2013
and 2012, were held at the Federal Reserve.
(in millions)
Federal funds sold and securities
Dec. 31,
Dec. 31,
2013
2012
purchased under resale agreements
$
25,801
Interest-earning deposits
Other short-term investments
186,249
1,743
33,884
102,408
1,021
Total
$
213,793
137,313
We have classified securities purchased under long-term
resale agreements (generally one year or more), which totaled
$10.1 billion and $9.5 billion at December 31, 2013 and 2012,
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 14.
154
Note 5: 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. There were no securities
classified as held-to-maturity as of December 31, 2012.
(in millions)
December 31, 2013
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized loan and other debt obligations (1)
Other (2)
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total available-for-sale securities
Held-to-maturity securities:
Federal agency mortgage-backed securities
Other (2)
Total held-to-maturity securities
Total (3)
December 31, 2012
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized loan and other debt obligations (1)
Other (2)
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total (3)
Gross
unrealized
gains
Gross
unrealized
losses
Cost
Fair
value
$
6,592
42,171
17
1,092
(329)
(727)
6,280
42,536
119,303
11,060
17,689
1,902
1,433
1,173
(3,614)
(40)
(115)
117,591
12,453
18,747
148,052
4,508
(3,769)
148,791
20,391
19,610
9,232
976
642
426
(140)
(93)
(29)
21,227
20,159
9,629
246,048
7,661
(5,087)
248,622
1,703
336
222
1,188
2,039
1,410
(60)
(4)
(64)
1,865
1,520
3,385
248,087
9,071
(5,151)
252,007
6,304
6,042
12,346
-
-
-
(99)
-
(99)
6,205
6,042
12,247
$
260,433
9,071
(5,250)
264,254
$
7,099
37,120
47
2,000
-
(444)
7,146
38,676
92,855
14,178
18,438
4,434
1,802
1,798
(4)
(49)
(268)
97,285
15,931
19,968
125,471
8,034
(321)
133,184
20,120
12,726
18,410
1,282
557
553
(69)
(95)
(76)
21,333
13,188
18,887
220,946
12,473
(1,005)
232,414
1,935
402
2,337
281
216
497
(40)
(9)
(49)
2,176
609
2,785
$
223,283
12,970
(1,054)
235,199
(1) Includes collateralized debt obligations (CDOs) with a cost basis and fair value of $509 million and $693 million, respectively, at December 31, 2013, and $556 million and
$644 million, respectively at December 31, 2012.
(2) Included in the “Other” category of available-for-sale securities are asset-backed securities collateralized by auto leases or loans and cash reserves with a cost basis and fair
value of $500 million and $513 million, respectively, at December 31, 2013, and $5.9 billion each at December 31, 2012. The remaining balances in the “Other” category of
available-for-sale securities primarily include asset-backed securities collateralized by credit cards, student loans and home equity loans. 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 $4.3 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 $1.7 billion each at December 31, 2013.
(3) At December 31, 2013 and 2012, we held no securities of any single issuer (excluding the U.S. Treasury and federal agencies) with a book value that exceeded 10% of
stockholders’ equity.
155
Note 5: 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.
(in millions)
December 31, 2013
Available-for-sale securities:
Less than 12 months
12 months or more
Gross
unrealized
losses
Gross
Gross
Fair
value
unrealized
losses
Fair
value
unrealized
losses
Total
Fair
value
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
$
(329)
(399)
5,786
9,238
-
(328)
-
4,120
(329)
(727)
5,786
13,358
Mortgage-backed securities:
Federal agencies
Residential
Commercial
(3,562)
67,045
(18)
(15)
1,242
2,128
(52)
(22)
(100)
1,132
232
2,027
(3,614)
68,177
(40)
(115)
1,474
4,155
Total mortgage-backed securities
(3,595)
70,415
(174)
3,391
(3,769)
73,806
Corporate debt securities
Collateralized loan and other debt obligations
Other
(85)
(55)
(11)
2,542
7,202
1,690
(55)
(38)
(18)
428
343
365
(140)
(93)
(29)
2,970
7,545
2,055
Total debt securities
(4,474)
96,873
(613)
8,647
(5,087)
105,520
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
(28)
(4)
(32)
424
34
458
(32)
308
-
-
(32)
308
(60)
(4)
(64)
732
34
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
Total held-to-maturity securities
(99)
6,153
(99)
6,153
-
-
-
-
(99)
6,153
(99)
6,153
Total
$
(4,605)
103,484
(645)
8,955
(5,250)
112,439
December 31, 2012
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
$
-
-
-
-
-
-
Securities of U.S. states and political subdivisions
(55)
2,709
(389)
4,662
(444)
7,371
Mortgage-backed securities:
Federal agencies
Residential
Commercial
(4)
(4)
(6)
2,247
261
491
-
(45)
(262)
-
1,564
2,564
(4)
(49)
(268)
2,247
1,825
3,055
Total mortgage-backed securities
(14)
2,999
(307)
4,128
(321)
7,127
Corporate debt securities
Collateralized loan and other debt obligations
Other
(14)
(2)
(11)
1,217
1,485
2,153
(55)
(93)
(65)
305
798
1,010
(69)
(95)
(76)
1,522
2,283
3,163
Total debt securities
(96)
10,563
(909)
10,903
(1,005)
21,466
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
(3)
(9)
(12)
116
48
164
(37)
-
(37)
538
-
538
(40)
(9)
(49)
654
48
702
Total
$
(108)
10,727
(946)
11,441
(1,054)
22,168
156
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.
See Note 1 – “Investments” for the factors that we consider in
our analysis of OTTI for debt and equity securities.
SECURITIES OF U.S. TREASURY AND FEDERAL AGENCIES
AND FEDERAL AGENCY MORTGAGE-BACKED SECURITIES
(MBS) The unrealized losses associated with U.S. Treasury and
federal agency securities and federal agency MBS are primarily
driven by changes in interest rates and not due to credit losses
given the explicit or implicit guarantees provided by the U.S.
government.
SECURITIES OF U.S. STATES AND POLITICAL
SUBDIVISIONS The unrealized losses associated with securities
of U.S. states and political subdivisions are primarily driven by
changes in the relationship between municipal and term funding
credit curves rather than by changes to the credit quality of the
underlying securities. Substantially all of these investments are
investment grade. The securities were generally underwritten in
accordance with our own investment standards prior to the
decision to purchase. Some of these securities are guaranteed by
a bond insurer, but we did not rely on this guarantee in making
our investment decision. These investments will continue to be
monitored as part of our ongoing impairment analysis, but are
expected to perform, even if the rating agencies reduce the credit
rating of the bond insurers. As a result, we expect to recover the
entire amortized cost basis of these securities.
RESIDENTIAL AND COMMERCIAL MBS The unrealized losses
associated with private residential MBS and commercial MBS
are primarily driven by changes in projected collateral losses,
credit spreads and interest rates. We assess for credit
impairment by estimating the present value of expected cash
flows. The key assumptions for determining expected cash flows
include default rates, loss severities and/or prepayment rates.
We estimate losses to a security by forecasting the underlying
mortgage loans in each transaction. We use forecasted loan
performance to project cash flows to the various tranches in the
structure. We also consider cash flow forecasts and, as
applicable, independent industry analyst reports and forecasts,
sector credit ratings, and other independent market data. Based
upon our assessment of the expected credit losses and the credit
enhancement level of the securities, we expect to recover the
entire amortized cost basis of these securities.
CORPORATE DEBT SECURITIES The unrealized losses
associated with corporate debt securities are primarily related to
unsecured debt obligations issued by various corporations. We
evaluate the financial performance of each issuer on a quarterly
basis to determine that the issuer can make all contractual
principal and interest payments. Based upon this assessment, we
expect to recover the entire amortized cost basis of these
securities.
COLLATERALIZED LOAN AND OTHER DEBT OBLIGATIONS
The unrealized losses associated with collateralized loan and
other debt obligations relate to securities primarily backed by
commercial, residential or other consumer collateral. The
unrealized losses are primarily driven by changes in projected
collateral losses, credit spreads and interest rates. We assess for
credit impairment by estimating the present value of expected
cash flows. The key assumptions for determining expected cash
flows include default rates, loss severities and prepayment rates.
We also consider cash flow forecasts and, as applicable,
independent industry analyst reports and forecasts, sector credit
ratings, and other independent market data. Based upon our
assessment of the expected credit losses and the credit
enhancement level of the securities, we expect to recover the
entire amortized cost basis of these securities.
OTHER DEBT SECURITIES The unrealized losses associated
with other debt securities primarily relate to other asset-backed
securities. The losses are primarily driven by changes in
projected collateral losses, credit spreads and interest rates. We
assess for credit impairment by estimating the present value of
expected cash flows. The key assumptions for determining
expected cash flows include default rates, loss severities and
prepayment rates. Based upon our assessment of the expected
credit losses and the credit enhancement level of the securities,
we expect to recover the entire amortized cost basis of these
securities.
MARKETABLE EQUITY SECURITIES Our marketable equity
securities include investments in perpetual preferred securities,
which provide attractive tax-equivalent yields. We evaluated
these hybrid financial instruments with investment-grade
ratings for impairment using an evaluation methodology similar
to that used for debt securities. Perpetual preferred securities are
not considered to be other-than-temporarily impaired if there is
no evidence of credit deterioration or investment rating
downgrades of any issuers to below investment grade, and we
expect to continue to receive full contractual payments. We will
continue to evaluate the prospects for these securities for
recovery in their market value in accordance with our policy for
estimating OTTI. We have recorded impairment write-downs on
perpetual preferred securities where there was evidence of credit
deterioration.
OTHER INVESTMENT SECURITIES MATTERS The fair values
of our investment securities could decline in the future if the
underlying performance of the collateral for the residential and
commercial MBS or other securities deteriorate and our credit
enhancement levels do not provide sufficient protection to our
contractual principal and interest. As a result, there is a risk that
significant OTTI may occur in the future.
157
Note 5: Investment Securities (continued)
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 $18 million and $1.9
billion, respectively, at December 31, 2013, and $19 million and
$2.0 billion, respectively, at December 31, 2012. If an internal
credit grade was not assigned, we categorized the security as
non-investment grade.
(in millions)
December 31, 2013
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Investment grade
Non-investment grade
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
$
(329)
(671)
5,786
12,915
(3,614)
68,177
(2)
(46)
177
3,364
-
(56)
-
(38)
(69)
-
443
-
1,297
791
Total mortgage-backed securities
(3,662)
71,718
(107)
2,088
Corporate debt securities
Collateralized loan and other debt obligations
Other
Total debt securities
Perpetual preferred securities
(96)
(72)
(19)
2,343
7,376
1,874
(44)
(21)
(10)
627
169
181
(4,849)
102,012
(238)
3,508
(60)
732
-
-
Total available-for-sale securities
(4,909)
102,744
(238)
3,508
Held-to-maturity securities:
Federal agency mortgage-backed securities
Total held-to-maturity securities
(99)
6,153
(99)
6,153
-
-
-
-
Total
$
(5,008)
108,897
(238)
3,508
December 31, 2012
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized loan and other debt obligations
Other
Total debt securities
Perpetual preferred securities
Total
158
$
-
-
(378)
6,839
(4)
(3)
(31)
2,247
78
2,110
-
(66)
-
(46)
(237)
-
532
-
1,747
945
(38)
4,435
(283)
2,692
(19)
(49)
(49)
(533)
(40)
1,112
2,065
3,034
17,485
654
(50)
(46)
(27)
410
218
129
(472)
3,981
-
-
$
(573)
18,139
(472)
3,981
Contractual Maturities
The following table shows the remaining contractual maturities
and contractual weighted-average yields (taxable-equivalent
basis) of 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.
(in millions)
amount
Yield
Amount Yield
Amount Yield
Amount Yield
Amount Yield
Total
Within one year
After one year
through five years
After five years
through ten years
After ten years
Remaining contractual maturity
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
Residential
Commercial
117,591
12,453
18,747
3.33
4.31
5.24
1 7.14
-
-
-
-
398 2.71
-
52 3.33
-
956 3.46
113 5.43
59 0.96
116,236 3.33
12,340 4.30
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
Collateralized loan and
other debt obligations
Other
Total debt securities
21,227
4.18
6,136 2.06
7,255 4.22
6,528 5.80
1,308 5.77
20,159
9,629
1.59
1.80
40 0.25
906 2.53
1,100 0.63
2,977 1.74
7,750 1.29
1,243 1.64
11,269 1.89
4,503 1.73
at fair value
$ 248,622
3.69 % $ 12,084 1.99 % $ 20,384 2.75 % $ 25,293 3.14 % $ 190,861 3.97 %
Held-to-maturity securities (1):
Federal agency mortgage-
backed securities (2)
Other (3)
Total held-to-maturity
$
6,205
6,042
3.90 % $
1.89
-
- % $
195 1.72
-
4,468 1.87
- % $
-
1,379 1.98
- % $
6,205 3.90 %
-
-
securities at fair value $
12,247
2.92 % $
195 1.72 % $
4,468 1.87 % $
1,379 1.98 % $
6,205 3.90 %
December 31, 2012
Available-for-sale securities:
Securities of U.S. Treasury
and federal agencies
Securities of U.S. states and
$
7,146
1.59 % $
376 0.43 % $
661 1.24 % $
6,109 1.70 % $
-
- %
political subdivisions
38,676
5.29
1,861 2.61
11,620 2.18
3,380 5.51
21,815 7.15
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed
97,285
15,931
19,968
3.82
4.38
5.33
1 5.40
-
-
-
-
106 4.87
-
78 3.69
-
1,144 3.41
569 2.06
101 2.84
96,034 3.83
15,362 4.47
19,789 5.35
securities
133,184
4.12
1 5.40
184 4.37
1,814 2.95
131,185 4.13
Corporate debt securities
Collateralized loan and
other debt obligations
Other
Total debt securities
21,333
4.26
1,037 4.29
12,792 3.19
6,099 6.14
1,405 5.88
13,188
18,887
1.35
1.85
44 0.96
1,715 1.14
1,246 0.71
9,589 1.75
7,376 1.01
3,274 2.11
4,522 2.08
4,309 2.14
at fair value
$ 232,414
3.91 % $
5,034 2.28 % $ 36,092 2.37 % $ 28,052 3.07 % $ 163,236 4.44 %
(1) Weighted-average yields displayed by maturity bucket are weighted based on fair value for available-for-sale securities and amortized cost for held-to-maturity securities.
(2) Total amortized cost of federal agency mortgage-backed securities was $6.3 billion at December 31, 2013, with a remaining contractual maturity of after ten years.
(3) Total amortized cost of other debt securities was $6.0 billion at December 31, 2013, with remaining contractual maturities of within one year, after one year through five
years, and after five years through ten years of $0.2 billion, $4.4 billion and $1.4 billion, respectively, at December 31, 2013.
159
Note 5: Investment Securities (continued)
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 7 – Other Assets).
(in millions)
Gross realized gains
Gross realized losses
OTTI write-downs
Net realized gains from investment securities
Net realized gains from nonmarketable equity investments
Year ended December 31,
2013
2012
2011
$
492
(24)
600
(73)
1,305
(70)
(183)
(256)
(541)
285
271
694
1,158
1,086
842
Net realized gains from debt securities and equity investments
$
1,443
1,357
1,536
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.
Year ended December 31,
2013
2012
2011
$
2
1
72
53
4
-
26
16
-
84
86
11
1
42
2
-
252
101
3
1
64
158
240
423
-
25
25
183
161
344
12
4
16
256
160
416
96
22
118
541
170
711
(in millions)
OTTI write-downs included in earnings
Debt securities:
U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Corporate debt securities
Collateralized loan and other debt obligations
Other debt securities
Total debt securities
Equity securities:
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total investment securities
Nonmarketable equity investments
Total OTTI write-downs included in earnings
$
160
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.
(in millions)
OTTI on debt securities
Recorded as part of gross realized losses:
Credit-related OTTI
Intent-to-sell OTTI
Total recorded as part of gross realized losses
Changes to OCI for increase (decrease) in non-credit-related OTTI (1):
U.S. states and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Corporate debt securities
Collateralized loan and other debt obligations
Other debt securities
Total changes to OCI for non-credit-related OTTI
Total OTTI losses recorded on debt securities
Year ended December 31,
2013
2012
2011
$
107
51
158
(2)
(27)
(90)
-
(1)
1
237
3
240
1
(178)
(88)
1
(1)
28
(119)
(237)
$
39
3
422
1
423
(1)
(171)
105
2
4
(13)
(74)
349
(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 factors other than credit.
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.
(in millions)
Year ended December 31,
2013
2012
2011
Credit loss component, beginning of year
$
1,289
1,272
1,043
Additions:
Initial credit impairments
Subsequent credit impairments
Total additions
Reductions:
For securities sold or matured
For securities derecognized due to changes in consolidation status of variable interest entities
For recoveries of previous credit impairments (1)
Total reductions
Credit loss component, end of year
21
86
107
(194)
-
(31)
(225)
55
182
237
(194)
-
(26)
(220)
87
335
422
(160)
(2)
(31)
(193)
$
1,171
1,289
1,272
(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.
161
Note 5: Investment Securities (continued)
To determine credit impairment losses for asset-backed
securities (e.g., residential MBS, commercial MBS), we estimate
expected future cash flows of the security by estimating the
expected future cash flows of the underlying collateral and
applying those collateral cash flows, together with any credit
enhancements such as subordinated interests owned by third
parties, to the security. The expected future cash flows of the
underlying collateral are determined using the remaining
contractual cash flows adjusted for future expected credit losses
(which consider current delinquencies and nonperforming assets
(NPAs), future expected default rates and collateral value by
vintage and geographic region) and prepayments. The expected
cash flows of the security are then discounted at the security’s
current effective interest rate to arrive at a present value
amount. Total credit impairment losses on residential MBS that
we do not intend to sell are shown in the table below. The table
also presents a summary of the significant inputs considered in
determining the measurement of the credit loss component
recognized in earnings for residential MBS.
($ in millions)
Credit impairment losses on residential MBS
Investment grade
Non-investment grade
Total credit impairment losses on residential MBS
Significant inputs (non-agency – non-investment grade MBS)
Expected remaining life of loan loss rate (1):
Range (2)
Credit impairment loss rate distribution (3):
0 - 10% range
10 - 20% range
20 - 30% range
Greater than 30%
Weighted average loss rate (4)
Current subordination levels (5):
Range (2)
Weighted average (4)
Prepayment speed (annual CPR (6)):
Range (2)
Weighted average (4)
Year ended December 31,
2013
2012
2011
$
$
-
72
72
-
84
84
5
247
252
0-20 %
1-44
0-48
91
8
1
-
6
0-41
-
4-27
16
77
11
4
8
8
0-57
2
5-29
15
42
18
28
12
12
0-25
4
3-19
11
(1) Represents future expected credit losses on each pool of loans underlying respective securities expressed as a percentage of the total current outstanding loan balance of the
pool for each respective security.
(2) Represents the range of inputs/assumptions based upon the individual securities within each category.
(3) Represents distribution of credit impairment losses recognized in earnings categorized based on range of expected remaining life of loan losses. For example 91% of credit
impairment losses recognized in earnings for the year ended December 31, 2013, had expected remaining life of loan loss assumptions of 0 to 10%.
(4) Calculated by weighting the relevant input/assumption for each individual security by current outstanding amortized cost basis of the security.
(5) Represents current level of credit protection provided by tranches subordinate to our security holdings (subordination), expressed as a percentage of total current underlying
loan balance.
(6) Constant prepayment rate.
Total credit impairment losses on commercial MBS that we
do not intend to sell were $28 million, $86 million, and
$101 million for the years ended December 31, 2013, 2012 and
2011, respectively. Significant inputs considered in determining
the credit impairment losses for commercial MBS are the
expected remaining life of loan loss rates and current
subordination levels. Prepayment activity on commercial MBS
does not significantly impact the determination of their credit
impairment because, unlike residential MBS, commercial MBS
experience significantly lower prepayments due to certain
contractual restrictions, impacting the borrower’s ability to
prepay the mortgage. The expected remaining life of loan loss
rates for commercial MBS with credit impairment losses ranged
from 4% to 15%, 3% to 18%, and 4% to 18%, while the current
subordination level ranges were 0% to 21%, 0% to 13%, and 3%
to 15% for the years ended December 31, 2013, 2012 and 2011,
respectively.
162
Note 6: 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 $6.4 billion and $7.4 billion at
December 31, 2013 and December 31, 2012, respectively, for
unearned income, net deferred loan fees, and unamortized
discounts and premiums. Outstanding balances also include PCI
loans net of any remaining purchase accounting adjustments.
Information about PCI loans is presented separately in the
“Purchased Credit-Impaired Loans” section of this Note.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign (1)
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans
2013
2012
2011
2010
2009
December 31,
$
197,210
187,759
167,216
151,284
158,352
107,100
16,747
12,034
47,665
106,340
16,904
12,424
37,771
105,975
19,382
13,117
39,760
99,435
25,333
13,094
32,912
97,527
36,978
14,210
29,398
380,756
361,198
345,450
322,058
336,465
258,497
249,900
228,894
230,235
229,536
65,914
26,870
50,808
42,954
75,465
24,640
45,998
42,373
85,991
22,836
43,508
42,952
96,149
22,260
43,516
43,049
103,708
24,003
42,624
46,434
445,043
438,376
424,181
435,209
446,305
$
825,799
799,574
769,631
757,267
782,770
(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 Concentrations
Loan concentrations may exist when there are amounts loaned
to borrowers engaged in similar activities or similar types of
loans extended to a diverse group of borrowers that would cause
them to be similarly impacted by economic or other conditions.
At December 31, 2013 and 2012, we did not have concentrations
representing 10% or more of our total loan portfolio in domestic
commercial and industrial loans and lease financing by industry
or CRE loans (real estate mortgage and real estate construction)
by state or property type. Our real estate 1-4 family mortgage
loans to borrowers in the state of California represented
approximately 13% of total loans at both December 31, 2013
and 2012, of which 2% were PCI loans in both years. These
California loans are generally diversified among the larger
metropolitan areas in California, with no single area consisting
of more than 3% of total loans. We continuously 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.
Some of our real estate 1-4 family first and junior lien
mortgage loans include an interest-only feature as part of the
loan terms. These interest-only loans were approximately 15% of
total loans at December 31, 2013, and 18% at December 31, 2012.
Substantially all of these interest-only loans at origination were
considered to be prime or near prime. We do not offer option
adjustable-rate mortgage (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. We acquired an option
payment loan portfolio (Pick-a-Pay) from Wachovia at
December 31, 2008. A majority of the portfolio was identified as
PCI loans. Since the acquisition, we have reduced our exposure
to the option payment portion of the portfolio through our
modification efforts and loss mitigation actions. At
December 31, 2013, approximately 3% of total loans remained
with the payment option feature compared with 10% at
December 31, 2008.
Our first and junior 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 total outstanding
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. At December 31, 2013, our lines of credit portfolio
had an outstanding balance of $75.7 billion, of which
$3.9 billion, or 5%, is in its amortization period, another
$11.6 billion, or 15%, of our total outstanding balance, will reach
their end of draw period during 2014 through 2015,
$22.8 billion, or 30%, during 2016 through 2018, and
$37.4 billion, or 50%, will convert in subsequent years. This
portfolio had unfunded credit commitments of $73.6 billion at
December 31, 2013. The lines that enter their amortization
period may experience higher delinquencies and higher loss
163
Note 6: Loans and Allowance for Credit Losses (continued)
rates than the ones in their draw period. At December 31, 2013,
$274 million, or 7%, of outstanding lines of credit that are in
their amortization period were 30 or more days past due,
compared with $1.5 billion, or 2%, for lines in their draw 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.
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
market. 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.
(in millions)
Purchases (1)
Sales
Transfers to MHFS/LHFS (1)
Year ended December 31,
2013
2012
Commercial Consumer
Total
Commercial Consumer
Total
$
10,914
(6,740)
(258)
581
11,495
(514)
(7,254)
(11)
(269)
12,280
(5,840)
(84)
167
(840)
(21)
12,447
(6,680)
(105)
(1) The “Purchases” and “Transfers to MHFS/LHFS" categories exclude activity in government insured/guaranteed 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 $8.2 billion and $9.8 billion
for the year ended 2013 and 2012, respectively.
164
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 December 31, 2013.
We issue commercial letters of credit to assist customers in
purchasing goods or services, typically for international trade. At
December 31, 2013 and 2012, we had $1.2 billion and
$1.5 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 14 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 certain loans and commitments to lend, we may require
collateral or a guarantee, based on our assessment of a
customer’s credit risk. 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 asset, such as equipment and other
business assets. Collateral requirements for each loan or
commitment may vary according to the specific credit
underwriting, including terms and structure of loans funded
immediately or under a commitment to fund at a later date.
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.
(in millions)
Commercial:
Dec. 31,
Dec. 31,
2013
2012
Commercial and industrial
$
238,962
215,626
Real estate mortgage
Real estate construction
Foreign
5,910
12,593
12,216
6,165
9,109
8,423
Total commercial
269,681
239,323
Consumer:
Real estate 1-4 family first mortgage
32,908
42,657
Real estate 1-4 family
junior lien mortgage
Credit card
Other revolving credit and installment
47,668
78,961
24,213
50,934
70,960
19,791
Total consumer
183,750
184,342
Total unfunded
credit commitments
$
453,431
423,665
165
Note 6: Loans and Allowance for Credit Losses (continued)
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:
(in millions)
Balance, beginning of year
Provision for credit losses
Interest income on certain impaired loans (1)
Loan charge-offs:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loan charge-offs
Loan recoveries:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loan recoveries
Year ended December 31,
2013
2012
2011
2010
2009
$
17,477
2,309
(264)
19,668
7,217
23,463
7,899
25,031
15,753
21,711
21,668
(315)
(332)
(266)
-
(715)
(190)
(28)
(33)
(27)
(1,306)
(1,598)
(2,775)
(3,365)
(382)
(191)
(24)
(111)
(636)
(351)
(38)
(173)
(1,151)
(1,189)
(670)
(1,063)
(120)
(198)
(229)
(237)
(993)
(2,014)
(2,796)
(5,433)
(5,564)
(1,439)
(3,013)
(3,883)
(4,900)
(3,318)
(1,578)
(3,437)
(3,763)
(4,934)
(4,812)
(1,022)
(1,101)
(1,449)
(2,396)
(2,708)
(625)
(753)
(651)
(757)
(799)
(925)
(1,308)
(2,063)
(1,129)
(1,360)
(5,417)
(8,959)
(10,819)
(14,667)
(14,261)
(6,410)
(10,973)
(13,615)
(20,100)
(19,825)
380
227
137
16
27
787
245
269
126
321
153
461
163
124
19
32
799
157
259
185
362
177
419
143
146
24
45
777
405
218
251
439
226
427
68
110
20
53
678
522
211
218
499
219
254
33
16
20
40
363
185
174
180
564
191
1,114
1,901
1,140
1,539
1,669
1,294
1,939
2,316
2,347
1,657
Net loan charge-offs (2)
(4,509)
(9,034)
(11,299)
(17,753)
(18,168)
Allowances related to business combinations/other (3)
(42)
(59)
(63)
698
(180)
Balance, end of year
Components:
Allowance for loan losses
Allowance for unfunded credit commitments
Allowance for credit losses (4)
Net loan charge-offs as a percentage of average total loans (2)
Allowance for loan losses as a percentage of total loans (4)
Allowance for credit losses as a percentage of total loans (4)
$
14,971
17,477
19,668
23,463
25,031
$
$
14,502
17,060
19,372
23,022
24,516
469
417
296
441
515
14,971
17,477
19,668
23,463
25,031
0.56 %
1.76
1.81
1.17
2.13
2.19
1.49
2.52
2.56
2.30
3.04
3.10
2.21
3.13
3.20
(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) Includes $693 million for the year ended December 31, 2010, related to the adoption of consolidation accounting guidance on January 1, 2010.
(4) The allowance for credit losses includes $30 million, $117 million, $231 million, $298 million and $333 million at December 31, 2013, 2012, 2011, 2010, and 2009,
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.
166
The following table summarizes the activity in the allowance for credit losses by our commercial and consumer portfolio segments.
Year ended December 31,
(in millions)
Commercial Consumer
Total
Commercial
Consumer
2013
2012
Total
Balance, beginning of period
Provision for credit losses
Interest income on certain impaired loans
$
5,714
671
(54)
11,763
1,638
(210)
17,477
2,309
(264)
6,358
666
(95)
13,310
6,551
19,668
7,217
(220)
(315)
Loan charge-offs
Loan recoveries
(993)
787
(5,417)
1,114
(6,410)
1,901
(2,014)
799
(8,959)
1,140
(10,973)
1,939
Net loan charge-offs
(206)
(4,303)
(4,509)
(1,215)
(7,819)
(9,034)
Allowance related to business combinations/other
(22)
(20)
(42)
-
(59)
(59)
Balance, end of period
$
6,103
8,868
14,971
5,714
11,763
17,477
The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
(in millions)
December 31, 2013
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
December 31, 2012
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
Allowance for credit losses
Recorded investment in loans
Commercial
C
onsumer
Total
Commercial
Consumer
Total
$
4,921
1,156
26
5,011
9,932
372,918
398,084 771,002
3,853
5,009
4
30
5,334
2,504
22,736
28,070
24,223
26,727
$
6,103
8,868
14,971
380,756
445,043 825,799
$
$
3,951
1,675
88
7,524
11,475
349,035
389,559
738,594
4,210
5,885
29
117
8,186
3,977
21,826
30,012
26,991
30,968
5,714
11,763
17,477
361,198
438,376
799,574
(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 September
30, 2013. 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 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 $12.7 billion in
criticized commercial real estate (CRE) loans at
December 31, 2013, $2.7 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.
167
Note 6: Loans and Allowance for Credit Losses (continued)
(in millions)
December 31, 2013
By risk category:
Pass
Criticized
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
Commercial
Real
Real
and
industrial
estate
mortgage
estate
construction
Lease
financing
Foreign
Total
$
182,072
14,923
94,992
10,972
196,995
215
105,964
1,136
14,594
1,720
16,314
433
11,577
457
12,034
-
44,208
2,737
347,443
30,809
46,945
720
378,252
2,504
Total commercial loans
$
197,210
107,100
16,747
12,034
47,665
380,756
December 31, 2012
By risk category:
Pass
Criticized
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
$
169,293
18,207
187,500
259
87,183
17,187
104,370
1,970
12,224
3,803
16,027
877
11,787
637
12,424
-
35,380
1,520
36,900
871
315,867
41,354
357,221
3,977
Total commercial loans
$
187,759
106,340
16,904
12,424
37,771
361,198
The following table provides past due information for
commercial loans, which we monitor as part of our credit risk
management practices.
(in millions)
December 31, 2013
By delinquency status:
Commercial
and
Real
estate
Real
estate
Lease
industrial
mortgage
construction
financing
Foreign
Total
Current-29 DPD and still accruing
$ 195,908
103,139
15,698
11,972
46,898
373,615
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
338
11
738
538
35
2,252
103
97
416
33
-
29
7
-
40
1,019
143
3,475
Total commercial loans (excluding PCI)
196,995
105,964
16,314
12,034
46,945
378,252
Total commercial PCI loans (carrying value)
215
1,136
433
-
720
2,504
Total commercial loans
$ 197,210
107,100
16,747
12,034
47,665
380,756
December 31, 2012
By delinquency status:
Current-29 DPD and still accruing
$
185,614
100,317
14,861
12,344
36,837
349,973
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
417
47
1,422
503
228
3,322
136
27
1,003
53
-
27
12
1
50
1,121
303
5,824
Total commercial loans (excluding PCI)
187,500
104,370
16,027
12,424
36,900
357,221
Total commercial PCI loans (carrying value)
259
1,970
877
-
871
3,977
Total commercial loans
$
187,759
106,340
16,904
12,424
37,771
361,198
168
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.
(in millions)
December 31, 2013
By delinquency status:
Current-29 DPD
30-59 DPD
60-89 DPD
90-119 DPD
120-179 DPD
180+ DPD
Government insured/guaranteed loans (1)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
Real estate
Real estate
1-4 family
first
1-4 family
junior lien
Credit
Other
revolving
credit and
mortgage
mortgage
card Automobile
installment
Total
$
193,361
64,194
26,203
49,699
31,866
365,323
2,784
1,157
587
747
5,024
30,737
461
253
182
216
485
-
202
144
124
196
1
-
852
186
66
4
1
-
178
111
76
20
7
4,477
1,851
1,035
1,183
5,518
10,696
41,433
234,397
65,791
26,870
50,808
42,954
420,820
24,100
123
-
-
-
24,223
Total consumer loans
$
258,497
65,914
26,870
50,808
42,954
445,043
December 31, 2012
By delinquency status:
Current-29 DPD
30-59 DPD
60-89 DPD
90-119 DPD
120-179 DPD
180+ DPD
Government insured/guaranteed loans (1)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
$
179,870
73,256
23,976
44,973
29,546
351,621
3,295
1,528
853
1,141
6,655
29,719
223,061
26,839
577
339
265
358
518
-
211
143
122
187
1
-
798
164
57
5
1
-
168
108
73
28
4
5,049
2,282
1,370
1,719
7,179
12,446
42,165
75,313
24,640
45,998
42,373
411,385
152
-
-
-
26,991
Total consumer loans
$
249,900
75,465
24,640
45,998
42,373
438,376
(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 $20.8 billion at December 31 2013, compared with $20.2 billion at December 31, 2012. Student loans 90+ DPD totaled $900 million at December 31, 2013,
compared with $1.1 billion at December 31, 2012.
Of the $7.7 billion of consumer loans not government
insured/guaranteed that are 90 days or more past due at
December 31, 2013, $902 million was accruing, compared with
$10.3 billion past due and $1.1 billion accruing at
December 31, 2012.
Real estate 1-4 family first mortgage loans 180 days or more
past due totaled $5.0 billion, or 2.1% of total first mortgages
(excluding PCI), at December 31, 2013, compared with
$6.7 billion, or 3.0%, at December 31, 2012.
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 $5.0 billion at December 31, 2013, and
$5.4 billion at December 31, 2012.
169
Note 6: Loans and Allowance for Credit Losses (continued)
(in millions)
December 31, 2013
By updated FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
FICO not required
Government insured/guaranteed loans (1)
Real estate
R
eal estate
1-4 family
first
1-4 family
junior lien
Credit
Other
revolving
credit and
mortgage
mortgage
card Automobile
installment
Total
$
14,128
9,030
14,917
24,336
32,991
72,062
33,311
2,885
-
30,737
5,047
3,247
5,984
10,042
13,575
19,238
7,705
953
-
-
2,404
2,175
4,176
5,398
5,530
4,535
2,408
244
-
-
8,400
5,925
8,827
8,992
6,546
6,313
5,397
408
-
956
30,935
1,015
2,156
3,914
5,263
6,828
5,127
1,992
5,007
21,392
36,060
52,682
63,905
108,976
53,948
6,482
5,007
-
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
December 31, 2012
By updated FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
FICO not required
Government insured/guaranteed loans (1)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
$
17,662
10,208
15,764
24,725
31,502
63,946
26,044
3,491
-
29,719
6,122
3,660
6,574
11,361
15,992
21,874
8,526
1,204
-
-
2,314
1,961
3,772
4,990
5,114
4,109
2,223
157
-
-
7,928
1,163
35,189
5,451
8,142
7,949
5,787
5,400
4,443
898
-
-
952
2,011
3,691
4,942
6,971
1,912
2,882
5,403
22,232
36,263
52,716
63,337
102,300
43,148
8,632
5,403
12,446
42,165
223,061
75,313
24,640
45,998
42,373
411,385
26,839
152
-
-
-
26,991
Total consumer loans
$
249,900
75,465
24,640
45,998
42,373
438,376
(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.
LTV refers to the ratio comparing the loan’s unpaid principal
The following table shows the most updated LTV and CLTV
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.
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. LTV does not necessarily reflect the
likelihood of performance of a given loan, but does provide an
indication of collateral value. 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.
170
(in millions)
By LTV/CLTV:
0-60%
60.01-80%
80.01-100%
100.01-120% (1)
> 120% (1)
No LTV/CLTV available
Government insured/guaranteed loans (2)
December 31, 2013
December 31, 2012
Real estate
Real estate
1-4 family
first
1-4 family
junior lien
mortgage
by LTV
mortgage
by CLTV
$
74,046
80,187
30,843
10,678
6,306
1,600
30,737
13,636
17,154
16,272
9,992
7,369
1,368
-
Real estate
Real estate
1-4 family
first
1-4 family
junior lien
mortgage
by LTV
mortgage
by CLTV
56,247
69,759
34,830
17,004
13,529
1,973
29,719
12,170
15,168
18,038
13,576
14,610
1,751
-
Total
68,417
84,927
52,868
30,580
28,139
3,724
29,719
Total
87,682
97,341
47,115
20,670
13,675
2,968
30,737
Total consumer loans (excluding PCI)
234,397
65,791
300,188
223,061
75,313
298,374
Total consumer PCI loans (carrying value)
24,100
123
24,223
26,839
152
26,991
Total consumer loans
$
258,497
65,914
324,411
249,900
75,465
325,365
(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.
(in millions)
Commercial:
Commercial and industrial
$
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial (1)
Consumer:
Real estate 1-4 family first mortgage (2
)
Real estate 1-4 family junior lien mortg
age
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans
(excluding PCI)
Dec. 31,
Dec. 31,
2013
2012
738
2,252
416
29
40
1,422
3,322
1,003
27
50
3,475
5,824
9,799
11,455
2,188
2,922
173
33
245
40
12,193 14,662
$
15,668 20,486
(1) Includes LHFS of $1 million and $16 million at December 31, 2013 and
December 31, 2012, respectively.
(2) Includes MHFS of $227 million and $336 million at December 31, 2013 and
December 31, 2012, respectively.
171
Note 6: Loans and Allowance for Credit Losses (continued)
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 $4.5 billion at December 31, 2013, and
$6.0 billion at December 31, 2012, 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. 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 FFELP
were $22.2 billion at December 31, 2013, up from $21.8 billion at
December 31, 2012.
The following table shows non-PCI loans 90 days or more
past due and still accruing by class for loans not government
insured/guaranteed.
(in millions)
December 31,
2013
2012
Loan 90 days or more past due and still accruing:
Total (excluding PCI):
$
23,219 23,245
Less: FHA insured/VA guaranteed (1)(2)
21,274 20,745
Less: Student loans guaranteed
under the FFELP (3)
Total, not government
900
1,065
insured/guaranteed
$
1,045
1,435
By segment and class, not government
insured/guaranteed:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage (2)
Real estate 1-4 family junior lien mortgage (2)
Credit card
Automobile
Other revolving credit and installment
$
11
35
97
-
143
354
86
321
55
86
47
228
27
1
303
564
133
310
40
85
Total consumer
902
1,132
Total, not government
insured/guaranteed
$
1,045
1,435
(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.
172
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 $650 million at
December 31, 2013, and $705 million at December 31, 2012.
For additional information on our impaired loans and
allowance for credit losses, see Note 1.
Total impaired loans (excluding PCI)
$
33,646
28,070
21,488
(in millions)
December 31, 2013
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial (1)
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer (2)
December 31, 2012
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial (1)
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer (2)
Recorded investment
Impaired loans
Unpaid
principal
balance
Impaired
with related
allowance for
Related
allowance for
loans
credit losses
credit losses
$
2,016
4,269
946
71
44
1,274
3,375
615
33
37
1,024
3,264
589
33
37
223
819
101
8
5
7,346
5,334
4,947
1,156
22,450
19,500
3,130
2,582
13,896
2,092
431
245
44
431
189
34
431
95
27
26,300
22,736
16,541
$
3,331
5,766
1,975
54
109
2,086
4,673
1,345
39
43
2,086
4,537
1,345
39
43
11,235
8,186
8,050
1,674
21,293
2,855
531
314
27
18,472
2,483
531
314
26
15,224
2,070
531
314
26
25,020
21,826
18,165
3,026
681
132
11
3
3,853
5,009
353
1,025
276
11
9
3,074
859
244
27
6
4,210
5,884
Total impaired loans (excluding PCI)
$
36,255
30,012
26,215
(1) Excludes the unpaid principal balance for loans that have been fully charged off or otherwise have zero recorded investment.
(2) At December 31, 2013 and December 31, 2012, includes the recorded investment of $2.5 billion and $1.9 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.
173
Note 6: Loans and Allowance for Credit Losses (continued)
Commitments to lend additional funds on loans whose terms
have been modified in a TDR amounted to $407 million and
$421 million at December 31, 2013 and 2012, 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.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
2013
2012
2011
Average
recorded
Recognized
interest
Average
recorded
Recognized
interest
Average
recorded
Recognized
interest
investment
income
investment
income
investment
income
Year ended December 31,
$
1,475
3,842
966
38
33
94
141
35
1
-
2,281
4,821
1,818
57
36
6,354
271
9,013
111
119
61
1
1
293
3,282
5,308
2,481
80
29
105
80
70
-
-
11,180
255
Real estate 1-4 family first mortgage
19,419
973
15,750
803
13,592
700
Real estate 1-4 family
junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
2,498
480
232
30
143
57
29
3
Total consumer (1)
22,659
1,205
Total impaired loans (excluding PCI)
$
29,013
1,476
2,193
572
299
25
18,839
27,852
80
63
42
2
1,962
594
244
26
76
21
26
1
990
16,418
824
1,283
27,598
1,079
(in millions)
Average recorded investment in impaired loans
Interest income:
Cash basis of accounting
Other (2)
Total interest income
Year ended December 31,
2013
2012
2011
29,013
27,852
27,598
426
1,050
316
967
180
899
1,476
1,283
1,079
$
$
$
(1) Years ended December 31, 2013 and 2012, reflect the OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be classified
as TDRs, as well as written down to net realizable collateral value.
(2) 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. See footnote 1 to the table of changes in the allowance for credit losses.
174
At December 31, 2013, the loans in trial modification period
were $253 million under HAMP, $45 million under 2MP and
$352 million under proprietary programs, compared with
$402 million, $45 million and $258 million at
December 31, 2012, respectively. Trial modifications with a
recorded investment of $286 million at December 31, 2013, and
$276 million at December 31, 2012, were accruing loans and
$364 million and $429 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.
TROUBLED DEBT RESTRUCTURINGS (TDRs) 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 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 Homes 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.
175
Note 6: Loans and Allowance for Credit Losses (continued)
(in millions)
Principal (2)
Primary modification type (1)
Financial effects of modifications
Interest
rate
reduction
Other
concessions (3)
Total
Charge-
offs (4)
Weighted
average
interest
rate
reduction
Recorded
investment
related to
interest rate
reduction (5)
Year ended December 31, 2013
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Trial modifications (6)
Total consumer
Total
Year ended December 31, 2012
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Trial modifications (6)
Total consumer
Total
Year ended December 31, 2011
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Trial modifications (6)
Total consumer
Total
$
$
$
$
$
$
4
33
-
-
15
52
1,143
103
-
3
-
-
1,249
1,301
11
47
12
-
-
70
1,371
79
-
5
-
-
1,455
1,525
166
113
29
-
-
308
1,629
98
-
73
1
-
1,801
2,109
176
307
12
-
1
496
1,170
181
182
12
10
-
1,555
2,051
35
219
19
-
-
273
1,302
244
241
54
1
-
1,842
2,115
64
146
114
-
-
324
1,908
559
336
115
4
-
2,922
3,246
1,081
1,391
381
-
-
2,853
3,681
472
-
97
12
50
4,312
7,165
1,370
1,907
531
4
19
3,831
5,822
756
-
265
22
666
7,531
11,362
2,412
1,894
421
57
22
4,806
934
197
-
3
4
651
1,789
6,595
1,261
1,731
393
-
16
3,401
5,994
756
182
112
22
50
7,116
10,517
1,416
2,173
562
4
19
4,174
8,495
1,079
241
324
23
666
10,828
15,002
2,642
2,153
564
57
22
5,438
4,471
854
336
191
9
651
6,512
17
8
4
-
-
29
233
42
-
34
-
-
309
338
40
12
10
-
-
62
547
512
-
50
5
-
1,114
1,176
84
24
26
-
-
134
293
28
2
23
1
-
347
4.71 % $
1.66
1.07
-
-
2.72
2.64
3.33
10.38
7.66
4.87
-
3.31
3.21 % $
1.60 % $
1.57
1.69
-
-
1.58
3.00
3.70
10.85
6.90
4.29
-
3.78
3.59 % $
3.13 % $
1.46
0.81
-
-
1.55
3.27
4.34
10.77
6.39
5.00
-
4.00
11,950
481
3.82 % $
176
308
12
-
1
497
2,019
276
182
12
10
-
2,499
2,996
38
226
19
-
-
283
2,379
313
241
56
2
-
2,991
3,274
69
160
125
-
-
354
3,322
654
260
177
4
-
4,417
4,771
(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 $3.1 billion, $3.9 billion and
$496 million, for the years ended December 31, 2013, 2012 and 2011, respectively, which reflect the impact of the prospective adoption of the OCC guidance issued in 2012.
(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 interest rate. Years ended December 2013 and 2012 includes $4.0 billion and $5.2 billion of consumer loans discharged in bankruptcy, respectively, as a result of the
OCC guidance implementation. The OCC guidance issued in third quarter 2012 required consumer loans discharged in bankruptcy to be classified as TDRs, as well as written
down to net realizable collateral value.
(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 $393 million, $495 million and $577 million for the years ended
December 31, 2013, 2012 and 2011, 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.
176
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.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total
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.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Automobile
Total consumer
Total PCI loans (carrying value)
Total PCI loans (unpaid principal balance)
$
Recorded investment of defaults
Year ended December 31,
2013
2012
2011
234
303
70
-
1
379
579
261
1
-
216
331
69
1
1
608
1,220
618
370
567
1,110
34
59
18
1
55
94
55
1
137
156
110
3
482
772
1,516
$
1,090
1,992
2,134
December 31,
2013
2012
2008
215
1,136
433
720
259
1,970
877
871
4,580
5,803
6,462
1,859
2,504
3,977
18,704
24,100
26,839
39,214
123
-
152
-
728
151
24,223
26,991
40,093
26,727
30,968
58,797
38,229
45,174
98,182
$
$
$
177
Note 6: Loans and Allowance for Credit Losses (continued)
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:
x
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
x
x
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)
Total, beginning of year
Addition of accretable yield due to acquisitions
Accretion into interest income (1)
Accretion into noninterest income due to sales (2)
$
Year ended December 31,
2013
2012
2011
2010
2009
18,548 15,961 16,714 14,559 10,447
-
128
1
3
-
(1,833) (2,152 (2,206)
)
(2,392) (2,601)
(151)
(5
)
(189)
(43)
(5)
441
Reclassification from nonaccretable difference for loans with improving credit-related cash flows
971
1,141
373
3,399
Changes in expected cash flows that do not affect nonaccretable difference (3)
(144)
3,600
1,141
1,191
6,277
Total, end of year
$
17,392 18,548 15,961 16,714 14,559
(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. The decline in expected interest cash flows in 2013 is primarily attributable to a decline in variable rate indices applicable to these loans,
an increase in prepayment estimates, and updated estimates for interest collections attributable to loan modification activities.
178
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.
(in millions)
Balance, December 31, 2008
Provision for losses due to credit deterioration
Charge-offs
Balance, December 31, 2009
Provision for losses due to credit deterioration
Charge-offs
Balance, December 31, 2010
Provision for losses due to credit deterioration
Charge-offs
Balance, December 31, 2011
Provision for losses due to credit deterioration
Charge-offs
Balance, December 31, 2012
Reversal of provision for losses
Charge-offs
Balance, December 31, 2013
COMMERCIAL PCI CREDIT QUALITY INDICATORS The following
table provides a breakdown of commercial PCI loans by risk category.
Commercial Pick-a-Pay
consumer
Total
Other
$
$
-
850
(520)
330
712
(776)
266
106
(207)
165
25
(102)
88
(52)
(10)
26
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3
-
3
59
(30)
32
54
(20)
66
7
(44)
29
(16)
(9)
4
-
853
(520)
333
771
(806)
298
160
(227)
231
32
(146)
117
(68)
(19)
30
(in millions)
December 31, 2013
By risk category:
Pass
Criticized
Total commercial PCI loans
December 31, 2012
By risk category:
Pass
Criticized
Total commercial PCI loans
Commercial
and
Real
estate
Real
estate
industrial
mortgage
construction
Foreign
Total
$
$
$
$
118
97
316
820
215
1,136
95
164
259
341
1,629
1,970
160
273
433
207
670
877
8
712
720
255
616
871
602
1,902
2,504
898
3,079
3,977
179
Note 6: Loans and Allowance for Credit Losses (continued)
The following table provides past due information for commercial PCI loans.
(in millions)
December 31, 2013
By delinquency status:
Commercial
Real
Real
and
industrial
estate
mortgage
estate
construction
Foreign
Total
Current-29 DPD and still accruing
30-89 DPD and still accruing
90+ DPD and still accruing
$
210
5
-
1,052
41
43
Total commercial PCI loans
$
215
1,136
December 31, 2012
By delinquency status:
Current-29 DPD and still accruing
30-89 DPD and still accruing
90+ DPD and still accruing
Total commercial PCI loans
$
$
235
1
23
259
1,804
26
140
1,970
355
2
76
433
699
51
127
877
632
-
88
720
704
-
167
871
2,249
48
207
2,504
3,442
78
457
3,977
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.
(in millions)
By delinquency status:
December 31, 2013
December 31, 2012
Real estate
Real estate
1-4 family
1-4 family
first
junior lien
Real estate
Real estate
1-4 family
1-4 family
first
junior lien
mortgage m
ortgage
Total
mortgage
mortgage
Total
Current-29 DPD and still accruing
$
20,712
171
20,883
30-59 DPD and still accruing
60-89 DPD and still accruing
90-119 DPD and still accruing
120-179 DPD and still accruing
180+ DPD and still accruing
2,185
1,164
457
517
4,291
8
4
2
4
2,193
1,168
459
521
22,304
2,587
1,361
650
804
198
11
7
6
7
22,502
2,598
1,368
656
811
95
4,386
5,356
116
5,472
Total consumer PCI loans (adjusted unpaid principal balance) $
29,326
284
29,610
33,062
345
33,407
Total consumer PCI loans (carrying value)
$
24,100
123
24,223
26,839
152
26,991
180
The following table provides FICO scores for consumer PCI loans.
Total consumer PCI loans (adjusted unpaid principal balance) $
29,326
284
29,610
Total consumer PCI loans (carrying value)
$
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.
December 31, 2013
December 31, 2012
Real estate
Real estate
1-4 family
first
1-4 family
junior lien
Real estate
Real estate
1-4 family
first
1-4 family
junior lien
mortgage
mortgage
Total
mortgage
mortgage
Total
$
9,933
6,029
6,789
3,732
1,662
865
198
118
101
60
10,034
6,089
70
35
11
5
1
1
6,859
3,767
1,673
870
199
119
13,163
6,673
6,602
3,635
1,757
874
202
156
33,062
26,839
144
68
13,307
6,741
73
39
11
6
1
3
6,675
3,674
1,768
880
203
159
345
33,407
152
26,991
December 31, 2013
December 31, 2012
Real estate
Real estate
1-4 family
1-4 family
first
junior lien
mortgage
mortgage
Real estate
Real estate
1-4 family
1-4 family
first
junior lien
mortgage
mortgage
by LTV
by CLTV
Total
by LTV
by CLTV
Total
$
2,501
8,541
10,366
4,677
3,232
9
32
42
88
67
54
1
2,533
8,583
10,454
4,744
3,286
10
1,374
4,119
9,576
8,084
9,889
21
30
61
93
1,395
4,149
9,637
8,177
138
10,027
20
2
22
33,062
26,839
345
33,407
152
26,991
(in millions)
By FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
(in millions)
By LTV/CLTV:
0-60%
60.01-80%
80.01-100%
100.01-120% (1)
> 120% (1)
No LTV/CLTV available
Total consumer PCI loans (adjusted unpaid principal balance) $
29,326
284
29,610
Total consumer PCI loans (carrying value)
$
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.
181
Note 7: Premises, Equipment, Lease Commitments and Other Assets
Operating lease rental expense (predominantly for premises),
net of rental income, was $1.3 billion, $1.1 billion and
$1.2 billion in 2013, 2012 and 2011, respectively.
The components of other assets were:
(in millions)
Land
Buildings
Furniture and equipment
Leasehold improvements
Premises and equipment leased
under capital leases
$
December 31,
2013
2012
1,759
7,931
7,517
1,939
1,832
7,670
7,194
1,839
(in millions)
82
122
Nonmarketable equity investments:
Dec. 31,
2013
Dec. 31,
2012
Total premises and equipment
19,228
18,657
Less: Accumulated depreciation
and amortization
Net book value,
10,072
9,229
Cost method:
Private equity
Federal bank stock
$
2,308
4,670
2,572
4,227
Total cost method
6,978
6,799
premises and equipment
$
9,156
9,428
Equity method:
LIHTC investments (1)
Private equity and other
6,209
5,782
4,767
6,156
Total equity method
11,991
10,923
Fair value (2)
1,386
-
Total nonmarketable
equity investments
20,355
17,722
Corporate/bank-owned life insurance
Accounts receivable
Interest receivable
Core deposit intangibles
Customer relationship and
18,738
21,422
5,019
4,674
18,649
25,828
5,006
5,915
other amortized intangibles
1,084
1,352
Foreclosed assets:
Government insured/guaranteed (3)
Non-government insured/guaranteed
Operating lease assets
Due from customers on acceptances
Other
2,093
1,844
2,047
279
1,509
2,514
2,001
282
8,787
12,800
Total other assets
$
86,342
93,578
(1) Represents low income housing tax credit investments.
(2) Represents nonmarketable equity investments for which we have elected the
fair value option. See Note 17 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.
Income (expense) related to nonmarketable equity
investments was:
(in millions)
Net realized gains from nonmarketable
equity investments
All other
Total
Year ended December 31,
2013
2012
2011
$
$
1,158
(287)
871
1,086
(185)
901
842
(298)
544
Depreciation and amortization expense for premises and
equipment was $1.2 billion, $1.3 billion and $1.4 billion in 2013,
2012 and 2011, respectively.
Dispositions of premises and equipment, included in
noninterest expense, resulted in a net loss of $15 million in 2013,
a net gain of $7 million in 2012 and a net loss of $17 million in
2011, respectively.
We have obligations under a number of noncancelable
operating leases for premises and equipment. The leases
predominantly expire over the next 15 years, with the longest
expiring in 2105, and many provide for periodic adjustment of
rentals based on changes in various economic indicators. Some
leases also include a renewal option. The following table
provides the future minimum payments under capital leases and
noncancelable operating leases, net of sublease rentals, with
terms greater than one year as of December 31, 2013.
Operating
leases
Capital
leases
$
1,155
1,052
908
778
648
2,812
3
2
3
3
3
13
27
(9)
(7)
11
$
$
(in millions)
Year ended December 31,
2014
2015
2016
2017
2018
Thereafter
Total minimum lease payments
$
7,353
Executory costs
Amounts representing interest
Present value of net minimum
lease payments
182
Note 8: 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. In a
securitization transaction, assets from our balance sheet are
transferred to an SPE, which then issues to investors various
forms of interests in those assets and may also enter into
derivative transactions. In a securitization transaction, we
typically receive cash and/or other interests in an SPE as
proceeds for the assets we transfer. Also, in certain transactions,
we may retain the right to service the transferred receivables and
to repurchase those receivables from the SPE if the outstanding
balance of the receivables falls to a level where the cost exceeds
the benefits of servicing such receivables. In addition, we may
purchase the right to service loans in an SPE that were
transferred to the SPE by a third party.
In connection with our securitization activities, we have
various forms of ongoing involvement with SPEs, which may
include:
•
underwriting securities issued by SPEs and subsequently
making markets in those securities;
providing liquidity facilities to support short-term
obligations of SPEs issued to third party investors;
providing credit enhancement on securities issued by SPEs
or market value guarantees of assets held by SPEs through
the use of letters of credit, financial guarantees, credit
default swaps and total return swaps;
entering into other derivative contracts with SPEs;
holding senior or subordinated interests in SPEs;
acting as servicer or investment manager for SPEs; and
providing administrative or trustee services to SPEs.
•
•
•
•
•
•
SPEs are generally considered variable interest entities
(VIEs). A VIE is an entity that has either a total equity
investment that is insufficient to finance its activities without
additional subordinated financial support or whose equity
investors lack the ability to control the entity’s activities or lack
the ability to receive expected benefits or absorb obligations in a
manner that’s consistent with their investment in the entity. A
VIE is consolidated by its primary beneficiary, the party that has
both the power to direct the activities that most significantly
impact the VIE and a variable interest that could potentially be
significant to the VIE. A variable interest is a contractual,
ownership or other interest that changes with changes in the fair
value of the VIE’s net assets. To determine whether or not a
variable interest we hold could potentially be significant to the
VIE, we consider both qualitative and quantitative factors
regarding the nature, size and form of our involvement with the
VIE. We assess whether or not we are the primary beneficiary of
a VIE on an on-going basis.
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.
183
Note 8: Securitizations and Variable Interest Entities (continued)
The classifications of assets and liabilities in our balance sheet associated with our transactions with VIEs follow:
(in millions)
December 31, 2013
Cash
Trading assets
Investment securities (1)
Mortgages held for sale
Loans
Mortgage servicing rights
Other assets
Total assets
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Noncontrolling interests
Net assets
December 31, 2012
Cash
Trading assets
Investment securities (1)
Mortgages held for sale
Loans
Mortgage servicing rights
Other assets
Total assets
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Noncontrolling interests
Net assets
VIEs that we
VIEs
Transfers that
we account
do not
consolidate
that we
consolidate
for as secured
borrowings
Total
$
-
1,206
165
162
7
193
18,795
1,352
8,976
-
7,652
14,859
6,151
38
6,058
-
347
-
6,021
-
110
172
1,561
29,123
38
19,731
14,859
6,608
48,663
8,122
15,307
72,092
-
3,464
29 (2)
99 (2)
-
2,356 (2)
7,871
3
5,673
7,900
3,566
8,029
3,464
2,484
13,547
19,495
-
5
-
5
$
45,199
5,633
1,760
52,592
$
-
1,902
19,900
-
9,841
11,114
4,993
260
114
2,772
469
10,553
-
457
30
218
14,848
-
7,088
-
161
47,750
14,625
22,345
-
3,441
-
3,441
-
$
44,309
2,059 (2)
13,228
901 (2)
3,483 (2)
20
6,520
6,443
19,768
48
8,134
-
2,577
55,020
290
2,234
37,520
469
27,482
11,114
5,611
84,720
15,287
4,362
10,003
29,652
48
(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 December 31, 2013 and 2012, respectively, with recourse to the general credit of Wells Fargo: Short-term borrowings, $0 and
$2.1 billion; Accrued expenses and other liabilities, $9 million and $767 million; and Long-term debt, $29 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 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
184
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.
Total
VIE
Debt and
equity
Servicing
Carrying value - asset (liability)
Other
commitments
and
Net
assets
interests (1)
assets Derivatives
guarantees
assets
$
1,314,285
38,330
170,088
6,730
6,021
11,415
23,112
4,382
3,464
10,343
2,721
1,739
7,627
37
5,888
6,857
6,455
1,061
54
860
14,253
258
325
-
-
-
-
-
-
23
-
-
209
214
-
(84)
-
-
-
5
(745)
16,229
(26)
-
(130)
-
-
(2,213)
-
-
(189)
1,971
8,161
121
5,888
6,773
4,242
1,061
54
699
$
1,588,170
33,299
14,859
344
(3,303)
45,199
Debt and
Maximum exposure to loss
Other
commitments
equity
Servicing
and
Total
interests
assets Derivatives
guarantees
exposure
$
2,721
1,739
7,627
37
5,888
6,857
6,455
1,061
54
860
14,253
258
325
-
-
-
-
-
-
23
$
33,299
14,859
-
-
322
214
-
84
-
-
-
178
798
2,287
19,261
346
-
130
-
1,665
626
159
31
188
2,343
8,274
381
5,888
8,606
7,081
1,220
85
1,249
5,432
54,388
(in millions)
December 31, 2013
Residential mortgage loan
securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
Residential mortgage loan
securitizations:
Conforming (4)
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
(continued on following page)
185
Note 8: Securitizations and Variable Interest Entities (continued)
(continued from previous page)
(in millions)
December 31, 2012
Residential mortgage loan securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
Residential mortgage loan securitizations:
Conforming (4)
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
Total
VIE
Debt and
equity
Servicing
Other
commitments
and
assets
interests (1)
assets Derivatives
guarantees
Net
assets
Carrying value - asset (liability)
$
1,268,494
49,794
168,126
6,940
8,155
10,404
20,098
6,641
4,771
10,401
3,620
2,188
7,081
13
7,962
7,155
5,180
1,439
49
977
10,336
284
466
-
-
-
-
-
-
28
-
-
404
471
-
(104)
-
1
-
14
(1,690)
12,266
(53)
-
144
-
-
(1,657)
-
-
1
2,419
7,951
628
7,962
7,051
3,523
1,440
49
1,020
$
1,553,824
35,664
11,114
786
(3,255)
44,309
Debt and
Maximum exposure to loss
Other
commitments
equity
Servicing
and
Total
interests
assets Derivatives
guarantees
exposure
$
3,620
2,188
7,081
13
7,962
7,155
5,180
1,439
49
977
10,336
284
466
-
-
-
-
-
-
28
-
-
446
471
-
104
-
1
-
318
5,061
353
-
144
-
1,967
247
261
27
119
19,017
2,825
7,993
628
7,962
9,226
5,427
1,701
76
1,442
$
35,664
11,114
1,340
8,179
56,297
(1) Includes total equity interests of $6.9 billion at December 31, 2013 and $5.8 billion at December 31, 2012. 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) 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 over 72% and 83% were rated as investment grade by the primary rating agencies at December 31, 2013 and 2012,
respectively. These senior loans are accounted for at amortized cost and are subject to the Company’s allowance and credit charge-off policies.
(3) Includes structured financing, student loan securitizations, 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.
(4) Maximum exposure to loss for conforming residential mortgage loan securitizations at December 31, 2013 reflects the benefit of settlements reached with both FHLMC and
FNMA in 2013, that resolved substantially all repurchase liabilities with FHLMC and FNMA, for mortgage loans either sold or originated prior to January 1, 2009. For additional
information on the agreement reached with FHLMC and FNMA see Note 9.
186
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.
RESIDENTIAL MORTGAGE LOANS Residential mortgage loan
securitizations are financed through the issuance of fixed- or
floating-rate-asset-backed-securities, which are collateralized by
the loans transferred to a VIE. We typically transfer loans we
originated to these VIEs, account for the transfers as sales, retain
the right to service the loans and may hold other beneficial
interests issued by the VIEs. We also may be exposed to limited
liability related to recourse agreements and repurchase
agreements we make to our issuers and purchasers, which are
included in other commitments and guarantees. In certain
instances, we may service residential mortgage loan
securitizations structured by third parties whose loans we did
not originate or transfer. Our residential mortgage loan
securitizations consist of conforming and nonconforming
securitizations.
Conforming residential mortgage loan securitizations are
those that are guaranteed by GSEs, including GNMA. Because of
the power of the GSEs over the VIEs that hold the assets from
these conforming residential mortgage loan securitizations, we
do not consolidate them.
The loans sold to the VIEs in nonconforming residential
mortgage loan securitizations are those that do not qualify for a
GSE guarantee. We may hold variable interests issued by the
VIEs, primarily in the form of senior securities. We do not
consolidate the nonconforming residential mortgage loan
securitizations included in the table because we either do not
hold any variable interests, hold variable interests that we do not
consider potentially significant or are not the primary servicer
for a majority of the VIE assets.
Other commitments and guarantees include amounts related
to loans sold that we may be required to repurchase, or
otherwise indemnify or reimburse the investor or insurer for
losses incurred, due to material breach of contractual
representations and warranties as well as other retained
recourse arrangements. The maximum exposure to loss for
material breach of contractual representations and warranties
represents a stressed case estimate we utilize for determining
stressed case regulatory capital needs and is considered to be a
remote scenario.
COMMERCIAL MORTGAGE LOAN SECURITIZATIONS
Commercial mortgage loan securitizations are financed through
the issuance of fixed- or floating-rate-asset-backed-securities,
which are collateralized by the loans transferred to the VIE. In a
typical securitization, we may transfer loans we originate to
these VIEs, account for the transfers as sales, retain the right to
service the loans and may hold other beneficial interests issued
by the VIEs. In certain instances, we may service commercial
mortgage loan securitizations structured by third parties whose
loans we did not originate or transfer. We typically serve as
primary or master servicer of these VIEs. The primary or master
servicer in a commercial mortgage loan securitization typically
cannot make the most significant decisions impacting the
performance of the VIE and therefore does not have power over
the VIE. We do not consolidate the commercial mortgage loan
securitizations included in the disclosure because we either do
not have power or do not have a variable interest that could
potentially be significant to the VIE.
COLLATERALIZED DEBT OBLIGATIONS (CDOs) A CDO is a
securitization where a VIE purchases a pool of assets consisting
of asset-backed securities and issues multiple tranches of equity
or notes to investors. In some CDOs, a portion of the assets are
obtained synthetically through the use of derivatives such as
credit default swaps or total return swaps.
Prior to 2008, we engaged in the structuring of CDOs on
behalf of third party asset managers who would select and
manage the assets for the CDO. Typically, the asset manager has
some discretion to manage the sale of assets of, or derivatives
used by the CDO, which generally gives the asset manager the
power over the CDO. We have not structured these types of
transactions since the credit market disruption began in late
2007.
In addition to our role as arranger we may have other forms
of involvement with these CDOs, including ones established
prior to 2008. Such involvement may include acting as liquidity
provider, derivative counterparty, secondary market maker or
investor. For certain CDOs, we may also act as the collateral
manager or servicer. We receive fees in connection with our role
as collateral manager or servicer.
We assess whether we are the primary beneficiary of CDOs
based on our role in them in combination with the variable
interests we hold. Subsequently, we monitor our ongoing
involvement to determine if the nature of our involvement has
changed. We are not the primary beneficiary of these CDOs in
most cases because we do not act as the collateral manager or
servicer, which generally denotes power. In cases where we are
the collateral manager or servicer, we are not the primary
beneficiary because we do not hold interests that could
potentially be significant to the VIE.
COLLATERALIZED LOAN OBLIGATIONS (CLOs) A CLO is a
securitization where an SPE purchases a pool of assets consisting
of loans and issues multiple tranches of equity or notes to
187
Note 8: Securitizations and Variable Interest Entities (continued)
OTHER TRANSACTIONS WITH VIEs Auction rate securities
(ARS) are debt instruments with long-term maturities, but
which re-price more frequently, and preferred equities with no
maturity. At December 31, 2013, we held in our securities
available-for-sale portfolio $653 million of ARS issued by VIEs
redeemed pursuant to agreements entered into in 2008 and
2009, compared with $686 million at December 31, 2012.
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 December 31, 2013 and
December 31, 2012, we reported the debt securities issued to the
VIEs as long-term junior subordinated debt with a carrying
value of $1.9 billion and $4.9 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.
In 2013, we redeemed $2.8 billion of trust preferred
securities that will no longer count as Tier 1 capital under the
Dodd-Frank Act and the Basel Committee recommendations
known as the Basel III standards.
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.
investors. Generally, CLOs are structured on behalf of a third
party asset manager that typically selects and manages the assets
for the term of the CLO. Typically, the asset manager has the
power over the significant decisions of the VIE through its
discretion to manage the assets of the CLO. We assess whether
we are the primary beneficiary of CLOs based on our role in
them and the variable interests we hold. In most cases, we are
not the primary beneficiary because we do not have the power to
manage the collateral in the VIE.
In addition to our role as arranger, we may have other forms
of involvement with these CLOs. Such involvement may include
acting as underwriter, derivative counterparty, secondary market
maker or investor. For certain CLOs, we may also act as the
servicer, for which we receive fees in connection with that role.
We also earn fees for arranging these CLOs and distributing the
securities.
ASSET-BASED FINANCE STRUCTURES We engage in various
forms of structured finance arrangements with VIEs that are
collateralized by various asset classes including energy contracts,
auto and other transportation leases, intellectual property,
equipment and general corporate credit. We typically provide
senior financing, and may act as an interest rate swap or
commodity derivative counterparty when necessary. In most
cases, we are not the primary beneficiary of these structures
because we do not have power over the significant activities of
the VIEs involved in them.
For example, we have investments in asset-backed securities
that are collateralized by auto leases or loans and cash reserves.
These fixed-rate and variable-rate securities have been
structured as single-tranche, fully amortizing, unrated bonds
that are equivalent to investment-grade securities due to their
significant overcollateralization. The securities are issued by
VIEs that have been formed by third party auto financing
institutions primarily because they require a source of liquidity
to fund ongoing vehicle sales operations. The third party auto
financing institutions manage the collateral in the VIEs, which is
indicative of power in them and we therefore do not consolidate
these VIEs.
TAX CREDIT STRUCTURES We co-sponsor and make
investments in affordable housing and sustainable energy
projects that are designed to generate a return primarily through
the realization of federal tax credits. In some instances, our
investments in these structures may require that we fund future
capital commitments at the discretion of the project sponsors.
While the size of our investment in a single entity may at times
exceed 50% of the outstanding equity interests, we do not
consolidate these structures due to the project sponsor’s ability
to manage the projects, which is indicative of power in them.
INVESTMENT FUNDS We do not consolidate the investment
funds because we do not absorb the majority of the expected
future variability associated with the funds’ assets, including
variability associated with credit, interest rate and liquidity risks.
188
(in millions)
Year ended December 31,
2013
Other
financial
2012
Other
financial
Mortgage
2011
Other
financial
Mortgage
Mortgage
loans
assets
loans
assets
loans
assets
Sales proceeds from securitizations (1)
$
357,807
Fees from servicing rights retained
Other interests held
Purchases of delinquent assets
Servicing advances, net of repayments
4,240
2,284
18
(34)
-
10
93
-
-
535,372
4,433
1,767
62
226
-
10
135
-
-
337,357
4,401
1,779
9
29
-
11
263
-
-
(1) Represents cash flow data for all loans securitized in the period presented.
In 2013, 2012, and 2011, we recognized net gains of
$149 million, $518 million and $112 million, respectively, from
transfers accounted for as sales of financial assets in
securitizations. 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 2013, 2012 and
2011 predominantly related to securitizations of residential
mortgages that are sold to the GSEs, including FNMA, FHLMC
and GNMA (conforming residential mortgage securitizations).
During 2013, 2012 and 2011 we transferred $343.9 billion,
$517.3 billion and $329.1 billion respectively, in fair value of
conforming residential mortgages to unconsolidated VIEs and
recorded the transfers as sales. 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 2013 we recorded a $3.5 billion servicing asset,
measured at fair value using a Level 3 measurement technique,
and a $143 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 2012, we recorded a $4.9 billion
servicing asset and a $274 million liability. In 2011, we recorded
a $4.0 billion servicing asset and a $101 million liability.
We used the following key weighted-average assumptions to
measure mortgage servicing assets at the date of securitization:
Residential mortgage
servicing rights
2013
2012
2011
Year ended December 31,
Prepayment speed (1)
Discount rate
Cost to service ($ per loan) (2) $
11.2 %
7.3
184
13.4
7.3
151
12.8
7.7
146
(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 2013, 2012 and 2011, we transferred $5.6 billion,
$3.4 billion and $3.0 billion, respectively, in fair value of
commercial mortgages to unconsolidated VIEs and recorded the
transfers as sales. These transfers resulted in a gain of
$152 million in 2013, $178 million in 2012 and $48 million in
2011, respectively, because the loans were carried at LOCOM. In
connection with these transfers, in 2013 we recorded a servicing
asset of $20 million, initially measured at fair value using a Level
3 measurement technique, and available-for-sale securities of
$54 million, classified as Level 2. In 2012, we recorded a
servicing asset of $13 million and available-for-sale securities of
$116 million. In 2011, we recorded a servicing asset of
$20 million and available-for-sale securities of $532 million.
189
Note 8: Securitizations and Variable Interest Entities (continued)
The following table provides key economic assumptions and
the sensitivity of the current fair value of residential mortgage
servicing rights and other retained interests to immediate
adverse changes in those assumptions. “Other interests held”
relate predominantly to residential and commercial mortgage
loan securitizations. Residential mortgage-backed securities
retained in securitizations issued through GSEs, such as FNMA,
FHLMC and GNMA, are excluded from the table because these
securities have a remote risk of credit loss due to the GSE
guarantee. These securities also have economic characteristics
similar to GSE mortgage-backed securities that we purchase,
which are not included in the table. Subordinated interests
include only those bonds whose credit rating was below AAA by
a major rating agency at issuance. Senior interests include only
those bonds whose credit rating was AAA by a major rating
agency at issuance. The information presented excludes trading
positions held in inventory.
Other interests held
Consumer
Commercial (2)
Subordinated
bonds
Senior
bonds
Subordinated
bonds
Senior
bonds
587
6.3
283
3.6
($ in millions, except cost to service amounts)
Residential
mortgage
servicing
rights (1)
Fair value of interests held at December 31, 2013 $
15,580
Expected weighted-average life (in years)
6.4
Interest-
only
strips
135
3.8
Key economic assumptions:
Prepayment speed assumption (3)
10.7 %
10.7
Decrease in fair value from:
10% adverse change
25% adverse change
Discount rate assumption
Decrease in fair value from:
100 basis point increase
200 basis point increase
Cost to service assumption ($ per loan)
Decrease in fair value from:
10% adverse change
25% adverse change
Credit loss assumption
Decrease in fair value from:
10% higher losses
25% higher losses
$
$
864
2,065
3
7
7.8 %
18.3
840
1,607
191
636
1,591
2
5
$
Fair value of interests held at December 31, 2012
Expected weighted-average life (in years)
$
11,538
4.8
187
4.1
Key economic assumptions:
Prepayment speed assumption (3)
Decrease in fair value from:
10% adverse change
25% adverse change
Discount rate assumption
Decrease in fair value from:
100 basis point increase
200 basis point increase
Cost to service assumption ($ per loan)
Decrease in fair value from:
10% adverse change
25% adverse change
Credit loss assumption
Decrease in fair value from:
10% higher losses
25% higher losses
$
$
15.7 %
10.6
869
2,038
5
12
7.4 %
16.9
4
8
562
1,073
219
615
1,537
39
5.9
6.7
-
-
4.4
2
4
0.4 %
-
-
40
5.9
6.8
-
-
8.9
2
4
$
0.4 %
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4.5
3.6
30
38
30
58
14.2
29
39
249
4.7
3.5
12
21
10.0
12
19
-
-
1
982
5.3
2.2
43
84
-
-
-
(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.
190
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 and
$1.4 billion at December 31, 2013, and December 31, 2012,
respectively. 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
December 31, 2013, and 2012, results in a decrease in fair value
of $175 million and $139 million, respectively. See Note 9 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 still accruing interest as well as nonaccrual loans.
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.
(in millions)
Commercial:
Real estate mortgage
Total commercial
Consumer:
Total loans
Delinquent loans
Year ended
December 31,
December 31,
December 31,
2013
2012
2013
2012
2013
2012
Net charge-offs
$
119,346
128,564
8,808
12,216
119,346
128,564
8,808
12,216
617
617
541
541
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Other revolving credit and installment
1,313,298 1,283,504
17,009
21,574
797
1,170
1
1
1,790
2,034
-
99
-
110
-
-
-
-
Total consumer
1,315,089 1,285,539
17,108
21,684
797
1,170
Total off-balance sheet securitized loans (1)
$
1,434,435 1,414,103
25,916
33,900
1,414
1,711
(1) At December 31, 2013 and 2012, the table includes total loans of $1.3 trillion at both dates and delinquent loans of $14.0 billion and $17.4 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.
191
Note 8: Securitizations and Variable Interest Entities (continued)
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.
(in millions)
December 31, 2013
Secured borrowings:
Total
VIE
assets
Consolidated
Third
party
Noncontrolling
assets
liabilities
interests
Municipal tender option bond securitizations
Commercial real estate loans
Residential mortgage securitizations
$
11,626
486
5,337
9,210
486
5,611
(7,874)
(277)
(5,396)
Total secured borrowings
17,449
15,307
(13,547)
Consolidated VIEs:
Nonconforming residential
mortgage loan securitizations
Multi-seller commercial paper conduit
Structured asset finance
Investment funds
Other
Total consolidated VIEs
6,770
6,018
(2,214)
-
56
1,536
582
8,944
-
56
1,536
512
-
(18)
(70)
(182)
8,122
(2,484)
Total secured borrowings and consolidated VIEs
$
26,393
23,429
(16,031)
December 31, 2012
Secured borrowings:
Municipal tender option bond securitizations
$
16,782
Commercial real estate loans
Residential mortgage securitizations
Total secured borrowings
Consolidated VIEs:
Nonconforming residential
mortgage loan securitizations
Multi-seller commercial paper conduit
Structured asset finance
Investment funds
Other
Total consolidated VIEs
975
5,757
23,514
8,633
2,059
71
1,837
3,454
16,054
Total secured borrowings and consolidated VIEs
$
39,568
15,130
975
6,240
22,345
7,707
2,036
71
1,837
2,974
14,625
36,970
(13,248)
(696)
(5,824)
(19,768)
(2,933)
(2,053)
(17)
(2)
(1,438)
(6,443)
Carrying value
Net
assets
1,336
209
215
1,760
3,804
-
38
1,466
325
5,633
7,393
1,882
279
416
2,577
4,774
(17)
54
1,835
1,488
8,134
-
-
-
-
-
-
-
-
(5)
(5)
(5)
-
-
-
-
-
-
-
-
(48)
(48)
(26,211)
(48)
10,711
In addition to the transactions included in the previous table,
at both December 31, 2013, and December 31, 2012, 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
December 31, 2013, and December 31, 2012, we pledged
approximately $6.6 billion and $6.4 billion in loans (principal
and interest eligible to be capitalized), $160 million and
$179 million in available-for-sale securities, and $180 million
and $138 million in cash and cash equivalents to collateralize the
VIE’s borrowings, respectively. These assets were not transferred
to the VIE, and accordingly we have excluded the VIE from the
previous table.
We have raised financing through the securitization of
certain financial assets in transactions with VIEs accounted for
as secured borrowings. We also consolidate VIEs where we are
the primary beneficiary. In certain transactions we provide
contractual support in the form of limited recourse and liquidity
to facilitate the remarketing of short-term securities issued to
third party investors. Other than this limited contractual
support, the assets of the VIEs are the sole source of repayment
of the securities held by third parties.
MUNICIPAL TENDER OPTION BOND SECURITIZATIONS As
part of our normal portfolio investment activities, we consolidate
municipal bond trusts that hold highly rated, long-term, fixed-
rate municipal bonds, the majority of which are rated AA or
192
MULTI-SELLER COMMERCIAL PAPER CONDUIT In
July 2013, we dissolved a multi-seller asset-based commercial
paper conduit we had administered that financed certain client
transactions. This conduit was a bankruptcy remote entity that
made loans to, or purchased certificated interests, generally from
SPEs, established by our clients (sellers) and which were secured
by pools of financial assets. The conduit funded itself through
the issuance of highly rated commercial paper to third party
investors. We were the primary beneficiary of the conduit
because we had power over the significant activities of the
conduit and had a significant variable interest due to our
liquidity arrangement. In 2013, we redeemed the outstanding
commercial paper issued from our multi-seller conduit to third
party investors at par.
INVESTMENT FUNDS We have consolidated certain of our
investment funds where we manage the assets of the fund and
our interests absorb a majority of the funds’ variability. We
consolidate these VIEs because we have discretion over the
management of the assets and are the sole investor in these
funds.
better. Our residual interests in these trusts generally allow us to
capture the economics of owning the securities outright, and
constructively make decisions that significantly impact the
economic performance of the municipal bond vehicle, primarily
by directing the sale of the municipal bonds owned by the
vehicle. In addition, the residual interest owners have the right
to receive benefits and bear losses that are proportional to
owning the underlying municipal bonds in the trusts. The trusts
obtain financing by issuing floating-rate trust certificates that
reprice on a weekly or other basis to third-party investors. Under
certain conditions, if we elect to terminate the trusts and
withdraw the underlying assets, the third party investors are
entitled to a small portion of any unrealized gain on the
underlying assets. We may serve as remarketing agent and/or
liquidity provider for the trusts. The floating-rate investors have
the right to tender the certificates at specified dates, often with
as little as seven days’ notice. Should we be unable to remarket
the tendered certificates, we are generally obligated to purchase
them at par under standby liquidity facilities unless the bond’s
credit rating has declined below investment grade or there has
been an event of default or bankruptcy of the issuer and insurer.
NONCONFORMING RESIDENTIAL MORTGAGE LOAN
SECURITIZATIONS We have consolidated certain of our
nonconforming residential mortgage loan securitizations in
accordance with consolidation accounting guidance. We have
determined we are the primary beneficiary of these
securitizations because we have the power to direct the most
significant activities of the entity through our role as primary
servicer and also hold variable interests that we have determined
to be significant. The nature of our variable interests in these
entities may include beneficial interests issued by the VIE,
mortgage servicing rights and recourse or repurchase reserve
liabilities. The beneficial interests issued by the VIE that we hold
include either subordinate or senior securities held in an amount
that we consider potentially significant.
193
Note 9: 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.
(in millions)
Fair value, beginning of year
Servicing from securitizations or asset transfers (1)
Sales
Net additions
Changes in fair value:
Due to changes in valuation model inputs or assumptions:
Mortgage interest rates (2)
Servicing and foreclosure costs (3)
Discount rates (4)
Prepayment estimates and other (5)
Net changes in valuation model inputs or assumptions
Other changes in fair value (6)
Total changes in fair value
Fair value, end of year
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:
Year ended December 31,
2013
2012
2011
$
11,538
3,469
12,603
5,182
14,467
3,957
(583)
(293)
-
2,886
4,889
3,957
4,362
(2,092)
(3,749)
(228)
-
(736)
(677)
(397)
273
(694)
(150)
913
3,398
(2,893)
(3,680)
(2,242)
(3,061)
(2,141)
1,156
(5,954)
(5,821)
$
15,580
11,538
12,603
(1) The year ended December 31, 2012, includes $315 million residential MSRs transferred from amortized MSRs that we elected to carry at fair value effective January 1, 2012.
(2) 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).
(3) Includes costs to service and unreimbursed foreclosure costs.
(4) Reflects discount rate assumption change, excluding portion attributable to changes in mortgage interest rates; the year ended December 31, 2012, change reflects
increased capital return requirements from market participants.
(5) 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.
(6) Represents changes due to collection/realization of expected cash flows over time.
The changes in amortized MSRs were:
(in millions)
Balance, beginning of year
Purchases
Servicing from securitizations or asset transfers (1)
Amortization (2)
Balance, end of year (2)
Valuation allowance:
Balance, beginning of year
Reversal of provision (provision) for MSRs in excess of fair value
Balance, end of year (3)
Amortized MSRs, net
Fair value of amortized MSRs:
Beginning of year
End of year (4)
Year ended December 31,
2013
2012
2011
$
1,160
1,445
1,422
176
147
(254)
177
(229)
(233)
155
132
(264)
1,229
1,160
1,445
-
-
-
(37)
37
-
(3)
(34)
(37)
1,229
1,160
1,408
1,400
1,575
1,756
1,400
1,812
1,756
$
$
(1) The year ended December 31, 2012, is net of $350 million ($313 million after valuation allowance) of residential MSRs that we elected to carry at fair value effective
January 1, 2012. A cumulative adjustment of $2 million to fair value was recorded in retained earnings at January 1, 2012.
(2) Includes $350 million in residential amortized MSRs at December 31, 2011. For the year ended December 31, 2011, the residential MSR amortization was $(50) million.
(3) 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. Residential amortized MSRs are evaluated for impairment purposes by the following risk strata: mortgages
sold to GSEs (FHLMC and FNMA) and mortgages sold to GNMA, each by interest rate stratifications. A valuation allowance of $37 million was recorded on the residential
amortized MSRs for the year ended December 31, 2011. For the year ended December 31, 2012, valuation allowance of $37 million for residential MSRs was reversed upon
election to carry at fair value.
(4) Includes fair value of $316 million in residential amortized MSRs and $1,440 million in commercial amortized MSRs at December 31, 2011. The balances at
December 31, 2013 and 2012, are all commercial amortized MSRs.
194
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.
(in billions)
Residential mortgage servicing:
Serviced for others
Owned loans serviced
Subservicing
Total residential servicing
Commercial mortgage servicing:
Serviced for others
Owned loans serviced
Subservicing
Total commercial servicing
Total managed servicing portfolio
Total serviced for others
Ratio of MSRs to related loans serviced for others
The components of mortgage banking noninterest income were:
(in millions)
Servicing income, net:
Servicing fees
Contractually specified servicing fees
Late charges
Ancillary fees
Unreimbursed direct servicing costs (1)
Net servicing fees
Changes in fair value of MSRs carried at fair value:
Due to changes in valuation model inputs or assumptions (2)
Other changes in fair value (3)
Total changes in fair value of MSRs carried at fair value
Amortization
Provision for MSRs in excess of fair value
Net derivative gains (losses) from economic hedges (4)
Total servicing income, net
Net gains on mortgage loan origination/sales activities
Total mortgage banking noninterest income
Market-related valuation changes to MSRs, net of hedge results (2) + (4)
December 31,
2013
2012
$
1,485
1,498
338
6
368
7
1,829
1,873
419
107
7
533
$
$
2,362
1,904
0.88 %
408
106
13
527
2,400
1,906
0.67
Year ended December 31,
2013
2012
2011
$
4,442
4,626
4,611
216
343
257
342
298
354
(1,074)
(1,234)
(1,119)
3,927
3,991
4,144
3,398
(2,893)
(3,680)
(2,242)
(3,061)
(2,141)
1,156
(5,954)
(5,821)
(254)
(233)
-
-
(264)
(34)
(2,909)
3,574
5,241
1,920
1,378
6,854
10,260
3,266
4,566
8,774
11,638
7,832
489
681
1,561
$
$
(1) Primarily associated with foreclosure expenses and certain interest costs.
(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 16 – Free-Standing Derivatives for
additional discussion and detail.
195
Note 9: 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. Because the level of
mortgage loan repurchase losses depends upon economic
factors, investor demand strategies and other external
conditions that may change over the life of the underlying loans,
the level of the liability for mortgage loan repurchase losses is
difficult to estimate and requires considerable management
judgment. We maintain regular contact with the GSEs, the
Federal Housing Finance Agency (FHFA), and other significant
investors to monitor their repurchase demand practices and
issues as part of our process to update our repurchase liability
estimate as new information becomes available. The Company
reached 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.
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
$896 million at December 31, 2013, 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.
(in millions)
Year ended December 31,
2013
2012
2011
Balance, beginning of year
$
2,206
1,326
1,289
Provision for repurchase losses:
Loan sales
Change in estimate (1)
Total additions
Losses (2)
143
285
275
101
1,665
1,184
428
1,940
1,285
(1,735) (1,060)
(1,248)
Balance, end of year
$
899
2,206
1,326
(1) Results from such factors as changes in investor demand and mortgage insurer
practices, credit deterioration and changes in the financial stability of
correspondent lenders.
(2) Year ended December 31, 2013, reflects $746 million and $508 million as a
result of the settlements reached with FHLMC and FNMA, respectively, 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.
196
Note 10: Intangible Assets
The gross carrying value of intangible assets and accumulated amortization was:
(in millions)
Amortized intangible assets (1):
MSRs (2)
Core deposit intangibles
Customer relationship and other intangibles
December 31, 2013
December 31, 2012
Gross
carrying
Accumulated
Net
carrying
Gross
carrying
Accumulated
Net
carrying
value
amortization
value
value
amortization
value
$
2,639
12,834
3,145
(1,410)
(8,160)
1,229
4,674
(2,061)
1,084
2,317
12,836
3,147
(1,157)
(6,921)
(1,795)
1,160
5,915
1,352
Total amortized intangible assets
$
18,618
(11,631)
6,987
18,300
(9,873)
8,427
Unamortized intangible assets:
MSRs (carried at fair value) (2)
Goodwill
Trademark
(1) Excludes fully amortized intangible assets.
(2) See Note 9 for additional information on MSRs.
$
15,580
25,637
14
11,538
25,637
14
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 December 31, 2013. Future
amortization expense may vary from these projections.
(in millions)
Year ended December 31, 2013 (actual)
Estimate for year ended December 31,
2014
2015
2016
2017
2018
Customer
Core
relationship
Amortized
deposit
and other
MSRs
intangibles
intangibles
Total
$
$
254
1,241
267
1,762
247
215
177
134
100
1,113
1,022
919
851
769
251
227
212
195
184
1,611
1,464
1,308
1,180
1,053
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 24 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.
(in millions)
December 31, 2011
Goodwill from business combinations
December 31, 2012
December 31, 2013
Wealth,
Community
Wholesal
e Brokerage and
Consolidated
Banking
Banking
Retirement
Company
$
$
$
17,924
(2)
17,922
6,820
524
7,344
17,922
7,344
371
-
371
371
25,115
522
25,637
25,637
197
Note 11: Deposits
Time certificates of deposit (CDs) and other time deposits issued
by domestic and foreign offices totaled $117.4 billion and
$90.1 billion at December 31, 2013 and 2012, respectively.
Substantially all of these deposits were interest bearing. The
contractual maturities of these deposits are presented in the
following table.
Of these deposits, the amount of domestic time deposits with
a denomination of $100,000 or more was $16.6 billion and
$23.7 billion at December 31, 2013 and 2012, respectively. The
contractual maturities of these deposits are presented in the
following table.
(in millions)
2014
2015
2016
2017
2018
Thereafter
Total
December 31, 2013
Three months or less
(in millions)
After three months through six months
After six months through twelve months
After twelve months
Total
$
86,958
13,308
7,624
2,661
3,263
3,619
$
117,433
$
2013
3,177
2,003
2,741
8,685
$
16,606
Time CDs and other time deposits issued by foreign offices
with a denomination of $100,000 or more were $15.3 billion and
$11.7 billion at December 31, 2013 and 2012, respectively.
Demand deposit overdrafts of $554 million and $806 million
were included as loan balances at December 31, 2013 and 2012,
respectively.
Note 12: Short-Term Borrowings
The table below shows selected information for short-term
borrowings, which predominantly mature in less than 30 days.
We pledge certain financial instruments that we own to
collateralize repurchase agreements and other securities
financings. For additional information, see the “Pledged Assets”
section of Note 14.
(in millions)
As of December 31,
Federal funds purchased and securities sold
under agreements to repurchase
Commercial paper
Other short-term borrowings
Total
Year ended December 31,
Average daily balance
Federal funds purchased and securities sold
under agreements to repurchase
Commercial paper
Other short-term borrowings
Total
Maximum month-end balance
Federal funds purchased and securities sold
under agreements to repurchase (1)
Commercial paper (2)
Other short-term borrowings (3)
2013
2012
2011
Amount
Rate
Amount
Rate
Amount
Rate
$
36,263
0.05 % $
34,973
0.17 % $
31,038
0.05 %
5,162
12,458
0.18
0.31
4,038
18,164
0.27
0.16
3,624
14,429
0.23
0.18
$
53,883
0.12
$
57,175
0.17
$
49,091
0.10
$
36,227
4,702
13,787
0.08
0.25
0.22
$
32,092
4,142
14,962
$
0.12
0.26
0.29
34,388
4,437
12,956
0.11
0.26
0.35
$
54,716
0.13
$
51,196
0.18
$
51,781
0.18
$
39,451
5,700
16,564
N/A
N/A
N/A
$
36,327
5,036
18,164
$
N/A
N/A
N/A
37,509
6,229
14,429
N/A
N/A
N/A
N/A- Not applicable
(1) Highest month-end balance in each of the last three years was May 2013, June 2012 and March 2011.
(2) Highest month-end balance in each of the last three years was March 2013, September 2012 and April 2011.
(3) Highest month-end balance in each of the last three years was March 2013, December 2012 and December 2011.
198
Note 13: Long-Term Debt
We issue long-term debt denominated in multiple currencies,
predominantly in U.S. dollars. Our issuances have both fixed and
floating interest rates. As a part of our overall interest rate risk
management strategy, we often use derivatives to manage our
exposure to interest rate risk. We also use derivatives to manage
our exposure to foreign currency risk. As a result, the long-term
debt presented below is primarily hedged in a fair value or cash
flow hedge relationship. See Note 16 for further information on
qualifying hedge contracts.
(in millions)
Wells Fargo & Company (Parent only)
Senior
Fixed-rate notes
Floating-rate notes
Structured notes (1)
Total senior debt - Parent
Subordinated
Fixed-rate notes (2)
Floating-rate notes
Total subordinated debt - Parent
Junior subordinated
Fixed-rate notes - hybrid trust securities
Floating-rate notes
Total junior subordinated debt - Parent (3)
Total long-term debt - Parent (2)
Wells Fargo Bank, N.A. and other bank entities (Bank)
Senior
Fixed-rate notes
Floating-rate notes
Floating-rate extendible notes (4)
Fixed-rate advances - Federal Home Loan Bank (FHLB) (5)
Floating-rate advances - FHLB (5)
Structured notes (1)
Capital leases (Note 7)
Total senior debt - Bank
Subordinated
Fixed-rate notes
Floating-rate notes
Total subordinated debt - Bank
Junior subordinated
Floating-rate notes
Total junior subordinated debt - Bank (3)
Long-term debt issued by VIE - Fixed rate (6)
Long-term debt issued by VIE - Floating rate (6)
Mortgage notes and other debt (7)
Total long-term debt - Bank
(continued on following page)
Following is a summary of our long-term debt carrying
values, reflecting unamortized debt discounts and premiums,
and purchase accounting adjustments, where applicable. The
interest rates displayed represent the range of contractual rates
in effect at December 31, 2013. These interest rates do not
include the effects of any associated derivatives designated in a
hedge accounting relationship.
Maturity
date(s)
Stated
interest rate(s)
2014-2038
2014-2048
2014-2053
1.00-6.75% $
0.00-3.598
Varies
2014-2044
2015-2016
3.45-7.574%
0.576-0.614
2029-2068
2027
5.95-7.95%
0.744-1.244
December 31,
2013
2012
44,145
12,445
4,891
61,481
17,469
1,190
18,659
1,178
263
1,441
44,623
10,996
3,633
59,252
11,340
1,165
12,505
4,221
255
4,476
81,581
76,233
2015
2015-2053
2015
2014-2031
2018-2019
2014-2025
2014-2025
0.75%
0.00-0.522
500
2,219
0.291-0.346
10,749
3.83 - 8.17
0.22-0.29
Varies
Varies
2014-2038
2014-2017
4.75-7.74%
0.448-2.965
2027
0.811-0.894%
2014-2047
2015-2042
2014-2062
0.00-7.00%
0.296-32.11
0.00-12.80
160
19,000
13
11
32,652
10,725
1,616
12,341
303
303
1,098
1,230
16,874
64,498
1,331
170
4,450
216
2,002
163
12
8,344
14,153
1,617
15,770
294
294
1,542
1,826
16,976
44,752
199
Note 13: Long-Term Debt (continued)
(continued from previous page)
(in millions)
Other consolidated subsidiaries
Senior
Fixed-rate notes
FixFloat notes
Total senior debt - Other consolidated subsidiaries
Junior subordinated
Floating-rate notes
Total junior subordinated debt - Other
consolidated subsidiaries (3)
Long-term debt issued by VIE - Fixed rate (6)
Long-term debt issued by VIE - Floating rate (6)
Mortgage notes and other (7)
Maturity
date(s)
Stated
interest rate(s)
December 31,
2013
2012
2014-2023
2.774-4.38%
2020 6.795% through 2015, varies
6,543
20
6,563
2027
0.736%
155
2015
2015
2014-2022
5.16%
1.544
1.54-6.00
155
18
10
173
5,968
20
5,988
155
155
105
10
136
Total long-term debt - Other consolidated subsidiaries
Total long-term debt
6,919
6,394
$
152,998
127,379
(1) Primarily consists of long-term notes where the performance of the note is linked to an embedded equity, commodity, or currency index, or basket of indices accounted for
separately from the note as a free-standing derivative. For information on embedded derivatives, see Note 16 – Free-standing derivatives. In addition, a major portion
consists of zero coupon callable notes where interest is paid as part of the final redemption amount.
(2) Includes fixed-rate subordinated notes issued by the Parent at a discount of $140 million in fourth quarter 2013 to effect a modification of Wells Fargo Bank, NA notes. These
notes are carried at their par amount on the balance sheet of the Parent presented in Note 25.
(3) Represents junior subordinated debentures held by unconsolidated wholly-owned trusts formed for the sole purpose of issuing trust preferred securities. See Note 8 for
additional information on our trust preferred security structures.
(4) Represents floating-rate extendible notes where holders of the notes may elect to extend the contractual maturity of all or a portion of the principal amount on a periodic
basis.
(5) At December 31, 2013, Federal Home Loan Bank advances are secured by residential loan collateral. Outstanding advances at December 31, 2012, were secured by
As part of our long-term and short-term borrowing
arrangements, we are subject to various financial and
operational covenants. Some of the agreements under which
debt has been issued have provisions that may limit the merger
or sale of certain subsidiary banks and the issuance of capital
stock or convertible securities by certain subsidiary banks. At
December 31, 2013, we were in compliance with all the
covenants.
investment securities and residential loan collateral.
(6) For additional information on VIEs, see Note 8.
(7) Primarily related to securitizations and secured borrowings, see Note 8.
The aggregate carrying value of long-term debt that matures
(based on contractual payment dates) as of December 31, 2013,
in each of the following five years and thereafter, is presented in
the following table.
$
Parent
Company
8,535
8,684
15,734
9,122
7,937
31,569
12,800
26,531
19,732
13,114
26,867
53,954
$
81,581
152,998
(in millions)
2014
2015
2016
2017
2018
Thereafter
Total
200
Note 14: 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, liquidity agreements,
written put options, recourse obligations, residual value
guarantees, and contingent consideration. The following table
shows carrying value, maximum exposure to loss on our
guarantees and the related non-investment grade amounts.
December 31, 2013
Maximum exposure to loss
Expires after
Expires after
Expires in
Carrying
one year
one year
through
three years
through
Expires
after five
Non-
investment
(in millions)
value
or less
three years
five years
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
Liquidity agreements (2)
Written put options (3)
Loans and MHFS sold with recourse
Contingent consideration
Other guarantees
-
-
907
86
30
3
-
-
4,775
116
15
329
3
-
2,967
418
94
17
18
-
3,521
849
-
16
3,199
17
2,725
5,014
-
3,220
17
13,988
6,397
109
954
1,316
25
-
4,311
3,674
109
4
Total guarantees
$
1,082
22,142
15,127
9,712
12,903
59,884
17,635
December 31, 2012
Maximum exposure to loss
Expires after
Expires after
Expires in
one year
three years
Carrying
one year
through
through
Expires after
Non-
investment
(in millions)
value
or less
three years
five years
five years
Total
grade
Standby letters of credit (1)
Securities lending and
other indemnifications
Liquidity agreements (2)
Written put options (2)(3)
Loans and MHFS sold with recourse
Contingent consideration
Other guarantees
Total guarantees
$
$
42
19,463
11,782
6,531
1,983
39,759
11,331
-
-
1,427
99
35
3
3
-
2,951
443
11
677
7
-
3,873
357
24
26
20
2,511
2,541
-
2,475
647
94
1
3
2,575
4,426
-
717
3
11,874
5,873
129
1,421
118
3
3,953
3,905
129
4
1,606
23,548
16,069
9,768
12,215
61,600
19,443
(1) Total maximum exposure to loss includes direct pay letters of credit (DPLCs) of $16.8 billion and $18.5 billion at December 31, 2013 and December 31, 2012, 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) Certain of these agreements included in this table are related to off-balance sheet entities and, accordingly, are also disclosed in Note 8.
(3) Written put options, which are in the form of derivatives, are also included in the derivative disclosures in Note 16.
“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 6.
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.
201
Note 14: Guarantees, Pledged Assets and Collateral (continued)
STANDBY LETTERS OF CREDIT We issue standby letters of
credit, which include performance and financial guarantees, for
customers in connection with contracts between our customers
and third parties. Standby letters of credit are agreements where
we are obligated to make payment to a third party on behalf of a
customer in the event the customer fails to meet their
contractual obligations. We consider the credit risk in standby
letters of credit and commercial and similar letters of credit in
determining the allowance for credit losses. Standby letters of
credit include direct pay letters of credit we issue to provide
credit enhancements for certain bond issuances.
SECURITIES LENDING AND OTHER INDEMNIFICATIONS As
a securities lending agent, we lend debt and equity securities
from participating institutional clients’ portfolios to third-party
borrowers. These arrangements are for an indefinite period of
time whereby we indemnify our clients against default by the
borrower in returning these lent securities. This indemnity is
supported by collateral received from the borrowers and is
generally in the form of cash or highly liquid securities that are
marked to market daily. There was $346 million at
December 31, 2013 and $443 million at December 31, 2012, in
collateral supporting loaned securities with values of $337
million and $436 million, respectively.
We use certain third party clearing agents to clear and settle
transactions on behalf of some of our institutional brokerage
customers. We indemnify the clearing agents against loss that
could occur for non-performance by our customers on
transactions that are not sufficiently collateralized. Transactions
subject to the indemnifications may include customer
obligations related to the settlement of margin accounts and
short positions, such as written call options and securities
borrowing transactions. Outstanding customer obligations were
$769 million and $579 million and the related collateral was
$3.7 billion and $3.1 billion at December 31, 2013, and
December 31, 2012, respectively. Our estimate of maximum
exposure to loss, which requires judgment regarding the range
and likelihood of future events, was $2.9 billion as of
December 31, 2013, and $2.1 billion as of December 31, 2012.
We enter into other types of indemnification agreements in
the ordinary course of business under which we agree to
indemnify third parties against any damages, losses and
expenses incurred in connection with legal and other
proceedings arising from relationships or transactions with us.
These relationships or transactions include those arising from
service as a director or officer of the Company, underwriting
agreements relating to our securities, acquisition agreements
and various other business transactions or arrangements.
Because the extent of our obligations under these agreements
depends entirely upon the occurrence of future events, we are
unable to determine our potential future liability under these
agreements. We do, however, record a liability for residential
mortgage loans that we expect to repurchase pursuant to various
representations and warranties. See Note 9 for additional
information on the liability for mortgage loan repurchase losses.
202
LIQUIDITY AGREEMENTS We provide liquidity to certain off-
balance sheet entities that hold securitized fixed-rate municipal
bonds and consumer or commercial assets that are partially
funded with the issuance of money market and other short-term
notes. See Note 8 for additional information on securitizations
and VIEs.
WRITTEN PUT OPTIONS Written put options are contracts
that give the counterparty the right to sell to us an underlying
instrument held by the counterparty at a specified price, and
include options, floors, caps and credit default swaps. These
written put option contracts generally permit net settlement.
While these derivative transactions expose us to risk in the event
the option is exercised, we manage this risk by entering into
offsetting trades or by taking short positions in the underlying
instrument. We offset substantially all put options written to
customers with purchased options. Additionally, for certain of
these contracts, we require the counterparty to pledge the
underlying instrument as collateral for the transaction. Our
ultimate obligation under written put options is based on future
market conditions and is only quantifiable at settlement. See
Note 16 for additional information regarding written derivative
contracts.
LOANS AND MHFS SOLD WITH RECOURSE In certain loan
sales or securitizations, we provide recourse to the buyer
whereby we are required to indemnify the buyer for any loss on
the loan up to par value plus accrued interest. We provide
recourse, predominantly to the GSEs, on loans sold under
various programs and arrangements. Primarily all of these
programs and arrangements require that we share in the loans’
credit exposure for their remaining life by providing recourse to
the GSE, up to 33.33% of actual losses incurred on a pro-rata
basis, in the event of borrower default. Under the remaining
recourse programs and arrangements, if certain events occur
within a specified period of time from transfer date, we have to
provide limited recourse to the buyer to indemnify them for
losses incurred for the remaining life of the loans. The maximum
exposure to loss reported in the accompanying table represents
the outstanding principal balance of the loans sold or securitized
that are subject to recourse provisions or the maximum losses
per the contractual agreements. However, we believe the
likelihood of loss of the entire balance due to these recourse
agreements is remote and amounts paid can be recovered in
whole or in part from the sale of collateral. During 2013 and
2012 we repurchased $33 million and $26 million, respectively,
of loans associated with these agreements. We also provide
representation and warranty guarantees on loans sold under the
various recourse programs and arrangements. Our loss exposure
relative to these guarantees is separately considered and
provided for, as necessary, in determination of our liability for
loan repurchases due to breaches of representation and
warranties. See Note 9 for additional information on the liability
for mortgage loan repurchase losses.
CONTINGENT CONSIDERATION In connection with certain
brokerage, asset management, insurance agency and other
acquisitions we have made, the terms of the acquisition
agreements provide for deferred payments or additional
consideration, based on certain performance targets.
OTHER GUARANTEES We are members of exchanges and
clearing houses that we use to clear our trades and those of our
customers. It is common that all members in these organizations
are required to collectively guarantee the performance of other
members. Our obligations under the guarantees are based on
either a fixed amount or a multiple of the collateral we are
required to maintain with these organizations. We have not
recorded a liability for these arrangements as of the dates
presented in the previous table because we believe the likelihood
of loss is remote.
We also have contingent performance arrangements related
to various customer relationships and lease transactions. We are
required to pay the counterparties to these agreements if third
parties default on certain obligations.
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, government-sponsored
entities (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 $8.1 billion
and $14.6 billion at December 31, 2013, and December 31, 2012,
respectively, which can only be used to settle the liabilities of
those entities. The table also excludes $15.3 billion and
$22.3 billion in assets pledged in transactions accounted for as
secured borrowings at December 31, 2013 and
December 31, 2012, respectively. See Note 8 for additional
information on consolidated VIE assets and secured borrowings.
(in millions)
Trading assets and other (1)
Investment securities (2)
Loans (3)
Total pledged assets
$
Dec. 31,
2013
30,288
85,468
381,597
Dec. 31,
2012
28,031
96,018
360,171
$
497,353
484,220
(1) Represent assets pledged to collateralize repurchase agreements and other securities financings. Balance includes $29.0 billion and $27.4 billion at December 31, 2013, and
December 31, 2012, respectively, under agreements that permit the secured parties to sell or repledge the collateral.
(2) Includes $8.7 billion and $8.4 billion in collateral for repurchase agreements at December 31, 2013, and December 31, 2012, 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.
203
Note 14: 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 16.
(in millions)
Assets:
Resale and securities borrowing agreements
Gross amounts recognized
Gross amounts offset in consolidated balance sheet (1)
Net amounts in consolidated balance sheet (2)
Noncash collateral not recognized in consolidated balance sheet (3)
Net amount (4)
Liabilities:
Repurchase and securities lending agreements
Gross amounts recognized
Gross amounts offset in consolidated balance sheet (1)
Net amounts in consolidated balance sheet (5)
Noncash collateral pledged but not netted in consolidated balance sheet (6)
Net amount (7)
Dec. 31,
2013
Dec. 31,
2012
$
38,635
(2,817)
45,847
(2,561)
35,818
43,286
(35,768)
(42,920)
$
50
366
$
38,032
(2,817)
35,876
(2,561)
35,215
33,315
(34,770)
(33,050)
$
445
265
(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 December 31, 2013 and December 31, 2012, includes $25.7 billion and $33.8 billion, respectively, classified on our consolidated balance sheet in Federal funds sold,
securities purchased under resale agreements and other short-term investments and $10.1 billion and $9.5 billion, respectively, in Loans.
(3) Represents the fair value of non-cash 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 December 31, 2013 and December 31, 2012, we have received total collateral with a fair value of $43.3 billion and $46.6 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 $23.8 billion at
December 31, 2013 and $29.7 billion at December 31, 2012.
(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 non-cash 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 December 31, 2013 and December 31, 2012, we have pledged total collateral with a fair value of $39.0 billion and
$36.4 billion, respectively, of which, the counterparty does not have the right to sell or repledge $10.0 billion as of December 31, 2013 and $9.1 billion as of December 31,
2012.
(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.
204
Note 15: Legal Actions
Wells Fargo and certain of our subsidiaries are involved in a
number of judicial, regulatory and arbitration proceedings
concerning matters arising from the conduct of our business
activities. These proceedings include actions brought against
Wells Fargo and/or our subsidiaries with respect to corporate
related matters and transactions in which Wells Fargo and/or
our subsidiaries were involved. In addition, Wells Fargo and our
subsidiaries may be requested to provide information or
otherwise cooperate with government authorities in the conduct
of investigations of other persons or industry groups.
Although there can be no assurance as to the ultimate
outcome, Wells Fargo and/or our subsidiaries have generally
denied, or believe we have a meritorious defense and will deny,
liability in all significant litigation pending against us, including
the matters described below, and we intend to defend vigorously
each case, other than matters we describe as having settled.
Reserves are established for legal claims when payments
associated with the claims become probable and the costs can be
reasonably estimated. The actual costs of resolving legal claims
may be substantially higher or lower than the amounts reserved
for those claims.
FHA INSURANCE LITIGATION On October 9, 2012, the United
States filed a complaint, captioned United States of America v.
Wells Fargo Bank, N.A., in the U.S. District Court for the
Southern District of New York. The complaint makes claims with
respect to Wells Fargo’s Federal Housing Administration (FHA)
lending program for the period 2001 to 2010. The complaint
alleges, among other allegations, that Wells Fargo improperly
certified certain FHA mortgage loans for United States
Department of Housing and Urban Development (HUD)
insurance that did not qualify for the program, and therefore
Wells Fargo should not have received insurance proceeds from
HUD when some of the loans later defaulted. The complaint
further alleges Wells Fargo knew some of the mortgages did not
qualify for insurance and did not disclose the deficiencies to
HUD before making insurance claims. On December 1, 2012,
Wells Fargo filed a motion in the U.S. District Court for the
District of Columbia seeking to enforce a release of Wells Fargo
given by the United States, which was denied on
February 12, 2013. On April 11, 2013, Wells Fargo appealed the
decision to the U.S. Court of Appeals for the District of Columbia
Circuit, with appellate briefing completed on
November 26, 2013. On December 14, 2012, the United States
filed an amended complaint. On January 16, 2013, Wells Fargo
filed a motion in the Southern District of New York to dismiss
the amended complaint. On September 24, 2013, the Court
entered an order denying the motion with respect to the
government’s federal statutory claims and granting in part, and
denying in part, the motion with respect to the government’s
common law claims. On January 10, 2014, the United States
filed a second amended complaint.
INTERCHANGE LITIGATION Wells Fargo Bank, N.A., Wells
Fargo & Company, Wachovia Bank, N.A. and Wachovia
Corporation are named as defendants, separately or in
combination, in putative class actions filed on behalf of a
plaintiff class of merchants and in individual actions brought by
individual merchants with regard to the interchange fees
associated with Visa and MasterCard payment card transactions.
These actions have been consolidated in the U.S. District Court
for the Eastern District of New York. Visa, MasterCard and
several banks and bank holding companies are named as
defendants in various of these actions. The amended and
consolidated complaint asserts claims against defendants based
on alleged violations of federal and state antitrust laws and seeks
damages, as well as injunctive relief. Plaintiff merchants allege
that Visa, MasterCard and payment card issuing banks
unlawfully colluded to set interchange rates. Plaintiffs also allege
that enforcement of certain Visa and MasterCard rules and
alleged tying and bundling of services offered to merchants are
anticompetitive. Wells Fargo and Wachovia, along with other
defendants and entities, are parties to Loss and Judgment
Sharing Agreements, which provide that they, along with other
entities, will share, based on a formula, in any losses from the
Interchange Litigation. On July 13, 2012, Visa, MasterCard and
the financial institution defendants, including Wells Fargo,
signed a memorandum of understanding with plaintiff
merchants to resolve the consolidated class actions and reached
a separate settlement in principle of the consolidated individual
actions. The proposed settlement payments by all defendants in
the consolidated class and individual actions total approximately
$6.6 billion. The class settlement also provides for the
distribution to class merchants of 10 basis points of default
interchange across all credit rate categories for a period of eight
consecutive months. The Court granted final approval of the
settlement, which is proceeding. Merchants have filed several
“opt-out” actions.
MARYLAND MORTGAGE LENDING LITIGATION On
December 26, 2007, a class action complaint captioned Denise
Minter, et al., v. Wells Fargo Bank, N.A., et al., was filed in the
U.S. District Court for the District of Maryland. The complaint
alleges that Wells Fargo and others violated provisions of the
Real Estate Settlement Procedures Act and other laws by
conducting mortgage lending business improperly through a
general partnership, Prosperity Mortgage Company. The
complaint asserts that Prosperity Mortgage Company was not a
legitimate affiliated business and instead operated to conceal
Wells Fargo Bank, N.A.’s role in the loans at issue. A plaintiff
class of borrowers who received a mortgage loan from Prosperity
Mortgage Company that was funded by Prosperity Mortgage
Company’s line of credit with Wells Fargo Bank, N.A. from 1993
to May 31, 2012, had been certified. Prior to trial, the Court
narrowed the class action to borrowers who were referred to
Prosperity Mortgage Company by Wells Fargo’s partner and
whose loans were transferred to Wells Fargo Bank, N.A. from
1993 to May 31, 2012. On May 6, 2013, the case went to trial. On
June 6, 2013, the jury returned a verdict in favor of all
defendants, including Wells Fargo. The plaintiffs have appealed.
On July 8, 2008, a class action complaint captioned Stacey
and Bradley Petry, et al., v. Wells Fargo Bank, N.A., et al., was
205
Note 15: Legal Actions (continued)
filed. The complaint alleges that Wells Fargo and others violated
the Maryland Finder’s Fee Act in the closing of mortgage loans in
Maryland. On March 13, 2013, the Court held the plaintiff class
did not have sufficient evidence to proceed to trial, which was
previously set for March 18, 2013. On June 20, 2013, the Court
entered judgment in favor of the defendants. The plaintiffs have
appealed.
MORTGAGE RELATED REGULATORY INVESTIGATIONS
Government agencies continue investigations or examinations of
certain mortgage related practices of Wells Fargo and
predecessor institutions. Wells Fargo, for itself and for
predecessor institutions, has responded, and continues to
respond, to requests from government agencies seeking
information regarding the origination, underwriting and
securitization of residential mortgages, including sub-prime
mortgages.
ORDER OF POSTING LITIGATION A series of putative class
actions have been filed against Wachovia Bank, N.A. and Wells
Fargo Bank, N.A., as well as many other banks, challenging the
high to low order in which the banks post debit card transactions
to consumer deposit accounts. There are currently several such
cases pending against Wells Fargo Bank (including the Wachovia
Bank cases to which Wells Fargo succeeded), most of which have
been consolidated in multi-district litigation proceedings in the
U.S. District Court for the Southern District of Florida. The bank
defendants moved to compel these cases to arbitration under
recent Supreme Court authority. On November 22, 2011, the
Judge denied the motion. The bank defendants appealed the
decision to the U.S. Court of Appeals for the Eleventh Circuit. On
October 26, 2012, the Eleventh Circuit affirmed the District
Court’s denial of the motion. Wells Fargo renewed its motion to
compel arbitration with respect to the unnamed putative class
members. On April 8, 2013, the District Court denied the
motion. Wells Fargo has appealed the decision to the Eleventh
Circuit.
On August 10, 2010, the U.S. District Court for the Northern
District of California issued an order in Gutierrez v. Wells Fargo
Bank, N.A., a case that was not consolidated in the multi-district
proceedings, enjoining the bank’s use of the high to low posting
method for debit card transactions with respect to the plaintiff
class of California depositors, directing the bank to establish a
different posting methodology and ordering remediation of
approximately $203 million. On October 26, 2010, a final
judgment was entered in Gutierrez. On October 28, 2010, Wells
Fargo appealed to the U.S. Court of Appeals for the Ninth
Circuit. On December 26, 2012, the Ninth Circuit reversed the
Note 16: Derivatives
order requiring Wells Fargo to change its order of posting and
vacated the portion of the order granting remediation of
approximately $203 million on the grounds of federal
preemption. The Ninth Circuit affirmed the District Court’s
finding that Wells Fargo violated a California state law
prohibition on fraudulent representations and remanded the
case to the District Court for further proceedings. On
August 5, 2013, the District Court entered a judgment against
Wells Fargo in the approximate amount of $203 million,
together with post-judgment interest thereon from
October 25, 2010, and, effective as of July 15, 2013, enjoined
Wells Fargo from making or disseminating additional
misrepresentations about its order of posting of transactions. On
August 7, 2013, Wells Fargo appealed the judgment to the Ninth
Circuit.
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.
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 $951 million as of December 31, 2013. 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.
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.
Our asset/liability management approach to interest rate,
foreign currency and certain other risks includes the use of
derivatives. Such derivatives are typically designated as fair
value or cash flow hedges, or economic hedges. This helps
minimize significant, unplanned fluctuations in earnings, fair
206
values of assets and liabilities, and cash flows caused by interest
rate, foreign currency and other market value volatility. This
approach involves modifying the repricing characteristics of
certain assets and liabilities so that changes in interest rates,
foreign currency and other exposures do not have a significantly
adverse effect on the net interest margin, cash flows and
earnings. As a result of fluctuations in these exposures, hedged
assets and liabilities will gain or lose market value. In a fair value
or economic hedge, the effect of this unrealized gain or loss will
generally be offset by the gain or loss on the derivatives linked to
the hedged assets and liabilities. In a cash flow hedge, where we
manage the variability of cash payments due to interest rate
fluctuations by the effective use of derivatives linked to hedged
assets and liabilities, the unrealized gain or loss on the
derivatives or the hedged asset or liability is generally reflected
in other comprehensive income and not in earnings.
We also offer various derivatives, including interest rate,
commodity, equity, credit and foreign exchange contracts, to our
customers as part of our trading businesses but usually offset our
exposure from such contracts by entering into other financial
contracts. These derivative transactions are conducted in an
effort to help customers manage their market price risks. The
customer accommodations and any offsetting derivative
contracts are treated as free-standing derivatives. To a much
lesser extent, we take positions executed for our own account
based on market expectations or to benefit from price
differentials between financial instruments and markets.
Additionally, free-standing derivatives include embedded
derivatives that are required to be accounted for separately from
their host contracts.
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.
(in millions)
Derivatives designated as hedging instruments
Interest rate contracts (1)
Foreign exchange contracts
Total derivatives designated as
qualifying hedging instruments
Derivatives not designated as hedging instruments
Free-standing derivatives (economic hedges):
Interest rate contracts (2)
Equity contracts
Foreign exchange contracts
Credit contracts - protection purchased
Other derivatives
Subtotal
Customer accommodation, trading and other
free-standing derivatives:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts - protection sold
Credit contracts - protection purchased
Subtotal
Total derivatives not designated as hedging instruments
Total derivatives before netting
Netting (3)
Total
December 31, 2013
December 31, 2012
Notional or
contractual
Fair value
Notional or
Fair value
Asset
Liability
contractual
Asset
Liability
amount
derivatives
derivatives
amount
derivatives
derivatives
$
100,412
26,483
4,315
1,091
2,528
847
92,004
27,382
7,284
1,808
2,696
274
5,406
3,375
9,092
2,970
220,577
3,273
10,064
-
2,160
595
349
21
-
13
897
206
35
-
16
334,555
450
694
75
3,074
16
2,296
-
3
-
-
50
64
-
78
978
1,154
453
886
4,030,068
50,936
53,113
2,774,783
63,617
65,305
96,889
96,379
164,160
19,501
23,314
2,673
7,475
3,731
354
1,147
2,603
7,588
3,626
1,532
368
66,316
68,830
67,294
69,984
72,700
73,359
90,732
71,958
166,061
26,455
29,021
3,456
3,783
3,713
315
1,495
3,590
4,114
3,241
2,623
329
76,379
79,202
76,832
80,088
85,924
83,058
(56,894)
(63,739)
(62,108)
(71,116)
$
15,806
9,620
23,816
11,942
(1) Notional amounts presented exclude $1.9 billion at December 31, 2013, and $4.7 billion at December 31, 2012, 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.
207
Note 16: Derivatives (continued)
The following table provides information on the gross fair
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 14.
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 $59.8 billion
and $66.1 billion of gross derivative assets and liabilities,
respectively, at December 31, 2013, and $68.9 billion and
$75.8 billion, respectively, at December 31, 2012, 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 $12.9 billion and $7.3 billion, respectively, at
December 31, 2013 and $17.0 billion and $7.3 billion,
respectively, at December 31, 2012, 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 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.
208
(in millions)
December 31, 2013
Derivative assets
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
Other contracts
Total derivative assets
Derivative liabilities
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
Other contracts
Gross amounts
offset in
Net amounts in
not offset in
consolidated
Gross amounts
Percent
Gross
amounts
consolidated
balance
consolidated
balance
balance sheet
(Disclosure-only
exchanged in
over-the-counter
Net
recognized
sheet (1)
sheet (2)
netting) (3)
amounts
market (4)
$
55,846
(48,271)
2,673
7,824
4,843
354
1,147
13
(659)
(3,254)
(3,567)
(302)
(841)
-
7,575
2,014
4,570
1,276
52
306
13
(1,101)
(72)
(239)
(9)
-
(33)
-
6,474
1,942
4,331
1,267
52
273
13
$
$
72,700
(56,894)
15,806
(1,454)
14,352
56,538
2,603
7,794
4,508
1,532
368
16
(53,902)
(952)
(3,502)
(3,652)
(1,432)
(299)
-
2,636
1,651
4,292
856
100
69
16
(482)
(11)
(124)
-
-
-
-
2,154
1,640
4,168
856
100
69
16
65
%
52
81
100
92
100
100
66
73
94
100
100
89
100
%
Total derivative liabilities
$
73,359
(63,739)
9,620
(617)
9,003
December 31, 2012
Derivative assets
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
Total derivative assets
Derivative liabilities
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
Other contracts
$
71,351
(53,708)
17,643
(2,692)
14,951
94
%
$
$
3,456
3,783
5,524
315
1,495
(1,080)
(2,428)
(3,449)
(296)
(1,147)
2,376
1,355
2,075
19
348
(27)
-
(105)
(4)
(56)
2,349
1,355
1,970
15
292
85,924
(62,108)
23,816
(2,884)
20,932
68,695
3,590
4,164
3,579
2,623
329
78
(62,559)
(1,394)
(2,618)
(1,804)
(2,450)
(291)
-
6,136
2,196
1,546
1,775
173
38
78
(287)
-
-
(55)
-
-
-
5,849
2,196
1,546
1,720
173
38
78
48
89
100
100
100
92
%
79
95
100
100
100
100
Total derivative liabilities
$
83,058
(71,116)
11,942
(342)
11,600
(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 $236 million and $352 million related to derivative assets and
$67 million and $68 million related to derivative liabilities as of December 31, 2013 and 2012, respectively. Cash collateral totaled $4.3 billion and $11.3 billion, netted
against derivative assets and liabilities, respectively, at December 31, 2013, and $5.0 billion and $14.5 billion, respectively, at December 31, 2012.
(2) Net derivative assets of $14.4 billion and $18.3 billion are classified in Trading assets as of December 31, 2013 and 2012, respectively. $1.4 billion and $5.5 billion are
classified in Other assets in the consolidated balance sheet as of December 31, 2013 and 2012, 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.
209
Note 16: Derivatives (continued)
Fair Value Hedges
We use interest rate swaps to convert certain of our fixed-rate
long-term debt to floating rates to hedge our exposure to interest
rate risk. We also enter into cross-currency swaps, cross-
currency interest rate swaps and forward contracts to hedge our
exposure to foreign currency risk and interest rate risk
associated with the issuance of non-U.S. dollar denominated
long-term debt. In addition, we use interest rate swaps, cross-
currency swaps, cross-currency interest rate swaps and forward
contracts to hedge against changes in fair value of certain
investments in available-for-sale debt securities due to changes
in interest rates, foreign currency rates, or both. We also use
interest rate swaps to hedge against changes in fair value for
certain mortgages held for sale. 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
(in millions)
Year ended December 31, 2013
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.
We use statistical regression analysis to assess hedge
effectiveness, both at inception of the hedging relationship and
on an ongoing basis. The regression analysis involves regressing
the periodic change in fair value of the hedging instrument
against the periodic changes in fair value of the asset or liability
being hedged due to changes in the hedged risk(s). The
assessment includes an evaluation of the quantitative measures
of the regression results used to validate the conclusion of high
effectiveness.
The following table shows the net gains (losses) recognized in
the income statement related to derivatives in fair value hedging
relationships.
Interest rate
Foreign exchange
Total net
contracts hedging:
contracts hedging:
gains
Available-
Mortgages
Long-
Available-
Long-
for-sale
held
securities
for sale
term
debt
for-sale
securities
term
debt
(losses)
on fair
value
hedges
Net interest income (expense) recognized on derivatives
$
(584)
(11)
1,632
(8)
280
1,309
Gains (losses) recorded in noninterest income
Recognized on derivatives
Recognized on hedged item
1,889
(1,874)
Net recognized on fair value hedges (ineffective portion) (1)
$
15
(10)
(246)
47
(3,767)
(49)
(847)
(2,727)
(57)
3,521
49
-
722
2,361
(125)
(366)
Year ended December 31, 2012
Net interest income (expense) recognized on derivatives
$
(457)
(4)
1,685
(5)
248
1,467
Gains (losses) recorded in noninterest income
Recognized on derivatives
Recognized on hedged item
Net recognized on fair value hedges (ineffective portion) (1)
$
Year ended December 31, 2011
(22)
17
(5)
(15)
6
(9)
(179)
233
54
39
(3)
36
567
(610)
(43)
390
(357)
33
Net interest income (expense) recognized on derivatives
$
(451)
-
1,659
(11)
376
1,573
Gains (losses) recorded in noninterest income
Recognized on derivatives
Recognized on hedged item
(1,298)
1,232
Net recognized on fair value hedges (ineffective portion) (1)
$
(66)
(21)
17
(4)
2,796
(2,616)
180
168
(186)
(18)
512
2,157
(445)
(1,998)
67
159
(1) Included $(5) million, $(9) million and $53 million, respectively, for years ended December 31, 2013, 2012, and 2011 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.
210
Cash Flow Hedges
We hedge floating-rate debt against future interest rate increases
by using interest rate swaps, caps, floors and futures to limit
variability of cash flows due to changes in the benchmark
interest rate. We also use interest rate swaps and floors to hedge
the variability in interest payments received on certain floating-
rate commercial loans, due to changes in the benchmark interest
rate. Gains and losses on derivatives that are reclassified from
OCI to interest income, interest expense, noninterest income
and noninterest expense in the current period are included in
the line item in which the hedged item’s effect on earnings is
recorded. All parts of gain or loss on these derivatives are
included in the assessment of hedge effectiveness. We assess
hedge effectiveness using regression analysis, both at inception
of the hedging relationship and on an ongoing basis. The
regression analysis involves regressing the periodic changes in
cash flows of the hedging instrument against the periodic
changes in cash flows of the forecasted transaction being hedged
due to changes in the hedged risk(s). The assessment includes an
evaluation of the quantitative measures of the regression results
used to validate the conclusion of high effectiveness.
Based upon current interest rates, we estimate that
$212 million (pre tax) of deferred net gains on derivatives in OCI
at December 31, 2013, 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.
(in millions)
Gains (losses) (pre tax) recognized in OCI on derivatives
Gains (pre tax) reclassified from cumulative OCI into net income (1)
Gains (losses) (pre tax) recognized in noninterest income for hedge ineffectiveness (2)
(1) See Note 23 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.
Year ended December 31,
2013
2012
2011
$
(32)
296
1
52
388
(1)
190
571
(5)
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,
which include swaps, swaptions, constant maturity mortgages,
forwards, Eurodollar and Treasury futures and options
contracts, resulted in net derivative losses of $2.9 billion in 2013
and net derivative gains of $3.6 billion and $5.2 billion in 2012
and 2011, respectively which are included in mortgage banking
noninterest income. The aggregate fair value of these derivatives
was a net liability of $531 million at December 31, 2013 and a net
asset of $87 million at December 31, 2012. 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. Our interest rate exposure on these derivative loan
commitments, as well as substantially all residential MHFS, is
hedged with free-standing derivatives (economic hedges) such as
swaps, forwards and options, Eurodollar futures and options,
and Treasury futures, forwards and options contracts. The
commitments, free-standing derivatives and residential MHFS
are carried at fair value with changes in fair value included in
mortgage banking noninterest income. For the fair value
measurement of interest rate lock commitments we include, at
inception and during the life of the loan commitment, the
expected net future cash flows related to the associated servicing
of the loan. Fair value changes subsequent to inception are based
on changes in fair value of the underlying loan resulting from the
exercise of the commitment and changes in the probability that
the loan will not fund within the terms of the commitment
(referred to as a fall-out factor). The value of the underlying loan
is affected primarily by changes in interest rates and the passage
of time. However, changes in investor demand can also cause
changes in the value of the underlying loan value that cannot be
hedged. The aggregate fair value of derivative loan commitments
on the balance sheet was a net liability of $26 million and a net
asset of $497 million at December 31, 2013 and
December 31, 2012, 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.
We also enter into various derivatives primarily to provide
derivative products to customers. To a lesser extent, we take
positions based on market expectations or to benefit from price
differentials between financial instruments and markets. These
derivatives are not linked to specific assets and liabilities on the
balance sheet or to forecasted transactions in an accounting
hedge relationship and, therefore, do not qualify for hedge
accounting. We also enter into free-standing derivatives for risk
management that do not otherwise qualify for hedge accounting.
They are carried at fair value with changes in fair value recorded
as other noninterest income.
211
Note 16: Derivatives (continued)
Free-standing derivatives also include embedded derivatives
that are required to be accounted for separately from their host
contract. We periodically issue hybrid long-term notes and CDs
where the performance of the hybrid instrument notes is linked
to an equity, commodity or currency index, or basket of such
indices. These notes contain explicit terms that affect some or all
of the cash flows or the value of the note in a manner similar to a
derivative instrument and therefore are considered to contain an
“embedded” derivative instrument. The indices on which the
performance of the hybrid instrument is calculated are not
clearly and closely related to the host debt instrument. The
“embedded” derivative is separated from the host contract and
accounted for as a free-standing derivative. Additionally, we may
invest in hybrid instruments that contain embedded derivatives,
such as credit derivatives, that are not clearly and closely related
to the host contract. In such instances, we either elect fair value
option for the hybrid instrument or separate the embedded
derivative from the host contract and account for the host
contract and derivative separately.
The following table shows the net gains recognized in the
income statement related to derivatives not designated as
hedging instruments.
(in millions)
Net gains (losses) recognized on free-standing derivatives (economic hedges):
Interest rate contracts
Recognized in noninterest income:
Mortgage banking (1)
Other (2)
Equity contracts (3)
Foreign exchange contracts (2)
Credit contracts (2)
Subtotal
Year ended December 31,
2013
2012
2011
$
1,412
119
(317)
24
(6)
(1,882)
2
4
(53)
(15)
246
(157)
(5)
70
(18)
1,232
(1,944)
136
Net gains (losses) recognized on customer accommodation, trading and other free-standing derivatives:
Interest rate contracts
Recognized in noninterest income:
Mortgage banking (4)
Other (5)
Commodity contracts (5)
Equity contracts (5)
Foreign exchange contracts (5)
Credit contracts (5)
Other (5)
Subtotal
(561)
7,222
3,594
743
324
589
(14)
(622)
(234)
746
(53)
-
501
(54)
-
298
124
769
698
(200)
(5)
577
8,010
5,278
Net gains recognized related to derivatives not designated as hedging instruments
$
1,809
6,066
5,414
(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.
(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.
212
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.
(in millions)
December 31, 2013
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-
backed securities index
Asset-backed securities index
Other
Protection
sold -
non-
Fair value
Protection
investment
Notional amount
Protection
purchased
Net
with
identical
protection
sold
Other
protection
Range of
liability
sold (A)
grade
underlyings (B)
(A) - (B)
purchased
maturities
$
48
10,947
1,091
1,553
5,237
1,245
6,493
4,454
894
659
5,557 2014-2021
389 2016-2052
-
3,270
388
2,471
799
898 2014-2018
344
48
1
1,106
1,106
55
55
2,570
2,570
535
1
3
571
54
2,567
535 2049-2052
87 2045-2046
5,451 2014-2025
Total credit derivatives
$
1,532
19,501
10,601
10,397
9,104
12,917
December 31, 2012
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-backed securities index
Asset-backed securities index
Other
$
240
15,845
1,787
2,433
4
531
57
4
3,520
1,249
64
3,344
8,448
2,039
348
861
64
3,344
9,636
948
3,444
790
6
106
6,209
1,485
7,701
2013-2021
393
2016-2056
76
459
58
616
524
2013-2017
2049-2052
92
2037-2046
3,238
4,655
2013-2056
Total credit derivatives
$
2,623
26,455
15,104
14,930
11,525
13,981
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.
213
Note 16: 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
$14.3 billion at December 31, 2013, and $16.2 billion at
December 31, 2012, respectively, for which we posted $12.2
billion and $14.3 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 December 31,
2013, or December 31, 2012, we would have been required to
post additional collateral of $2.5 billion or $1.9 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 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.
214
Note 17: 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.
Following are discussion of the fair value hierarchy and the
valuation methodologies used 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.
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:
x
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.
x
x
In the determination of the classification of financial
instruments in Level 2 or Level 3 of the fair value hierarchy, we
consider all available information, including observable market
data, indications of market liquidity and orderliness, and our
understanding of the valuation techniques and significant inputs
used. Based upon the specific facts and circumstances of each
instrument or instrument category, we make judgments
regarding the significance of the Level 3 inputs to the
instruments' fair value measurement in its entirety. If Level 3
inputs are considered significant, the instrument is classified as
Level 3.
Assets
SHORT-TERM FINANCIAL ASSETS Short-term financial assets
include cash and due from banks, federal funds sold and
securities purchased under resale agreements and due from
customers on acceptances. These assets are carried at historical
cost. The carrying amount is a reasonable estimate of fair value
because of the relatively short time between the origination of
the instrument and its expected realization.
TRADING ASSETS (EXCLUDING DERIVATIVES) AND
INVESTMENT SECURITIES Trading assets and available-for-
sale securities are recorded at fair value on a recurring basis.
Other investment securities classified as held-to-maturity are
subject to impairment and fair value measurement in the event
fair value declines below amortized cost and we do not expect to
recover the entire amortized cost basis of the debt security. Fair
value measurement is based upon various sources of market
pricing. We use quoted prices in active markets, where available,
and classify such instruments within Level 1 of the fair value
hierarchy. Examples include exchange-traded equity securities
and some highly liquid government securities, such as U.S.
Treasuries. When instruments are traded in secondary markets
and quoted market prices do not exist for such securities, we
generally rely on internal valuation techniques or on prices
obtained from third-party pricing services or brokers
(collectively, vendors) or combination thereof, and accordingly,
we classify these instruments as Level 2 or 3.
Trading securities are mostly valued using internal trader
prices that are subject to price verification procedures performed
by separate internal personnel. The majority of fair values
derived using internal valuation techniques are verified against
multiple pricing sources, including prices obtained from third-
party vendors. Vendors compile prices from various sources and
often apply matrix pricing for similar securities when no price is
observable. We review pricing methodologies provided by the
vendors in order to determine if observable market information
is being used versus unobservable inputs. When evaluating the
appropriateness of an internal trader price compared with
vendor prices, considerations include the range and quality of
vendor prices. Vendor prices are used to ensure the
reasonableness of a trader price; however valuing financial
instruments involves judgments acquired from knowledge of a
particular market. If a trader asserts that a vendor price is not
reflective of market value, justification for using the trader price,
including recent sales activity where possible, must be provided
to and approved by the appropriate levels of management.
Similarly, while investment securities traded in secondary
markets are typically valued using unadjusted vendor prices or
vendor prices adjusted by weighting them with internal
discounted cash flow techniques, these prices are reviewed and,
if deemed inappropriate by a trader who has the most knowledge
of a particular market, can be adjusted. Securities measured with
these internal valuation techniques are generally classified as
Level 2 of the hierarchy and often involve using quoted market
prices for similar securities, pricing models, discounted cash
flow analyses using significant inputs observable in the market
where available or a combination of multiple valuation
techniques. Examples include certain residential and
commercial MBS, municipal bonds, U.S. government and agency
MBS, and corporate debt securities.
Security fair value measurements using significant inputs
that are unobservable in the market due to limited activity or a
less liquid market are classified as Level 3 in the fair value
hierarchy. Such measurements include securities valued using
internal models or a combination of multiple valuation
215
Note 17: Fair Values of Assets and Liabilities (continued)
techniques, such as weighting of internal models and vendor or
broker pricing, where the unobservable inputs are significant to
the overall fair value measurement. Securities classified as Level
3 include certain residential and commercial MBS, other asset-
backed securities, CDOs and certain CLOs, and certain residual
and retained interests in residential mortgage loan
securitizations. We value CDOs using the prices of similar
instruments, the pricing of completed or pending third party
transactions or the pricing of the underlying collateral within the
CDO. Where vendor or broker prices are not readily available,
we use management's best estimate.
MORTGAGES HELD FOR SALE (MHFS) We carry substantially
all of our residential MHFS portfolio at fair value. Fair value is
based on quoted market prices, where available, or the prices for
other mortgage whole loans with similar characteristics. As
necessary, these prices are adjusted for typical securitization
activities, including servicing value, portfolio composition,
market conditions and liquidity. Most of our MHFS are classified
as Level 2. For the portion where market pricing data is not
available, we use a discounted cash flow model to estimate fair
value and, accordingly, classify as Level 3.
LOANS HELD FOR SALE (LHFS) LHFS are carried at the lower
of cost or market value, or at fair value. The fair value of LHFS is
based on what secondary markets are currently offering for loans
with similar characteristics. As such, we classify those loans
subjected to nonrecurring fair value adjustments as Level 2.
LOANS For information on how we report the carrying value of
loans, including PCI loans, see Note 1. Although most loans are
not recorded at fair value on a recurring basis, reverse mortgages
are recorded at fair value on a recurring basis. In addition, we
record nonrecurring fair value adjustments to loans to reflect
partial write-downs that are based on the observable market
price of the loan or current appraised value of the collateral.
We provide fair value estimates in this disclosure for loans
that are not recorded at fair value on a recurring or nonrecurring
basis. Those estimates differentiate loans based on their
financial characteristics, such as product classification, loan
category, pricing features and remaining maturity. Prepayment
and credit loss estimates are evaluated by product and loan rate.
The fair value of commercial loans is calculated by
discounting contractual cash flows, adjusted for credit loss
estimates, using discount rates that are appropriate for loans
with similar characteristics and remaining maturity.
For real estate 1-4 family first and junior lien mortgages, we
calculate fair value by discounting contractual cash flows,
adjusted for prepayment and credit loss estimates, using
discount rates based on current industry pricing (where readily
available) or our own estimate of an appropriate discount rate
for loans of similar size, type, remaining maturity and repricing
characteristics.
The carrying value of credit card loans, which is adjusted for
estimates of credit losses inherent in the portfolio at the balance
sheet date, is reported as a reasonable estimate of fair value. For
all other consumer loans, the fair value is generally calculated by
discounting the contractual cash flows, adjusted for prepayment
216
and credit loss estimates, based on the current rates we offer for
loans with similar characteristics.
Loan commitments, standby letters of credit and commercial
and similar letters of credit generate ongoing fees at our current
pricing levels, which are recognized over the term of the
commitment period. In situations where the credit quality of the
counterparty to a commitment has declined, we record an
allowance. A reasonable estimate of the fair value of these
instruments is the carrying value of deferred fees plus the related
allowance. Certain letters of credit that are hedged with
derivative instruments are carried at fair value in trading assets
or liabilities. For those letters of credit, fair value is calculated
based on readily quotable credit default spreads using a market
risk credit default swap model.
DERIVATIVES Quoted market prices are available and used for
our exchange-traded derivatives, such as certain interest rate
futures and option contracts, which we classify as Level 1.
However, substantially all of our derivatives are traded in over-
the-counter (OTC) markets where quoted market prices are not
always readily available. Therefore we value most OTC
derivatives using internal valuation techniques. Valuation
techniques and inputs to internally-developed models depend on
the type of derivative and nature of the underlying rate, price or
index upon which the derivative's value is based. Key inputs can
include yield curves, credit curves, foreign-exchange rates,
prepayment rates, volatility measurements and correlation of
such inputs. Where model inputs can be observed in a liquid
market and the model does not require significant judgment,
such derivatives are typically classified as Level 2 of the fair
value hierarchy. Examples of derivatives classified as Level 2
include generic interest rate swaps, foreign currency swaps,
commodity swaps, and certain option and forward contracts.
When instruments are traded in less liquid markets and
significant inputs are unobservable, such derivatives are
classified as Level 3. Examples of derivatives classified as Level 3
include complex and highly structured derivatives, certain credit
default swaps, interest rate lock commitments written for our
residential mortgage loans that we intend to sell and long dated
equity options where volatility is not observable. Additionally,
significant judgments are required when classifying financial
instruments within the fair value hierarchy, particularly between
Level 2 and 3, as is the case for certain derivatives.
MORTGAGE SERVICING RIGHTS (MSRs) AND CERTAIN
OTHER INTERESTS HELD IN SECURITIZATIONS MSRs and
certain other interests held in securitizations (e.g., interest-only
strips) do not trade in an active market with readily observable
prices. Accordingly, we determine the fair value of MSRs using a
valuation model that calculates the present value of estimated
future net servicing income cash flows. The model incorporates
assumptions that market participants use in estimating future
net servicing income cash flows, including estimates of
prepayment speeds (including housing price volatility), discount
rates, default rates, cost to service (including delinquency and
foreclosure costs), escrow account earnings, contractual
servicing fee income, ancillary income and late fees. Commercial
MSRs are carried at lower of cost or market value, and therefore
can be subject to fair value measurements on a nonrecurring
basis. Changes in the fair value of MSRs occur primarily due to
the collection/realization of expected cash flows, as well as
changes in valuation inputs and assumptions. For other interests
held in securitizations (such as interest-only strips), we use a
valuation model that calculates the present value of estimated
future cash flows. The model incorporates our own estimates of
assumptions market participants use in determining the fair
value, including estimates of prepayment speeds, discount rates,
defaults and contractual fee income. Interest-only strips are
recorded as trading assets. Our valuation approach is validated
by our internal valuation model validation group. Fair value
measurements of our MSRs and interest-only strips use
significant unobservable inputs and, accordingly, we classify
them as Level 3.
SHORT-TERM FINANCIAL LIABILITIES Short-term financial
liabilities are carried at historical cost and include federal funds
purchased and securities sold under repurchase agreements,
commercial paper and other short-term borrowings. The
carrying amount is a reasonable estimate of fair value because of
the relatively short time between the origination of the
instrument and its expected realization.
OTHER LIABILITIES Other liabilities recorded at fair value on
a recurring basis, excluding derivative liabilities (see the
“Derivatives” section for derivative liabilities), includes primarily
short sale liabilities. Short sale liabilities are predominantly
classified as either Level 1 or Level 2, generally dependent upon
whether the underlying securities have readily obtainable quoted
prices in active exchange markets.
FORECLOSED ASSETS Foreclosed assets are carried at net
realizable value, which represents fair value less costs to sell.
Fair value is generally based upon independent market prices or
appraised values of the collateral and, accordingly, we classify
foreclosed assets as Level 2.
NONMARKETABLE EQUITY INVESTMENTS We have elected
the fair value option for certain nonmarketable equity
investments. The remaining nonmarketable equity investments
are generally recorded under the cost or equity method of
accounting. There are generally restrictions on the sale and/or
liquidation of these investments, including federal bank stock.
Federal bank stock carrying value approximates fair value. We
use facts and circumstances available to estimate the fair value of
our nonmarketable equity investments. We typically consider
our access to and need for capital (including recent or projected
financing activity), qualitative assessments of the viability of the
investee, evaluation of the financial statements of the investee
and prospects for its future. Public equity investments are valued
using quoted market prices and discounts are only applied when
there are trading restrictions that are an attribute of the
investment. We estimate the fair value of investments in non-
public securities using metrics such as security prices of
comparable public companies, acquisition prices for similar
companies and original investment purchase price multiples,
while also incorporating a portfolio company's financial
performance and specific factors. For investments in private
equity funds, we use the NAV provided by the fund sponsor as an
appropriate measure of fair value. In some cases, such NAVs
require adjustments based on certain unobservable inputs.
Liabilities
DEPOSIT LIABILITIES Deposit liabilities are carried at
historical cost. The fair value of deposits with no stated maturity,
such as noninterest-bearing demand deposits, interest-bearing
checking, and market rate and other savings, is equal to the
amount payable on demand at the measurement date. The fair
value of other time deposits is calculated based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for like wholesale
deposits with similar remaining maturities.
LONG-TERM DEBT Long-term debt is generally carried at
amortized cost. For disclosure, we are required to estimate the
fair value of long-term debt. Generally, the discounted cash flow
method is used to estimate the fair value of our long-term debt.
Contractual cash flows are discounted using rates currently
offered for new notes with similar remaining maturities and, as
such, these discount rates include our current spread levels.
Level 3 Asset and Liability Valuation Processes
We generally determine fair value of our Level 3 assets and
liabilities by using internally developed models and, to a lesser
extent, prices obtained from third-party pricing services or
brokers (collectively, vendors). Our valuation processes vary
depending on which approach is utilized.
INTERNAL MODEL VALUATIONS Our internally developed
models primarily consist of discounted cash flow techniques. Use
of such techniques requires determining relevant inputs, some of
which are unobservable. Unobservable inputs are generally
derived from historic performance of similar assets or
determined from previous market trades in similar instruments.
These unobservable inputs usually consist of discount rates,
default rates, loss severity upon default, volatilities, correlations
and prepayment rates, which are inherent within our Level 3
instruments. Such inputs can be correlated to similar portfolios
with known historic experience or recent trades where particular
unobservable inputs may be implied; but due to the nature of
various inputs being reflected within a particular trade, the value
of each input is considered unobservable. We attempt to
correlate each unobservable input to historic experience and
other third party data where available.
Internal valuation models are subject to review prescribed
within our model risk management policies and procedures,
which include model validation. The purpose of model validation
includes ensuring the model is appropriate for its intended use
and the appropriate controls exist to help mitigate risk of invalid
valuations. 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 and supporting model documentation.
Validation also includes ensuring significant unobservable
model inputs are appropriate given observable market
217
Note 17: Fair Values of Assets and Liabilities (continued)
VENDOR-DEVELOPED VALUATIONS In certain limited
circumstances we obtain pricing from third party vendors for the
value of our Level 3 assets or liabilities. We have processes in
place to approve such vendors to ensure information obtained
and valuation techniques used are appropriate. Once these
vendors are approved to provide pricing information, we
monitor and review the results to ensure the fair values are
reasonable and in line with market experience in similar asset
classes. While the input amounts used by the pricing vendor in
determining fair value are not provided, and therefore
unavailable for our review, we do perform one or more of the
following procedures to validate the prices received:
•
•
•
comparison to other pricing vendors (if available);
variance analysis of prices;
corroboration of pricing by reference to other independent
market data, such as market transactions and relevant
benchmark indices;
review of pricing by Company personnel familiar with
market liquidity and other market-related conditions; and
investigation of prices on a specific instrument-by-
instrument basis.
•
•
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.
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.
We have ongoing monitoring procedures in place for our
Level 3 assets and liabilities that use such internal valuation
models. These procedures, which are designed to provide
reasonable assurance that models continue to perform as
expected after approved, include:
•
ongoing analysis and benchmarking to market transactions
and other independent market data (including pricing
vendors, if available);
back-testing of modeled fair values to actual realized
transactions; and
review of modeled valuation results against expectations,
including review of significant or unusual value fluctuations.
•
•
We update model inputs and methodologies periodically to
reflect these monitoring procedures. Additionally, procedures
and controls are in place to ensure existing models are subject to
periodic reviews, and we perform full model revalidations as
necessary.
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 adequacy of business unit risk management
programs, maintaining company-wide model validation policies
and standards and reporting the results of these activities to
management and our Corporate Model Risk Committee (CMoR).
The CMoR consists of senior executive management and reports
on top model risk issues to the Company’s Risk Committee of the
Board.
218
(in millions)
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Brokers
Third party pricing services
December 31, 2013
Trading assets (excluding derivatives)
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities
Other debt securities (1)
Total debt securities
Total marketable equity securities
Total available-for-sale securities
Derivatives (trading and other assets)
Derivatives (liabilities)
Other liabilities
December 31, 2012
Trading assets (excluding derivatives)
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities
Other debt securities (1)
Total debt securities
Total marketable equity securities
Total available-for-sale securities
Derivatives (trading and other assets)
Derivatives (liabilities)
Other liabilities
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
122
1
1,804
652
-
-
621
1,537
2,158
-
2,158
5
(12)
(115)
406
-
-
138
-
-
-
722
722
-
722
-
-
-
8
-
-
4
1,516
12,465
1,654
12,469
3
-
557
5,723
-
-
-
39,257
148,074
44,681
557
237,735
-
630
557
238,365
-
-
-
417
(418)
(36)
1,314
1,016
915
-
-
-
915
29
6,231
35,036
121,703
28,314
191,284
774
3
-
63
180
746
989
-
989
3
-
-
-
-
-
292
149
441
-
1,657
12,469
944
192,058
441
8
(26)
(121)
-
-
-
-
-
-
602
(634)
(104)
-
-
-
(1) Includes corporate debt securities, collateralized loan and other debt obligations, asset-backed securities, and other debt securities.
219
Note 17: 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)
December 31, 2013
Trading assets (excluding derivatives)
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Collateralized loan and other debt obligations (1)
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities(2)
Other trading assets
Total trading assets (excluding derivatives)
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized loan and other debt obligations(4)
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities (5)
Other marketable equity securities
Total marketable equity securities
Total available-for-sale securities
Mortgages held for sale
Loans held for sale
Loans
Mortgage servicing rights (residential)
Derivative assets:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Netting
Total derivative assets (7)
Other assets
Total assets recorded at fair value
Derivative liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Netting
Total derivative liabilities (7)
Short sale liabilities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Corporate debt securities
Equity securities
Other securities
Total short sale liabilities
Other liabilities (excluding derivatives)
Total liabilities recorded at fair value
$
Level 1
Level 2
Level 3
Netting
Total
8,301
-
-
-
-
-
5,908
14,209
2,694
16,903
557
-
-
-
-
-
113
-
-
-
-
-
-
3,669
2,043
212
7,052
14,608
487
87
28,158
2,487
30,645
5,723
39,322
117,591
12,389
18,609
148,589
20,833
18,739
21
843
6,577
7,441
39
670
240,686
508
1,511
2,019
2,689
-
-
-
-
36
-
1,522
44
-
-
-
1,602
628
9
637
241,323
11,505
1
272
-
55,466
2,667
4,221
4,789
782
-
-
67,925
-
21,194
-
351,671
(26)
-
(449)
(75)
-
-
-
(550)
(4,311)
-
-
(1,788)
-
(6,099)
-
(6,649)
(56,128)
(2,587)
(5,218)
(4,432)
(806)
-
-
(69,171)
(2,063)
(24)
(4,683)
(48)
(95)
(6,913)
-
(76,084)
-
39
541
53
1
122
13
769
54
823
-
3,214 (3)
-
64
138
202
281
1,420 (3)
492 (3)
-
1,657 (3)
2,149
-
7,266
729 (3)
-
729
7,995
2,374
-
5,723
15,580
344
6
2,081
10
719
13
-
3,173
1,503
37,171
(384)
(16)
(2,127)
(1)
(1,094)
(16)
-
(3,638)
-
-
-
-
-
-
(39)
(3,677)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,970
2,082
753
7,105
14,609
609
6,008
43,136
5,235
48,371
6,280
42,536
117,591
12,453
18,747
148,791
21,227
20,159
513
843
8,234
9,590
39
248,622
1,865
1,520
3,385
252,007
13,879
1
5,995
15,580
55,846
2,673
7,824
4,843
1,501
13
(56,894) (6)
(56,894)
(56,894)
-
(56,894)
-
-
-
-
-
-
63,739 (6)
63,739
-
-
-
-
-
-
-
63,739
15,806
1,503
353,142
(56,538)
(2,603)
(7,794)
(4,508)
(1,900)
(16)
63,739
(9,620)
(6,374)
(24)
(4,683)
(1,836)
(95)
(13,012)
(39)
(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 8 for additional information.
(6) Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 16 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)
220
(continued from previous page)
(in millions)
December 31, 2012
Trading assets (excluding derivatives)
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Collateralized loan and other debt obligations (1)
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities(2)
Other trading assets
Total trading assets (excluding derivatives)
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized loan and other debt obligations (4)
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities (5)
Other marketable equity securities
Total marketable equity securities
Total available-for-sale securities
Mortgages held for sale
Loans held for sale
Loans
Mortgage servicing rights (residential)
Derivative assets:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Netting
Total derivative assets (7)
Other assets
Total assets recorded at fair value
Derivative liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Netting
$
$
$
Level 1
Level 2
Level 3
Netting
Total
5,104
-
-
-
-
-
3,481
8,585
2,150
10,735
915
-
-
-
-
-
125
-
-
-
-
-
-
3,774
1,587
-
6,664
13,380
722
356
26,483
887
27,370
6,231
35,045
97,285
15,837
19,765
132,887
20,934
-
7
867
7,828
8,702
930
-
46
742
52
6
138
3
987
76
1,063
-
3,631 (3)
-
94
203
297
274
13,188 (3)
5,921 (3)
51
3,283 (3)
9,255
-
1,040
204,729
26,645
629
554
1,183
2,223
-
-
-
-
16
-
432
19
-
-
-
467
136
753
55
808
205,537
39,055
6
185
-
70,277
3,386
2,747
5,481
1,160
-
-
83,051
123
794 (3)
-
794
27,439
3,250
-
6,021
11,538
1,058
70
604
24
650
-
-
2,406
162
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(62,108) (6)
(62,108)
-
8,878
1,633
742
6,716
13,386
860
3,840
36,055
3,113
39,168
7,146
38,676
97,285
15,931
19,968
133,184
21,333
13,188
5,928
918
11,111
17,957
930
232,414
2,176
609
2,785
235,199
42,305
6
6,206
11,538
71,351
3,456
3,783
5,524
1,810
-
(62,108)
23,816
421
13,561
355,327
51,879
(62,108)
358,659
(52)
-
(199)
(23)
-
-
-
(68,244)
(3,541)
(3,239)
(3,553)
(1,152)
-
-
(399)
(49)
(726)
(3)
(1,800)
(78)
-
-
-
-
-
-
-
71,116 (6)
(68,695)
(3,590)
(4,164)
(3,579)
(2,952)
(78)
71,116
(11,942)
(5,100)
(9)
(3,941)
(1,268)
(47)
(10,365)
(83)
Total derivative liabilities (7)
(274)
(79,729)
(3,055)
71,116
Short sale liabilities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Corporate debt securities
Equity securities
Other securities
Total short sale liabilities
Other liabilities (excluding derivatives)
(4,225)
-
-
(1,233)
-
(5,458)
-
(875)
(9)
(3,941)
(35)
(47)
(4,907)
(34)
-
-
-
-
-
-
(49)
-
-
-
-
-
-
-
Total liabilities recorded at fair value
$
(5,732)
(84,670)
(3,104)
71,116
(22,390)
(1) Includes collateralized debt obligations of $21 million.
(2) Net gains from trading activities recognized in the income statement for the year ended December 31, 2012 include $305 million in net unrealized gains on trading securities
held at December 31, 2012.
(3) Balances consist of securities that are predominantly 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 $644 million.
(5) Perpetual preferred securities include ARS and corporate preferred securities. See Note 8 for additional information.
(6) Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 16 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.
221
Note 17: 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.
(in millions)
In
Out
In
Out
In
Out
Total
Transfers Between Fair Value Levels
Level 1
Level 2
Level 3 (1)
Year ended December 31, 2013
Trading assets (excluding derivatives) (2)
Available-for-sale securities (2)(3)
$
Mortgages held for sale
Loans
Net derivative assets and liabilities (4)
Short sale liabilities
$
$
Total transfers
Year ended December 31, 2012
Trading assets (excluding derivatives)
Available-for-sale securities (5)
Mortgages held for sale
Loans (6)
Net derivative assets and liabilities
Short sale liabilities
Total transfers
-
17
-
-
-
-
(242)
-
-
-
-
-
535
12,830
343
193
(142)
-
(56)
(117)
(336)
-
13
-
52
100
336
-
(13)
-
(289)
(12,830)
(343)
(193)
142
-
17
(242)
13,759
(496)
475
(13,513)
23
8
-
-
-
-
-
-
-
-
-
-
-
16
9,832
298
41
51
-
(37)
(68)
(488)
(5,851)
8
-
14
60
488
5,851
(8)
-
(16)
(9,832)
(298)
(41)
(51)
-
$
31
10,238
(6,436)
6,405
(10,238)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1) All transfers in and out of Level 3 are disclosed within the recurring Level 3 rollforward table in this Note.
(2) Consists of $231 million of collateralized loan obligations classified as trading assets and $12.5 billion classified as available-for-sale securities that we transferred from Level
3 to Level 2 in 2013 as a result of increased observable market data in the valuation of such instruments.
(3) Transfers out of available-for-sale securities classified as Level 3 exclude $6.0 billion in asset-backed securities that were transferred from the available-for-sale portfolio to
held-to-maturity securities.
(4) Consists of net derivative liabilities that were transferred from Level 3 to Level 2 due to increased observable market data. Also includes net derivative liabilities that were
transferred from Level 2 to Level 3 due to a decrease in observable market data.
(5) Includes $9.4 billion of securities of U.S. states and political subdivisions that we transferred from Level 3 to Level 2 as a result of increased observable market data in the
valuation of such instruments. This transfer was done in conjunction with a change in our valuation technique from an internal model based upon unobservable inputs to
third party vendor pricing based upon market observable data.
(6) Consists of reverse mortgage loans securitized with GNMA which were accounted for as secured borrowing transactions. We transferred the loans from Level 2 to Level 3 in
third quarter 2012 due to decreased market activity and visibility to significant trades of the same or similar products. As a result, we changed our valuation technique from
an internal model based on market observable data to an internal discounted cash flow model based on unobservable inputs.
222
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2013, are
summarized as follows:
(in millions)
Year ended December 31, 2013
Trading assets
(excluding derivatives):
Securities of U.S. states and
political subdivisions
Collateralized loan and other debt obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total trading assets
(excluding derivatives)
Available-for-sale securities:
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Residential
Commercial
Total mortgage-backed
securities
Corporate debt securities
Collateralized loan and other debt obligations
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable
equity securities
Total available-for-sale
securities
Mortgages held for sale
Loans
Mortgage servicing rights (residential) (8)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Other assets
Short sale liabilities
Other liabilities (excluding derivatives)
Total net gains
(losses) included in
Purchases,
sales,
Balance,
beginning
of period
Net
income
Other
compre-
hensive
income
issuances
and
settlements,
net (1)
Transfers
into
Level 3
Transfers
out of
Level 3
Balance,
end of
period
Net unrealized
gains (losses)
included in
income related
to assets and
liabilities held
at period end (2)
$
46
742
52
6
138
3
987
76
3
67
9
1
16
-
96
(22)
1,063
74
-
-
-
-
-
-
-
-
-
(10)
(37)
(1)
9
(35)
(3)
(77)
-
-
-
13
-
25
13
51
1
-
(231)
(20)
(15)
(22)
-
(288)
(1)
39
541
53
1
122
13
769
54
-
(33)
6
1
15
-
(11)
(8)
(77)
52
(289)
823
(19)(3)
3,631
11
(85)
(182)
53
(214)
3,214
94
203
17
(13)
(1)
28
297
274
13,188
5,921
51
3,283
9,255
26,645
794
-
794
27,439
3,250
6,021
11,538
659
21
(122)
21
(1,150)
(78)
4
10
8
(1)
3
27
29
62
10
-
10
72
5
(211)
1,156
(662)
-
(151)
(15)
(30)
75
(649)
(783)
162
-
(49)
315
-
3
27
(10)
124
(34)
(1)
19
(16)
40
(2)
-
(2)
38
-
-
-
-
-
-
-
-
-
-
-
-
-
(40)
(58)
(98)
(13)
625
(1,067)
(5)
31
(1,041)
-
-
-
(6)
(22)
64
138
(28)
202
23
-
(3)
(12,525)
-
-
24
(4,327)
(48)
(1,727)
281
1,420
492
-
1,657
24
(6,102)
2,149
(709)
100
(18,872)
7,266
(73)
-
(73)
-
-
-
-
-
-
729
-
729
(782)
100
(18,872)
7,995
(874)
106
2,886
(39)
(66)
137
1
805
-
838
1,026
-
7
336
-
-
-
(1)
(14)
2
-
-
(13)
-
-
-
(343)
(193)
-
2,374
5,723
15,580
2
36
104
-
-
-
142
-
-
-
(40)
(10)
(46)
9
(375)
(3)
(465)
1,503
-
(39)
(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) Level 3 transfers out include $6.0 billion in asset-backed securities that were transferred from the available-for-sale portfolio to held-to-maturity securities.
(5) Included in net gains (losses) from debt securities in the income statement.
(6) Included in net gains (losses) from equity investments in the income statement.
(7) Included in mortgage banking and other noninterest income in the income statement.
(8) For more information on the changes in mortgage servicing rights, see Note 9.
(9) Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.
(continued on following page)
-
-
(8)
(8)
-
-
-
-
(7)
(7)(4)
(15)(5)
-
-
-
(6)
(15)
(74)(7)
(178)(7)
3,398 (7)
(186)
(19)
48
(8)
345
-
180 (9)
(2)(3)
(3)
-
5 (7)
223
Note 17: 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 year ended December 31, 2013.
(in millions)
Year ended December 31, 2013
Trading assets
(excluding derivatives):
Securities of U.S. states and
political subdivisions
Collateralized loan and other debt obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total trading assets
(excluding derivatives)
Available-for-sale securities:
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Residential
Commercial
Total mortgage-backed
securities
Corporate debt securities
Collateralized loan and other debt obligations
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable
equity securities
Total available-for-sale
securities
Mortgages held for sale
Loans
Mortgage servicing rights (residential)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Other assets
Short sale liabilities
Other liabilities (excluding derivatives)
Purchases
Sales
Issuances
Settlements
Net
$
127
1,030
117
429
53
-
1,756
-
(136)
(1,064)
(117)
(420)
(45)
(3)
(1,785)
-
1,756
(1,785)
-
-
-
-
-
1,008
1,751
-
1,164
2,915
3,923
-
-
-
3,923
286
23
-
-
-
-
-
7
-
7
1,064
8
-
(69)
(37)
(1)
(38)
-
(14)
-
(5)
(36)
(41)
(162)
(20)
-
(20)
(182)
(574)
-
(583)
-
-
(148)
-
(5)
-
(153)
(2)
(8)
-
-
-
-
-
-
-
-
-
-
(1)
(3)
(1)
-
(43)
-
(48)
-
(48)
(10)
(37)
(1)
9
(35)
(3)
(77)
-
(77)
648
(761)
(182)
-
-
-
20
-
1,047
-
1,116
2,163
2,831
-
-
-
2,831
-
452
3,469
-
-
-
-
(4)
-
(4)
-
-
(4)
(3)
(57)
(60)
(33)
(369)
(3,865)
-
(2,213)
(6,078)
(7,301)
(53)
-
(53)
(7,354)
(586)
(369)
-
(39)
(66)
285
1
807
-
988
(36)
-
11
(40)
(58)
(98)
(13)
625
(1,067)
(5)
31
(1,041)
(709)
(73)
-
(73)
(782)
(874)
106
2,886
(39)
(66)
137
1
805
-
838
1,026
-
7
224
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2012, are
summarized as follows:
Total net gains
(losses) included in
Purchases,
sales,
Balance,
beginning
of period
Net
income
Other
compre-
hensive
income
issuances
and
settlements,
net (1)
Transfers
into
Level 3
Transfers
out of
Level 3
Balance,
end of
period
Net
unrealized
gains (losses)
included in
income related
to assets and
liabilities held
at period end (2)
(in millions)
Year ended December 31, 2012
Trading assets
(excluding derivatives):
Securities of U.S. states and
political subdivisions
Collateralized loan and other debt obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total trading assets
(excluding derivatives)
Available-for-sale securities:
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Residential
Commercial
Total mortgage-backed
securities
Corporate debt securities
Collateralized loan and other debt obligations
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
$
53
1,582
97
108
190
4
2,034
115
3
(191)
-
8
48
-
(132)
(39)
2,149
(171)
11,516
61
232
293
295
8,599
6,641
282
2,863
9,786
10
12
(56)
(44)
20
135
3
15
(29)
(11)
Total debt securities
30,489
110
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable
equity securities
Total available-for-sale
securities
Mortgages held for sale
Loans
Mortgage servicing rights (residential) (7)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Other assets
Short sale liabilities
Other liabilities (excluding derivatives)
1,344
23
1,367
31,856
3,410
23
12,603
609
-
(75)
(7)
(1,998)
(117)
(1,588)
244
-
(44)
91
2
93
203
(42)
43
(5,954)
7,397
78
(11)
23
38
40
7,565
(21)
-
(43)
-
-
-
-
-
-
-
-
-
160
16
57
73
19
514
3
14
148
165
931
(30)
(16)
(46)
885
-
-
-
-
-
-
-
-
(1)
(1)
-
-
-
(10)
(649)
(45)
(110)
(98)
(1)
(913)
-
(913)
-
-
-
-
14
-
14
-
14
-
-
-
-
(16)
-
(16)
-
46
742
52
6
138
3
987
76
-
(47)
(3)
2
23
-
(25)
(19)
(16)
1,063
(44)(3)
1,347
-
(9,402)
3,631
(9,832)
26,645
(64)(4)
50
(30)
20
(20)
3,940
(726)
(3)
329
(400)
4,887
(611)
(9)
(620)
4,267
(308)
145
4,889
(7,349)
(50)
18
5
810
-
(6,566)
(61)
-
38
29
-
29
1
-
-
29
1
30
60
-
-
-
-
(8)
-
-
-
-
(8)
-
-
-
(74)
-
(74)
(41)
-
-
(286)
(29)
(315)
94
203
297
274
13,188
5,921
51
3,283
9,255
-
-
-
794
-
794
3,250
6,021
11,538
659
21
(122)
21
(1,150)
(78)
2
1
(54)
-
-
-
(51)
(649)
-
-
-
162
-
(49)
60
(9,832)
27,439
488
5,851
-
(298)
(41)
-
(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) 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 9.
(8) Included in mortgage banking, trading activities and other noninterest income in the income statement.
(continued on following page)
-
(1)
(56)
(57)
-
-
-
(1)
(6)
(7)
-
-
- (5)
(64)
(30)(6)
43 (6)
(2,893)(6)
562
40
(16)
30
41
-
657 (8)
(8)(3)
- (3)
- (6)
225
Note 17: 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 year ended December 31, 2012.
Purchases
Sales
Issuances
Settlements
Net
$
85
829
192
49
116
1
1,272
-
(95)
(1,478)
(237)
(159)
(169)
(2)
(2,140)
-
1,272
(2,140)
-
-
-
-
-
-
-
-
-
-
-
-
-
(45)
-
(45)
-
(10)
(649)
(45)
(110)
(98)
(1)
(913)
-
(45)
(913)
1,847
86
39
125
26
5,608
3,004
-
2,074
5,078
12,684
-
-
-
12,684
441
2
-
11
-
386
2
(6)
-
393
19
9
(3)
(37)
(34)
-
(34)
(37)
(185)
-
(2)
(159)
(161)
(454)
-
(8)
(8)
(462)
-
-
(293)
-
(2)
(375)
(3)
3
-
(377)
(8)
(9)
11
1,011
(1,474)
1,347
-
-
-
-
-
666
-
1,401
2,067
3,078
-
-
-
3,078
-
257
5,182
-
-
1
-
-
-
1
-
-
(216)
(2)
(69)
(71)
(9)
(1,483)
(4,396)
(1)
(2,987)
(7,384)
50
(30)
20
(20)
3,940
(726)
(3)
329
(400)
(10,421)
4,887
(611)
(1)
(611)
(9)
(612)
(620)
(11,033)
(749)
(114)
-
(7,360)
(48)
6
6
813
-
4,267
(308)
145
4,889
(7,349)
(50)
18
5
810
-
(6,583)
(6,566)
(72)
-
246
(61)
-
38
(in millions)
Year ended December 31, 2012
Trading assets
(excluding derivatives):
Securities of U.S. states and
political subdivisions
Collateralized loan and other debt obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total trading assets
(excluding derivatives)
Available-for-sale securities:
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Residential
Commercial
Total mortgage-backed
securities
Corporate debt securities
Collateralized loan and other debt obligations
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable
equity securities
Total available-for-sale
securities
Mortgages held for sale
Loans
Mortgage servicing rights (residential)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Other assets
Short sale liabilities
Other liabilities (excluding derivatives)
226
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2011 are
summarized as follows:
(in millions)
Year ended December 31, 2011
Trading assets
(excluding derivatives):
Securities of U.S. states and
political subdivisions
Collateralized debt obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total trading assets
(excluding derivatives)
Available-for-sale securities:
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Residential
Commercial
Total mortgage-backed
securities
Corporate debt securities
Collateralized debt obligations
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
Total net gains
(losses) included in
Purchases,
sales,
Other
compre-
hensive
issuances
and
settlements,
Net
Balance,
beginning
Transfers
into
Transfers
out of
Balance,
end of
Net
unrealized
gains (losses)
included in net
income related
to assets and
liabilities held
of year
income
income
net (1)
Level 3
Level 3
year
at period end (2)
$
5
1,915
166
117
366
34
2,603
136
2,739
4,564
20
217
237
433
4,778
6,133
112
3,150
9,395
85
3
(24)
1
6
75
(3)
58
(21)
37
10
(9)
(44)
(53)
150
290
4
(3)
10
11
-
-
-
-
-
-
-
-
-
-
52
(1)
59
58
(112)
(202)
(27)
(18)
13
(32)
-
12
(297)
(70)
(36)
(122)
(28)
(541)
2
51
-
-
31
-
1
83
-
(18)
(12)
-
(10)
(129)
-
(169)
(2)
53
1,582
97
108
190
4
2,034
115
-
1
(80)
(4)
(2)
72
(13)
14
(539)
83
(171)
2,149
1 (3)
6,923
-
(33)
11,516
(6)
2
(4)
(185)
3,725
531
40
181
752
(85)
121
2
123
41
8
-
221
107
328
-
(64)
(4)
(68)
(32)
-
-
(70)
(598)
(668)
-
61
232
293
295
8,599
6,641
282
2,863
9,786
-
9
(8)
(56)
(64)
(3)
-
-
(25)
(7)
(32)
-
Total debt securities
19,492
408
(236)
11,126
500
(801)
30,489
(90)(4)
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable
equity securities
Total available-for-sale
securities
Mortgages held for sale
Loans
Mortgage servicing rights (residential) (7)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Other assets
Other liabilities (excluding derivatives)
2,434
32
160
-
2,466
160
(7)
1
(6)
21,958
3,305
309
14,467
77
(1)
(225)
9
(1,017)
(35)
(1,192)
314
(344)
568
(242)
44
13
(5,821)
4,051
2
126
(8)
(856)
(82)
3,233
12
(8)
-
-
-
-
-
-
-
-
-
-
-
-
(1,243)
(10)
(1,253)
9,873
(104)
(299)
3,957
(3,414)
(9)
28
(6)
(123)
-
(3,524)
(82)
308
2
-
2
502
492
-
-
(1)
(3)
(6)
1
-
-
(9)
-
-
(2)
-
(2)
1,344
23
1,367
(803)
31,856
(327)
-
-
(104)
11
2
(3)
(2)
-
3,410
23
12,603
609
-
(75)
(7)
(1,998)
(117)
(96)
(1,588)
-
-
244
(44)
(53)
-
(53)(5)
(143)
43 (6)
- (6)
(3,680)(6)
309
1
55
(19)
50
-
396 (8)
3 (3)
- (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 change in mortgage servicing rights, see Note 9.
(8) Included in mortgage banking, trading activities and other noninterest income in the income statement.
(continued on following page)
227
Note 17: 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 year ended December 31, 2011.
Purchases
Sales
Issuances
Settlements
Net
$
313
1,054
80
759
516
6
2,728
-
(199)
(1,310)
(150)
(790)
(585)
(22)
(3,056)
-
2,728
(3,056)
-
-
-
-
-
-
-
2
2
(102)
(41)
-
(5)
(53)
(12)
(213)
-
12
(297)
(70)
(36)
(122)
(28)
(541)
2
(213)
(539)
4,280
(4)
4,723
(2,076)
6,923
3
21
24
94
4,805
5,918
44
1,428
7,390
-
16,593
1
3
4
16,597
576
23
-
6
7
123
4
6
-
146
10
(125)
(10)
-
-
-
(208)
(36)
-
-
(456)
(456)
(85)
(789)
(13)
(12)
(25)
(814)
(21)
(309)
-
(1)
(17)
(255)
(4)
(3)
-
(280)
(1)
124
1
-
-
-
1
-
333
-
1,395
1,728
-
(9)
(19)
(28)
(72)
(1,044)
(5,720)
(4)
(2,186)
(7,910)
-
(6)
2
(4)
(185)
3,725
531
40
181
752
(85)
6,452
(11,130)
11,126
-
-
-
6,452
-
-
4,011
-
-
-
-
-
-
-
-
-
-
(1,231)
(1)
(1,243)
(10)
(1,232)
(1,253)
(12,362)
(659)
(13)
(54)
(3,419)
1
160
(6)
(126)
-
(3,390)
(91)
1
317
9,873
(104)
(299)
3,957
(3,414)
(9)
28
(6)
(123)
-
(3,524)
(82)
-
308
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.
(in millions)
Year ended December 31, 2011
Trading assets
(excluding derivatives):
Securities of U.S. states and
political subdivisions
Collateralized loan and other debt obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total trading assets
(excluding derivatives)
Available-for-sale securities:
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Residential
Commercial
Total mortgage-backed
securities
Corporate debt securities
Collateralized loan and other debt obligations
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable
equity securities
Total available-for-sale
securities
Mortgages held for sale
Loans
Mortgage servicing rights (residential)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Other assets
Short sale liabilities
Other liabilities (excluding derivatives)
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 (see discussion regarding
vendor-developed valuations within the “Level 3 Asset and
Liability Valuation Processes” section previously within this
Note). 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
228
4.6
4.4
8.5
0.8
1.5
3.0
4.0
2.2
7.4
12.2
2.8
5.5
21.5
5.4
3.3
12.2
0.8
191
7.8
10.7
5.0
50.0
15.6
21.8
32.6
1.8
72.2
25.4
(0.1)
0.7
47.4
($ in millions, except cost to service amounts)
December 31, 2013
Trading and available-for-sale securities:
Securities of U.S. states and
political subdivisions:
Government, healthcare and
Fair Value
Level 3
Valuation Technique(s)
Unobservable Input
Inputs
Average (1)
Significant
Range of
Weighted
other revenue bonds
$
2,739
Discounted cash flow
Discount rate
0.4 -
6.4 %
1.4
Auction rate securities and other municipal
bonds
Collateralized loan and other debt obligations (2)
63
451
612
1,349
Vendor priced
Discounted cash flow
Discount rate
0.4 -
12.3
Weighted average life
1.4 -
13.0 yrs
Market comparable pricing Comparability adjustment (12.0) -
23.3 %
Vendor priced
Asset-backed securities:
Auto loans and leases
Other asset-backed securities:
Diversified payment rights (3)
Other commercial and consumer
Marketable equity securities: perpetual
492
Discounted cash flow
Discount rate
Weighted average life
0.6 -
1.4 -
0.9
1.6 yrs
757
Discounted cash flow
Discount rate
1.4 -
4.7 %
944 (4)
Discounted cash flow
Discount rate
0.6 -
21.2
Weighted average life
0.6 -
7.6 yrs
78
Vendor priced
preferred
729 (5)
Discounted cash flow
Discount rate
4.8 -
8.3 %
Weighted average life
1.0 -
15.0 yrs
Mortgages held for sale (residential)
2,374
Discounted cash flow
Default rate
0.6 -
12.4 %
Loans
5,723 (6)
Discounted cash flow
Discount rate
2.4 -
Prepayment rate
2.0 -
9.9
3.9
Prepayment rate
3.3 -
37.8
Utilization rate
0.0 -
2.0
Mortgage servicing rights (residential)
15,580
Discounted cash flow Cost to service per loan (7) $ 86 -
773
Discount rate
3.8 -
7.9
Loss severity
1.3 -
32.5
Net derivative assets and (liabilities):
Interest rate contracts
(14)
Discounted cash flow
Discount rate
5.4 -
11.2 %
Prepayment rate (8)
7.5 -
19.4
Default rate
0.0 -
Loss severity 44.9 -
Prepayment rate 11.1 -
16.5
50.0
15.6
Interest rate contracts: derivative loan
commitments
Equity contracts
(26)
199
Discounted cash flow
Fall-out factor
1.0 -
99.0
Initial-value servicing (21.5) -
81.6 bps
Discounted cash flow
Conversion factor (18.4) -
0.3 -
Weighted average life
0.0 %
(14.1)
3.3 yrs
Credit contracts
(378)
Market comparable pricing
Comparability adjustment (31.3) -
30.4
(245)
Option model
Correlation factor
(5.3) -
87.6 %
Volatility factor
6.8 -
81.2
3
Option model
Credit spread
0.0 -
Loss severity 10.5 -
12.2
72.5
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, 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 $37.2 billion and total Level 3 liabilities of $3.7 billion, before netting of derivative balances.
229
Note 17: Fair Values of Assets and Liabilities (continued)
($ in millions, except cost to service amounts)
December 31, 2012
Trading and available-for-sale securities:
Securities of U.S. states and
political subdivisions:
Government, healthcare and
other revenue bonds
Fair Value
Level 3
Valuation Technique(s)
Significant
Unobservable Input
Range of
Inputs
Weighted
Average (1)
$
3,081
Discounted cash flow
Discount rate
0.5
-
4.8 %
1.8
Auction rate securities and other municipal bonds
596
Discounted cash flow
Discount rate
2.0 -
12.9
Collateralized loan and other debt obligations(2)
1,423
12,507
Market comparable pricing
Comparability adjustment (22.5) -
24.7 %
Weighted average life
3.0 -
7.5 yrs
Vendor priced
Asset-backed securities:
Auto loans and leases
5,921
Discounted cash flow
Default rate
2.1 -
Discount rate
0.6
Loss severity
50.0
Prepayment rate
0.6
Discount rate
Discount rate
Discount rate
0.5
1.0
0.6
-
-
-
-
-
-
9.7
1.6
66.6
0.9
2.2
2.9
6.8
Weighted average life
1.0 -
7.5 yrs
Other asset-backed securities:
Dealer floor plan
Diversified payment rights (3)
Other commercial and consumer
Marketable equity securities: perpetual
preferred
1,030
639
1,665 (4)
Discounted cash flow
Discounted cash flow
Discounted cash flow
87
Vendor priced
794 (5)
Discounted cash flow
Discount rate
Mortgages held for sale (residential)
3,250
Discounted cash flow
Loans
6,021 (6)
Discounted cash flow
Weighted average life
Default rate
Discount rate
Loss severity
Prepayment rate
Discount rate
Prepayment rate
4.3
1.0
0.6
3.4
1.3
1.0
2.4
1.6
-
-
-
-
-
-
-
-
9.3 %
7.0 yrs
14.8 %
7.5
35.3
11.0
2.8
44.4
2.0
Utilization rate
0.0 -
Mortgage servicing rights (residential)
11,538
Discounted cash flow
Cost to service per loan (7)
$ 90 -
854
Net derivative assets and (liabilities):
Interest rate contracts
Interest rate contracts: derivative loan
commitments
Equity contracts
Credit contracts
Discount rate
6.7
-
10.9 %
Prepayment rate (8)
7.3 -
23.7
162
Discounted cash flow
Default rate
0.0 -
20.0
Loss severity
45.8
Prepayment rate
7.4
-
-
83.2
15.6
497
Discounted cash flow
Fall-out factor
1.0 -
99.0
Initial-value servicing (13.7) - 137.2 bps
(122)
Option model
Correlation factor (43.6) -
94.5 %
Volatility factor
3.0 -
68.9
(1,157)
Market comparable pricing
Comparability adjustment (34.4) -
30.5
8
Option model
Credit spread
0.1 -
14.0
Loss severity
16.5
-
87.5
4.4
3.4
3.5
3.2
1.0
51.8
0.7
1.9
1.8
2.7
2.9
6.3
5.3
5.5
5.4
26.4
6.2
2.6
11.6
0.8
219
7.4
15.7
5.4
51.6
14.9
22.9
85.6
50.3
26.5
0.1
2.0
52.3
Insignificant Level 3 assets,
net of liabilities
835 (9)
Total level 3 assets, net of liabilities
$
48,775 (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 $665 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 $90 - $437.
(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 $51.9 billion and total Level 3 liabilities of $3.1 billion, before netting of derivative balances.
230
The valuation techniques used for our Level 3 assets and
liabilities, as presented in the previous table, are described as
follows:
x
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.
x Market comparable pricing - Market comparable pricing
x
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 which 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.
x
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.
x
x
x
x
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.
x
x
x
x
x
x
x
x
x
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.
x 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.
Significant Recurring Level 3 Fair Value Asset and
Liability Input Sensitivity
We generally use discounted cash flow or similar internal
modeling techniques to determine the fair value of our Level 3
assets and liabilities. Use of these techniques requires
determination of relevant inputs and assumptions, some of
which represent significant unobservable inputs as indicated in
the preceding table. Accordingly, changes in these unobservable
inputs may have a significant impact on fair value.
Certain of these unobservable inputs will (in isolation) have a
directionally consistent impact on the fair value of the
231
Note 17: Fair Values of Assets and Liabilities (continued)
instrument for a given change in that input. Alternatively, the
fair value of the instrument may move in an opposite direction
for a given change in another input. Where multiple inputs are
used within the valuation technique of an asset or liability, a
change in one input in a certain direction may be offset by an
opposite change in another input having a potentially muted
impact to the overall fair value of that particular instrument.
Additionally, a change in one unobservable input may result in a
change to another unobservable input (that is, changes in certain
inputs are interrelated to one another), which may counteract or
magnify the fair value impact.
SECURITIES, LOANS and MORTGAGES HELD FOR SALE The
fair values of predominantly all Level 3 trading securities,
mortgages held for sale, loans, other nonmarketable equity
investments, and available-for-sale securities have consistent
inputs, valuation techniques and correlation to changes in
underlying inputs. The internal models used to determine fair
value for these Level 3 instruments use certain significant
unobservable inputs within a discounted cash flow or market
comparable pricing valuation technique. Such inputs include
discount rate, prepayment rate, default rate, loss severity,
utilization rate and weighted average life.
These Level 3 assets would decrease (increase) in value based
upon an increase (decrease) in discount rate, default rate, loss
severity, or weighted average life inputs. Conversely, the fair
value of these Level 3 assets would generally increase (decrease)
in value if the prepayment rate input were to increase (decrease)
or if the utilization rate input were to increase (decrease).
Generally, a change in the assumption used for default rate is
accompanied by a directionally similar change in the risk
premium component of the discount rate (specifically, the
portion related to credit risk) and a directionally opposite change
in the assumption used for prepayment rates. Unobservable
inputs for loss severity, utilization rate and weighted average life
do not increase or decrease based on movements in the other
significant unobservable inputs for these Level 3 assets.
DERIVATIVE INSTRUMENTS Level 3 derivative instruments
are valued using market comparable pricing, option pricing and
discounted cash flow valuation techniques. We utilize certain
unobservable inputs within these techniques to determine the
fair value of the Level 3 derivative instruments. The significant
unobservable inputs consist of credit spread, a comparability
adjustment, prepayment rate, default rate, loss severity, initial-
value servicing, fall-out factor, volatility factor, weighted average
life, conversion factor, and correlation factor.
Level 3 derivative assets (liabilities) where we are long the
underlying would decrease (increase) in value upon an increase
(decrease) in default rate, fall-out factor, credit spread,
conversion factor, or loss severity inputs. Conversely, Level 3
derivative assets (liabilities) would increase (decrease) in value
upon an increase (decrease) in prepayment rate, initial-value
servicing, weighted average life, or volatility factor inputs. The
inverse of the above relationships would occur for instruments in
which we are short the underlying. The correlation factor and
comparability adjustment inputs may have a positive or negative
impact on the fair value of these derivative instruments
depending on the change in value of the item the correlation
factor and comparability adjustment is referencing. The
correlation factor and comparability adjustment is considered
independent from movements in other significant unobservable
inputs for derivative instruments.
Generally, for derivative instruments for which we are subject
to changes in the value of the underlying referenced instrument,
change in the assumption used for default rate is accompanied
by directionally similar change in the risk premium component
of the discount rate (specifically, the portion related to credit
risk) and a directionally opposite change in the assumption used
for prepayment rates. Unobservable inputs for loss severity, fall-
out factor, initial-value servicing, weighted average life,
conversion factor, and volatility do not increase or decrease
based on movements in other significant unobservable inputs for
these Level 3 instruments.
MORTGAGE SERVICING RIGHTS We use a discounted cash
flow valuation technique to determine the fair value of Level 3
mortgage servicing rights. These models utilize certain
significant unobservable inputs including prepayment rate,
discount rate and costs to service. An increase in any of these
unobservable inputs will reduce the fair value of the mortgage
servicing rights and alternatively, a decrease in any one of these
inputs would result in the mortgage servicing rights increasing in
value. Generally, a change in the assumption used for the default
rate is accompanied by a directionally similar change in the
assumption used for cost to service and a directionally opposite
change in the assumption used for prepayment. The sensitivity
of our residential MSRs is discussed further in Note 8.
232
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
December 31, 2013, and 2012, and for which a nonrecurring fair
adjustment was recorded during the years then ended.
(in millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
December 31, 2013
December 31, 2012
Mortgages held for sale (LOCOM) (1)
Loans held for sale
$
Loans:
Commercial
Consumer
Total loans (2)
Other assets (3)
-
-
-
-
-
-
1,126
14
414
3,690
4,104
893
-
2,019
14
-
7
7
414
3,697
4,111
445
740
1,185
-
-
-
-
-
-
1,509
4
1,045
-
2,554
4
1,507
5,889
7,396
-
4
4
989
144
1,507
5,893
7,400
1,133
(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.
(in millions)
Mortgages held for sale (LOCOM)
$
Loans held for sale
Loans:
Commercial
Consumer (1)
Total loans
Other assets (2)
Year ended December 31,
2013
2012
(23)
(1)
37
1
(216)
(795)
(2,050)
(4,989)
(2,266)
(5,784)
(214)
(316)
Total
$
(2,504)
(6,062)
(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.
233
Note 17: Fair Values of Assets and Liabilities (continued)
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.
($ in millions)
December 31, 2013
Residential mortgages
Fair Value
Level 3
Valuation Technique(s) (1)
Significant
Unobservable Inputs (1)
Range
of inputs
Weighted
Average (2)
held for sale (LOCOM)
$
893 (3)
Discounted cash flow
Default rate (5) 1.2 -
4.3 -
1.6 -
Discount rate
Loss severity
12.0
48.2
4.4 %
2.7 %
Market comparable pricing Comparability adjustment
4.6 -
4.6
Prepayment rate (6) 2.0 - 100.0
Other assets: private equity
fund investments (4)
Insignificant level 3 assets
Total
December 31, 2012
Residential mortgages
505
242
1,640
held for sale (LOCOM)
$
1,045 (3)
Discounted cash flow
Default rate(5)
Discount rate
Loss severity
Prepayment rate (6)
Insignificant level 3 assets
Total
148
1,193
21.2 %
2.9 -
4.1 -
2.0 -
45.0
1.0 - 100.0
11.9
10.9
5.2
67.2
4.6
7.9 %
10.9
6.0
66.7
(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 $825 million and $942 million government insured/guaranteed loans purchased from GNMA-guaranteed mortgage securitization, at
December 31, 2013 and 2012, respectively and $68 million and $103 million of other mortgage loans which are not government insured/guaranteed at December 31, 2013
and 2012, 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 impacts the frequency and timing of early resolution of
loans.
234
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.
(in millions)
December 31, 2013
Offshore funds
Funds of funds
Hedge funds
Private equity funds (1)(2)
Venture capital funds (2)
Total (3)
December 31, 2012
Offshore funds
Funds of funds
Hedge funds
Private equity funds
Venture capital funds
Total (3)
Fair
value
Unfunded
commitments
Redemption
frequency
Redemption
notice
period
1 - 180 days
N/A
5 - 95 days
N/A
N/A
Daily - Quarterly
N/A
Monthly - Semi Annually
N/A
N/A
$
308
-
2
1,496
63
$
1,869
$
379
1
2
807
82
$
1,271
-
-
-
316
14
330
-
-
-
195
21
216
Daily - Annually
Quarterly
Daily - Annually
N/A
N/A
1 - 180 days
90 days
5 - 95 days
N/A
N/A
N/A - Not applicable
(1) Excludes $505 million in a private equity fund that had a nonrecurring fair value adjustment during 2013 and 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, which we may have to divest.
(3) Includes nonmarketable equity investments carried at cost for which we use NAVs as a practical expedient for determining nonrecurring fair value adjustments. These
investments are predominantly private equity funds and had a fair value of $1.5 billion and $816 million and carrying value of $1.4 billion and $651 million at
December 31, 2013 and 2012, respectively. The fair value and carrying value of investments with nonrecurring fair value adjustments were $88 million and $21 million
during 2013 and 2012, respectively.
Offshore funds primarily invest in foreign mutual funds.
Redemption restrictions are in place for these investments with a
fair value of $144 million and $189 million at December 31, 2013
and December 31, 2012, 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.
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.
235
Note 17: Fair Values of Assets and Liabilities (continued)
Fair Value Option
We measure MHFS at fair value for MHFS originations for
which an active secondary market and readily available market
prices exist to reliably support fair value pricing models used for
these loans. Loan origination fees on these loans are recorded
when earned, and related direct loan origination costs are
recognized when incurred. We also measure at fair value certain
of our other interests held related to residential loan sales and
securitizations. We believe fair value measurement for MHFS
and other interests held, which we hedge with free-standing
derivatives (economic hedges) along with our MSRs measured at
fair value, reduces certain timing differences and better matches
changes in the value of these assets with changes in the value of
derivatives used as economic hedges for these assets.
We elected to measure certain LHFS portfolios at fair value
in conjunction with customer accommodation activities, to
better align the measurement basis of the assets held with our
management objectives given the trading nature of these
portfolios. In addition, we elected to measure at fair value
certain letters of credit and nonmarketable equity securities that
are hedged with derivative instruments to better reflect the
economics of the transactions. The letters of credit are included
in trading account assets or liabilities, and the nonmarketable
equity securities are included in other assets.
Loans that we measure at fair value consist predominantly of
reverse mortgage loans previously transferred under a GNMA
reverse mortgage securitization program accounted for as a
secured borrowing. Before the transfer, they were classified as
MHFS measured at fair value and, as such, remain carried on
our balance sheet under the fair value option.
Similarly, we may elect fair value option for the assets and
liabilities of certain consolidated VIEs. This option is generally
elected for newly consolidated VIEs for which predominantly all
of our interests, prior to consolidation, are carried at fair value
with changes in fair value recorded to earnings. Accordingly,
such an election allows us to continue fair value accounting
through earnings for those interests and eliminate income
statement mismatch otherwise caused by differences in the
measurement basis of the consolidated VIEs assets and
liabilities.
The following table reflects the differences between 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.
December 31, 2013
December 31, 2012
Fair value
carrying
amount
less
Fair value
carrying
amount
less
Fair value
Aggregate
aggregate
Fair value
Aggregate
aggregate
carrying
unpaid
unpaid
carrying
unpaid
unpaid
amount
principal
principal
amount
principal
principal
$
13,879
13,966
(87) (1)
42,305
41,183
1,122 (1)
205
39
1
1
5,995
188
1,386
-
359
46
9
9
5,674
188
n/a
(199)
(154)
(7)
(8)
(8)
321
-
n/a
199 (3)
309
49
6
2
655
64
10
6
6,206
5,669
89
-
(1)
89
n/a
(346)
(15)
(4)
(4)
537
-
n/a
(1,157)
1,156 (3)
(in millions)
Mortgages held for sale:
Total loans
Nonaccrual loans
Loans 90 days or more past due and still accruing
Loans held for sale:
Total loans
Nonaccrual loans
Loans:
Total loans
Nonaccrual loans
Other assets (2)
Long-term debt
(1) The difference between fair value carrying amount and aggregate unpaid principal includes changes in fair value recorded at and subsequent to funding, gains and losses on
the related loan commitment prior to funding, and premiums on acquired loans.
(2) Consists of nonmarketable equity investments carried at fair value. See Note 7 for more information.
(3) 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.
236
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.
2013
2012
Net gains
Mortgage
banking
(losses)
from
Other
Mortgage
banking
Net gains
(losses)
from
Other
Mortgage
banking
Net gains
(losses)
from
2011
Other
(in millions)
noninterest
income
trading
activities
noninterest
income
noninterest
income
trading
activities
noninterest
income
noninterest
income
trading
activities
noninterest
income
Year ended December 31,
Mortgages held for sale
$
2,073
Loans held for sale
Loans
Other assets
Long-term debt
Other interests held (1)
-
-
-
-
-
-
-
-
-
-
(15)
-
8,240
-
(216)
324
-
-
-
-
-
-
-
-
-
-
-
-
(42)
1
21
63
-
(27)
34
6,084
-
13
-
(11)
-
-
-
-
-
-
(25)
-
32
80
-
-
-
(1) Consists of retained interests in securitization 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.
(in millions)
Gains (losses) attributable to
instrument-specific credit risk:
Mortgages held for sale
Loans held for sale
Total
Year ended December 31,
2013
2012
2011
$
$
126
(124)
(144)
-
21
32
126
(103)
(112)
237
Note 17: Fair Values of Assets and Liabilities (continued)
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.
(in millions)
December 31, 2013
Financial assets
Carrying
amount
Level 1
Level 2
Level 3
Total
Estimated fair value
Cash and due from banks (1)
$
19,919
19,919
-
Federal funds sold, securities purchased under resale
agreements and other short-term investments (1)
Held-to-maturity securities
Mortgages held for sale (2)
Loans held for sale (2)
Loans, net (3)
Nonmarketable equity investments (cost method)
Financial liabilities
Deposits
Short-term borrowings (1)
Long-term debt (4)
December 31, 2012
Financial assets
213,793
12,346
2,884
132
793,363
6,978
1,079,177
53,883
152,987
5,160
208,633
6,205
2,009
136
-
-
6,042
893
-
19,919
213,793
12,247
2,902
136
58,350
740,063
798,413
-
8,635
8,635
1,037,448
42,079
1,079,527
53,883
-
53,883
144,984
10,879
155,863
-
-
-
-
-
-
-
-
Cash and due from banks (1)
$
21,860
21,860
-
Federal funds sold, securities purchased under resale
agreements and other short-term investments (1)
137,313
5,046
132,267
Mortgages held for sale (2)
Loans held for sale (2)
Loans, net (3)
Nonmarketable equity investments (cost method)
Financial liabilities
Deposits
Short-term borrowings (1)
Long-term debt (4)
4,844
104
763,968
6,799
1,002,835
57,175
127,366
-
-
-
-
-
-
-
3,808
83
56,237
2
946,922
57,175
119,220
-
-
1,045
29
716,114
8,229
21,860
137,313
4,853
112
772,351
8,231
57,020
1,003,942
-
11,063
57,175
130,283
(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 $12.0 billion and $12.4 billion at
December 31, 2013 and 2012, respectively.
(4) The carrying amount and fair value exclude balances for which the fair value option was elected and obligations under capital leases of $11 million and $12 million at
December 31, 2013 and 2012, 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.
This amounted to $597 million and $586 million at
December 31, 2013 and 2012, respectively.
238
Note 18: 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.
DEP Shares
Dividend Equalization Preferred Shares (DEP)
Series G
7.25% Class A Preferred Stock
Series H
Floating Class A Preferred Stock
Series I
Floating Class A Preferred Stock
Series J
8.00% Non-Cumulative Perpetual Class A Preferred Stock
Series K
7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
Series L
7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock
Series N
5.20% Non-Cumulative Perpetual Class A Preferred Stock
Series O
5.125% Non-Cumulative Perpetual Class A Preferred Stock
Series P
5.25% Non-Cumulative Perpetual Class A Preferred Stock
Series Q
5.85% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
Series R
6.625% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
ESOP
Cumulative Convertible Preferred Stock (1)
Total
December 31, 2013
December 31, 2012
Liquidation
preference
per share
Shares
authorized
and designated
Liquidation
preference
per share
Shares
authorized
and designated
$
10
97,000
$
10
97,000
15,000
50,000
15,000
50,000
20,000
50,000
20,000
50,000
100,000
25,010
100,000
25,010
1,000
2,300,000
1,000
2,300,000
1,000
3,500,000
1,000
3,500,000
1,000
4,025,000
1,000
4,025,000
25,000
30,000
25,000
30,000
25,000
27,600
25,000
27,600
25,000
26,400
25,000
69,000
25,000
34,500
-
1,105,664
11,340,174
-
-
-
-
-
-
-
910,934
11,015,544
(1) See the following page for additional information about the liquidation preference for the ESOP Cumulative Preferred Stock.
(in millions, except shares)
DEP Shares
Dividend Equalization Preferred Shares (DEP)
Series I (1)
Floating Class A Preferred Stock
Series J (1)
8.00% Non-Cumulative Perpetual Class A Preferred Stock
Series K (1)
7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
Series L (1)
7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock
Series N (1)
5.20% Non-Cumulative Perpetual Class A Preferred Stock
Series O (1)
5.125% Non-Cumulative Perpetual Class A Preferred Stock
Series P (1)
5.25% Non-Cumulative Perpetual Class A Preferred Stock
Series Q (1)
5.85% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
Series R (1)
6.625% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
ESOP
Cumulative Convertible Preferred Stock
December 31, 2013
December 31, 2012
Shares
issued and
outstanding
Par
value
Carrying
value Discount
Shares
issued and
outstanding
Par
value
Carrying
value Discount
96,546 $
-
-
25,010
2,501
2,501
-
-
96,546 $
-
-
25,010
2,501
2,501
-
-
2,150,375
2,150
1,995
155
2,150,375
2,150
1,995
155
3,352,000
3,352
2,876
476
3,352,000
3,352
2,876
476
3,968,000
3,968
3,200
768
3,968,000
3,968
3,200
768
30,000
750
750
26,000
650
650
25,000
625
625
69,000
1,725
1,725
33,600
840
840
1,105,664
1,105
1,105
-
-
-
-
-
-
30,000
750
750
26,000
650
650
-
-
-
-
-
-
-
-
-
910,934
911
911
-
-
-
-
-
-
Total
10,881,195 $
17,666
16,267
1,399
10,558,865 $
14,282
12,883
1,399
(1) Preferred shares qualify as Tier 1 capital.
239
Note 18: Preferred Stock (continued)
In March 2013, we issued 25 million Depositary Shares, each
representing a 1/1,000th interest in a share of the Non-
Cumulative Perpetual Class A Preferred Stock, Series P, for an
aggregate public offering price of $625 million.
In July 2013, we issued 69 million Depositary Shares, each
representing a 1/1,000th interest in a share of the Non-
Cumulative Perpetual Class A Preferred Stock, Series Q, for an
aggregate public offering price of $1.7 billion.
In December 2013, we issued 34 million Depositary Shares,
each representing a 1/1,000th interest in a share of the Non-
Cumulative Perpetual Class A Preferred Stock, Series R, for an
aggregate public offering price of $840 million.
See Note 8 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.
(in millions, except shares)
ESOP Preferred Stock
$1,000 liquidation preference per share
2013
2012
2011
2010
2008
2007
2006
2005
2004
Shares issued and outstanding
Carrying value
Dec. 31,
Dec. 31,
Dec. 31,
Dec. 31,
Adjustable dividend rate
2013
2012
2013
2012
Minimum
Maximum
349,788
217,404
241,263
171,011
57,819
39,248
21,139
7,992
-
-
$
245,604
277,263
201,011
73,434
53,768
33,559
18,882
7,413
350
217
241
171
58
39
21
8
-
1,105
-
246
277
201
73
54
34
19
7
911
(1,200)
(986)
8.50 %
10.00
9.00
9.50
10.50
10.75
10.75
9.75
8.50
9.50
11.00
10.00
10.50
11.50
11.75
11.75
10.75
9.50
Total ESOP Preferred Stock (1)
1,105,664
910,934
Unearned ESOP shares (2)
$
$
(1) At December 31, 2013 and December 31, 2012, additional paid-in capital included $95 million and $75 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.
240
Note 19: Common Stock and Stock Plans
Common Stock
The following table presents our reserved, issued and authorized
shares of common stock at December 31, 2013.
Dividend reinvestment and
common stock purchase plans
Director plans
Stock plans (1)
Convertible securities and warrants
Total shares reserved
Shares issued
Shares not reserved
Total shares authorized
Number of shares
11,732,445
1,054,645
653,684,625
104,944,332
771,416,047
5,481,811,474
2,746,772,479
9,000,000,000
(1) Includes employee options, restricted shares and restricted share rights, 401(k),
profit sharing and compensation deferral plans.
At December 31, 2013, we have warrants outstanding and
exercisable to purchase 39,108,864 shares of our common stock
with an exercise price of $34.01 per share, expiring on October
28, 2018. We did not purchase any of these warrants in 2013. We
purchased 70,210 of these warrants in 2012. These warrants
were issued in connection with our participation in the TARP
CPP.
Dividend Reinvestment and Common Stock
Purchase Plans
Participants in our dividend reinvestment and common stock
direct purchase plans may purchase shares of our common stock
at fair market value by reinvesting dividends and/or making
optional cash payments, under the plan's terms.
Employee Stock Plans
We offer stock-based employee compensation plans as described
below. For information on our accounting for stock-based
compensation plans, see Note 1.
LONG-TERM INCENTIVE COMPENSATION PLANS Our Long-
Term Incentive Compensation Plan (LTICP) provides for awards
of incentive and nonqualified stock options, stock appreciation
rights, restricted shares, restricted stock rights (RSRs),
performance share awards (PSAs) and stock awards without
restrictions.
During 2013, 2012 and 2011 we granted RSRs and
performance shares as our primary long-term incentive awards
instead of stock options. Holders of RSRs are entitled to the
related shares of common stock at no cost generally vesting over
three to five years after the RSRs were granted. RSRs generally
continue to vest after retirement according to the original vesting
schedule. Except in limited circumstances, RSRs are canceled
when employment ends.
Holders of each vested PSA are entitled to the related shares
of common stock at no cost. PSAs continue to vest after
retirement according to the original vesting schedule subject to
satisfying the performance criteria and other vesting conditions.
Holders of RSRs and PSAs may be entitled to receive
additional RSRs and PSAs (dividend equivalents) or cash
payments equal to the cash dividends that would have been paid
had the RSRs or PSAs been issued and outstanding shares of
common stock. RSRs and PSAs granted as dividend equivalents
are subject to the same vesting schedule and conditions as the
underlying award.
Stock options must have an exercise price at or above fair
market value (as defined in the plan) of the stock at the date of
grant (except for substitute or replacement options granted in
connection with mergers or other acquisitions) and a term of no
more than 10 years. Except for options granted in 2004 and
2005, which generally vested in full upon grant, options
generally become exercisable over three years beginning on the
first anniversary of the date of grant. Except as otherwise
permitted under the plan, if employment is ended for reasons
other than retirement, permanent disability or death, the option
exercise period is reduced or the options are canceled.
Certain options granted prior to 2004 included the right to
acquire a “reload” stock option. Reload grants are fully vested
upon grant and are expensed immediately; the last reload
options were granted in 2013. As of December 31, 2013, none of
the options outstanding included a reload feature.
Compensation expense for most of our RSRs, and PSAs
granted prior to 2013, is based on the quoted market price of the
related stock at the grant date; in 2013 certain RSRs and all PSAs
granted include discretionary performance based vesting
conditions and are subject to variable accounting. For these
awards, the associated compensation expense fluctuates with
changes in our stock price. Stock option expense is based on the
fair value of the awards at the date of grant. The following table
summarizes the major components of stock incentive
compensation expense and the related recognized tax benefit.
(in millions)
RSRs
Performance shares
Stock options
Total stock incentive compensation
expense
Related recognized tax benefit
Year ended December 31,
2013
2012
2011
568
157
-
725
273
435
112
13
560
211
338
128
63
529
200
$
$
$
241
Note 19: Common Stock and Stock Plans (continued)
For various acquisitions and mergers, we converted employee
and director stock options of acquired or merged companies into
stock options to purchase our common stock based on the terms
of the original stock option plan and the agreed-upon exchange
ratio. In addition, we converted restricted stock awards into
awards that entitle holders to our stock after the vesting
conditions are met. Holders receive cash dividends on
outstanding awards if provided in the original award.
The total number of shares of common stock available for
grant under the plans at December 31, 2013, was 282 million.
Director Awards
Beginning in 2011, we granted only common stock awards under
the LTICP to non-employee directors elected or re-elected at the
annual meeting of stockholders and prorated awards to directors
who join the Board at any other time. Stock awards vest
immediately. Options also were granted to directors prior to
2011, and can be exercised after twelve months through the tenth
anniversary of the grant date. Options granted prior to 2005 may
include the right to acquire a “reload” stock option.
Restricted Share Rights
A summary of the status of our RSRs and restricted share awards
at December 31, 2013, and changes during 2013 is in the
following table:
Number
Nonvested at January 1, 2013
55,287,337
$
Granted
Vested
Canceled or forfeited
18,476,399
(12,233,361)
(886,381)
Nonvested at December 31, 2013
60,643,994
Weighted-
average
grant-date
fair value
29.78
35.52
29.32
30.70
31.61
The weighted-average grant date fair value of RSRs granted
during 2012 and 2011 was $31.49 and $31.02, respectively.
At December 31, 2013, there was $702 million of total
unrecognized compensation cost related to nonvested RSRs. The
cost is expected to be recognized over a weighted-average period
of 2.5 years. The total fair value of RSRs that vested during 2013,
2012 and 2011 was $472 million, $89 million and $41 million,
respectively.
Performance Share Awards
Holders of PSAs are entitled to the related shares of common
stock at no cost subject to the Company's achievement of
specified performance criteria over a three-year period. PSAs are
granted at a target number; based on the Company's
performance, the number of awards that vest can be adjusted
downward to zero and upward to a maximum of either 125% or
150% of target. The awards vest in the quarter after the end of
the performance period. For PSAs whose performance period
ended December 31, 2013, the determination of the number of
performance shares that will vest will occur in the first quarter of
2014, after review of the Company’s performance by the Human
Resources Committee of the Board of Directors. In 2013, PSAs
granted include discretionary performance based vesting
conditions and are subject to variable accounting. For these
awards, the associated compensation expense fluctuates with
changes in our stock price and the estimated outcome of meeting
the performance conditions. The total expense that will be
recognized on these awards cannot be finalized until the
determination of the awards that will vest.
A summary of the status of our PSAs at December 31, 2013
and changes during 2013 is in the following table, based on the
target amount of awards:
Number
Nonvested at January 1, 2013
10,294,881
$
Granted
Vested
4,614,295
(4,070,028)
Nonvested at December 31, 2013
10,839,148
Weighted-
average
grant date
fair value
30.35
33.56
27.67
32.72
The weighted-average grant date fair value of performance
awards granted during 2012 and 2011 was $31.44 and $31.26,
respectively.
At December 31, 2013, there was $56 million of total
unrecognized compensation cost related to nonvested
performance awards. The cost is expected to be recognized over
a weighted-average period of 1.7 years.
242
Stock Options
The table below summarizes stock option activity and related
information for the stock plans. Options assumed in mergers are
included in the activity and related information for Incentive
Compensation Plans if originally issued under an employee plan,
and in the activity and related information for Director Awards if
originally issued under a director plan.
Incentive compensation plans
Options outstanding as of December 31, 2012
Granted
Canceled or forfeited
Exercised
Options exercisable and outstanding as of December 31, 2013
Director awards
Options outstanding as of December 31, 2012
Granted
Canceled or forfeited
Exercised
Options exercisable and outstanding as of December 31, 2013
As of December 31, 2013, there was no unrecognized
compensation cost related to stock options. The total intrinsic
value of options exercised during 2013, 2012 and 2011 was
$643 million, $694 million and $246 million, respectively.
Cash received from the exercise of stock options for 2013,
2012 and 2011 was $1.6 billion, $1.5 billion and $554 million,
respectively.
We do not have a specific policy on repurchasing shares to
satisfy share option exercises. Rather, we have a general policy
on repurchasing shares to meet common stock issuance
requirements for our benefit plans (including share option
exercises), conversion of our convertible securities, acquisitions
and other corporate purposes. Various factors determine the
amount and timing of our share repurchases, including our
capital requirements, the number of shares we expect to issue for
acquisitions and employee benefit plans, market conditions
(including the trading price of our stock), and regulatory and
legal considerations. These factors can change at any time, and
there can be no assurance as to the number of shares we will
repurchase or when we will repurchase them.
The fair value of each option award granted on or after
January 1, 2006, is estimated using a Black-Scholes valuation
model. The expected term of reload options granted is generally
based on the midpoint between the valuation date and the
contractual termination date of the original option. Our expected
volatilities are based on a combination of the historical volatility
of our common stock and implied volatilities for traded options
on our common stock. The risk-free rate is based on the U.S.
Treasury zero-coupon yield curve in effect at the time of grant.
Both expected volatility and the risk-free rates are based on a
period commensurate with our expected term. The expected
dividend is based on a fixed dividend amount.
Weighted-
average
Weighted-
average
remaining
exercise
price
contractual
term (in yrs.)
Aggregate
intrinsic
value
(in millions)
40.84
35.25
105.88
28.40
42.86
31.42
37.05
35.43
28.87
31.95
3.2
$
2,245
2.8
6
Number
202,926,392
72,581
(6,366,940)
(56,147,977)
140,484,056
$
588,022
11,585
(17,629)
(102,341)
479,637
The following table presents the weighted-average per share
fair value of options granted and the assumptions used, based on
a Black-Scholes option valuation model. All of the options
granted in the years shown resulted from the reload feature.
Year ended December 31,
2013
2012
2011
Per share fair value of options granted $
1.58
2.79
3.78
Expected volatility
Expected dividends
Expected term (in years)
Risk-free interest rate
18.3 % 29.2
$
0.93
0.5
0.1 %
0.68
0.7
0.1
32.7
0.32
1.0
0.2
Employee Stock Ownership Plan
The Wells Fargo & Company 401(k) Plan (401(k) Plan) is a
defined contribution plan with an Employee Stock Ownership
Plan (ESOP) feature. The ESOP feature enables the 401(k) Plan
to borrow money to purchase our preferred or common stock.
From 1994 through 2013, with the exception of 2009, we loaned
money to the 401(k) Plan to purchase shares of our ESOP
preferred stock. As our employer contributions are made to the
401(k) Plan and are used by the 401(k) Plan to make ESOP loan
payments, the ESOP preferred stock in the 401(k) Plan is
released and converted into our common stock shares.
Dividends on the common stock shares allocated as a result of
the release and conversion of the ESOP preferred stock reduce
retained earnings and the shares are considered outstanding for
computing earnings per share. Dividends on the unallocated
ESOP preferred stock do not reduce retained earnings, and the
shares are not considered to be common stock equivalents for
computing earnings per share. Loan principal and interest
payments are made from our employer contributions to the
401(k) Plan, along with dividends paid on the ESOP preferred
243
Note 19: Common Stock and Stock Plans (continued)
stock. With each principal and interest payment, a portion of the
ESOP preferred stock is released and converted to common
stock shares, which are allocated to the 401(k) Plan participants
and invested in the Wells Fargo ESOP Fund within the 401(k)
Plan.
The balance of common stock and unreleased preferred stock
held in the Wells Fargo ESOP fund, the fair value of unreleased
ESOP preferred stock and the dividends on allocated shares of
common stock and unreleased ESOP Preferred Stock paid to the
401(k) Plan were:
(in millions, except shares)
Allocated shares (common)
Unreleased shares (preferred)
Fair value of unreleased ESOP preferred shares
Allocated shares (common)
Unreleased shares (preferred)
Shares outstanding
December 31,
2013
2012
2011
137,354,139 136,821,035 131,046,406
1,105,664
1,105
910,934
911
858,759
859
Dividends paid
Year ended December 31,
2013
159
132
2012
2011
117
115
60
95
$
$
Deferred Compensation Plan for Independent
Sales Agents
WF Deferred Compensation Holdings, Inc. is a wholly-owned
subsidiary of the Parent formed solely to sponsor a deferred
compensation plan for independent sales agents who provide
investment, financial and other qualifying services for or with
respect to participating affiliates.
The Nonqualified Deferred Compensation Plan for
Independent Contractors, which became effective January 1,
2002, allows participants to defer all or part of their eligible
compensation payable to them by a participating affiliate. The
Parent has fully and unconditionally guaranteed the deferred
compensation obligations of WF Deferred Compensation
Holdings, Inc. under the plan.
244
Note 20: Employee Benefits and Other Expenses
Pension and Postretirement Plans
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.
Prior to July 1, 2009, eligible employees' Cash Balance Plan
accounts were allocated a compensation credit based on a
percentage of their certified compensation. The compensation
credit percentage was based on age and years of credited service.
The freeze discontinues the allocation of compensation credits
after June 30, 2009. Investment credits continue to be allocated
to participants based on their accumulated balances.
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); in 2013, lump sum payments exceeded this
threshold. Settlement losses of $123 million were recognized in
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.
We did not make a contribution to our Cash Balance Plan in
2013. We do not expect that we will be required to make a
contribution to the Cash Balance Plan in 2014; however, this is
dependent on the finalization of the actuarial valuation in 2014.
Our decision of whether to make a contribution in 2014 will be
based on various factors including the actual investment
performance of plan assets during 2014. Given these
uncertainties, we cannot estimate at this time the amount, if any,
that we will contribute in 2014 to the Cash Balance Plan. For the
nonqualified pension plans and postretirement benefit plans,
there is no minimum required contribution beyond the amount
needed to fund benefit payments; we may contribute more to our
postretirement benefit plans dependent on various factors.
We provide health care and life insurance benefits for certain
retired employees and reserve the right to terminate, modify or
amend any of the benefits at any time.
The information set forth in the following tables is based on
current actuarial reports using the measurement date of
December 31 for our pension and postretirement benefit plans.
The changes in the benefit obligation and the fair value of
plan assets, the funded status and the amounts recognized on
the balance sheet were:
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss (gain)
Benefits paid
Medicare Part D subsidy
Curtailment
Amendments
Liability transfer
Foreign exchange impact
2013
December 31,
2012
Pension benefits
Pension benefits
Non-
Other
Non-
Other
Qualified
qualified
benefits
Qualified
qualified
benefits
$
11,717
719
1,293
10,634
691
1,304
-
465
-
(1,106)
(875)
-
-
-
-
(3)
-
29
-
(17)
(62)
-
-
-
-
-
11
47
77
(306)
(147)
8
-
-
-
(1)
3
514
-
1,242
(725)
-
-
1
47
1
-
32
-
62
(66)
-
-
-
-
-
11
60
80
(23)
(147)
11
(3)
-
-
-
Benefit obligation at end of year
10,198
669
982
11,717
719
1,293
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Plan participants’ contributions
Benefits paid
Medicare Part D subsidy
Asset transfer
Foreign exchange impact
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized on the balance sheet at end of year:
Liabilities
$
$
9,539
743
4
-
(875)
-
-
(2)
9,409
-
-
62
-
(62)
-
-
-
-
636
71
-
77
(147)
8
-
-
9,061
1,149
9
-
(725)
-
44
1
645
9,539
-
-
66
-
(66)
-
-
-
-
640
55
(3)
80
(147)
11
-
-
636
(789)
(669)
(337)
(2,178)
(719)
(657)
(789)
(669)
(337)
(2,178)
(719)
(657)
245
Note 20: Employee Benefits and Other Expenses (continued)
The following table provides information for pension plans
with benefit obligations in excess of plan assets.
(in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
December 31,
2013
2012
$
10,822
10,820
12,391
12,389
9,364
9,490
The components of net periodic benefit cost and other
comprehensive income were:
2013
2012
December 31,
2011
Pension benefits
Pension benefits
Pension benefits
Non-
Other
Non-
Other
Non-
Other
Qualified
qualified
benefits
Qualified
qualified
benefits
Qualified
qualified
benefits
-
465
(674)
137
-
124
-
52
-
29
-
15
-
3
-
47
11
47
(36)
(1)
(2)
-
-
3
514
(652)
131
-
2
-
-
32
-
10
-
5
-
19
(2)
47
11
60
(36)
-
(2)
-
(3)
30
6
520
(759)
86
-
4
-
1
34
-
6
-
3
-
13
71
(41)
-
(3)
-
-
(143)
44
40
(1,175)
(137)
-
-
(17)
(15)
-
-
(124)
(3)
-
-
-
-
(341)
1
-
2
-
-
-
758
(131)
(2)
-
(1)
-
-
62
(10)
-
-
(5)
-
-
(42)
1,120
-
-
2
-
-
-
(86)
-
-
(4)
(3)
(1)
33
(6)
-
-
(3)
-
-
(74)
-
-
3
-
-
-
(1,436)
(35)
(338)
624
47
(40)
1,026
24
(71)
(in millions)
Service cost
Interest cost
$
Expected return on plan assets
Amortization of net actuarial loss (gain)
Amortization of prior service credit
Settlement loss (1)
Curtailment gain
Net periodic benefit cost
Other changes in plan assets
and benefit obligations
recognized in other
comprehensive income:
Net actuarial loss (gain)
Amortization of net actuarial gain (loss)
Prior service cost
Amortization of prior service credit
Settlement (1)
Curtailment
Translation adjustments
Total recognized in other
comprehensive income
Total recognized in net periodic
benefit cost and other
comprehensive income
$
(1,384)
12
(319)
622
94
(10)
883
68
(31)
(1) Qualified settlements include $123 million for the Cash Balance Plan.
246
Amounts recognized in cumulative OCI (pre tax) consist of:
(in millions)
Net actuarial loss (gain)
Net prior service credit
Net transition obligation
Total
The net actuarial loss for the defined benefit pension plans
and other post retirement plans that will be amortized from
cumulative OCI into net periodic benefit cost in 2014 is $74
million. The net prior service credit for the defined benefit
pension plans and other post retirement plans that will be
amortized from cumulative OCI into net periodic benefit cost in
2014 is $3 million.
2013
December 31,
2012
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
$
1,887
(2)
-
148
-
-
(321)
(22)
-
3,323
(2)
-
$
1,885
148
(343)
3,321
184
-
-
184
19
(25)
1
(5)
Plan Assumptions
For additional information on our pension accounting
assumptions, see Note 1.
The weighted-average discount rates used to estimate the projected benefit obligation for pension benefits were:
2013
December 31,
2012
Pension benefits
Pension benefits
Non-
Other
Non-
Other
Qualified
qualified
benefits
Qualified
qualified
benefits
Discount rate
4.75 %
4.25
4.50
4.00
4.00
3.75
The weighted-average assumptions used to determine the net periodic benefit cost were:
2013
2012
December 31,
2011
Pension benefits
Pension benefits
Pension benefits
Non-
Other
Non-
Other
Non-
Other
Qualified
qualified
benefits
Qualified
qualified
benefits
Qualified
qualified
benefits
Discount rate (1)
4.38 %
4.08
Expected return on plan assets
7.50
n/a
3.75
6.00
5.00
7.50
4.92
n/a
4.75
6.00
5.25
8.25
5.25
n/a
5.25
6.00
(1) The discount rate for the 2013 qualified pension benefits and for the 2013 and 2012 nonqualified pension benefits includes the impact of quarter-end remeasurements when
settlement losses are recognized.
To account for postretirement health care plans we use health
care cost trend rates to recognize the effect of expected changes
in future health care costs due to medical inflation, utilization
changes, new technology, regulatory requirements and Medicare
cost shifting. In determining the end of year benefit obligation
we assume a range of average annual increases of approximately
6.75% to 8.50%, dependent on plan type, for health care costs in
2014. These rates are assumed to trend down 0.25% per year
until the trend rate reaches an ultimate rate of 5.00% in 2023 to
2028, dependent on plan type. The 2013 periodic benefit cost
was determined using initial annual trend rates in the range of
7.00% to 8.75%, dependent on plan type. These rates were
assumed to decrease 0.25% per year until they reached ultimate
rates of 5.00% in 2023 to 2028, dependent on plan type.
Increasing the assumed health care trend by one percentage
point in each year would increase the benefit obligation as of
December 31, 2013, by $29 million and the total of the interest
cost and service cost components of the net periodic benefit cost
for 2013 by $1 million. Decreasing the assumed health care trend
by one percentage point in each year would decrease the benefit
obligation as of December 31, 2013, by $26 million and the total
of the interest cost and service cost components of the net
periodic benefit cost for 2013 by $1 million.
247
Note 20: Employee Benefits and Other Expenses (continued)
Investment Strategy and Asset Allocation
We seek to achieve the expected long-term rate of return with a
prudent level of risk given the benefit obligations of the pension
plans and their funded status. Our overall investment strategy is
designed to provide our Cash Balance Plan with long-term
growth opportunities while ensuring that risk is mitigated
through diversification across numerous asset classes and
various investment strategies. We target the asset allocation for
our Cash Balance Plan at a target mix range of 30-50% equities,
40-60% fixed income, and approximately 10% in real estate,
venture capital, private equity and other investments. The
Employee Benefit Review Committee (EBRC), which includes
several members of senior management, formally reviews the
investment risk and performance of our Cash Balance Plan on a
quarterly basis. Annual Plan liability analysis and periodic
asset/liability evaluations are also conducted.
Other benefit plan assets include (1) assets held in a 401(h)
trust, which are invested with a target mix of 40-60% for both
equities and fixed income, and (2) assets held in the Retiree
Medical Plan Voluntary Employees' Beneficiary Association
(VEBA) trust, which are invested with a general target asset mix
of 20-40% equities and 60-80% fixed income. In addition, the
strategy for the VEBA trust assets considers the effect of income
taxes by utilizing a combination of variable annuity and low
turnover investment strategies. Members of the EBRC formally
review the investment risk and performance of these assets on a
quarterly basis.
Projected Benefit Payments
Future benefits that we expect to pay under the pension and
other benefit plans are presented in the following table. Other
benefits payments are expected to be reduced by prescription
drug subsidies from the federal government provided by the
Medicare Prescription Drug, Improvement and Modernization
Act of 2003.
(in millions)
Qualified
qualified
benefits
receipts
Pension benefits
Other benefits
Non-
Future
Subsidy
Year ended
December 31,
2014
2015
2016
2017
2018
$
768
743
721
719
717
70
65
64
58
72
87
89
90
90
90
2019-2023
3,321
238
425
13
11
11
11
12
57
248
Fair Value of Plan Assets
The following table presents the balances of pension plan assets
and other benefit plan assets measured at fair value. See Note 17
for fair value hierarchy level definitions.
(in millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Pension plan assets
Other benefits plan assets
Carrying value at year end
December 31, 2013
Cash and cash equivalents
Long duration fixed income (1)
Intermediate (core) fixed income (2)
$
High-yield fixed income
International fixed income
Domestic large-cap stocks (3)
Domestic mid-cap stocks
Domestic small-cap stocks (4)
International stocks (5)
Emerging market stocks
Real estate/timber (6)
Hedge funds (7)
Private equity
Other
65
546
86
5
201
824
260
286
540
-
89
-
-
-
357
3,287
339
326
112
415
145
15
354
405
1
149
-
27
Total plan investments
$
2,902
5,932
-
1
-
-
-
-
-
-
1
-
294
152
158
52
658
422
3,834
425
331
313
1,239
405
301
895
405
384
301
158
79
147
-
64
-
-
-
-
-
28
-
-
-
-
2
22
-
115
-
-
107
46
38
54
-
-
-
-
-
9,492
241
382
Payable upon return of securities loaned
Net receivables
Total plan assets
December 31, 2012
Cash and cash equivalents
Long duration fixed income (1)
Intermediate (core) fixed income (2)
High-yield fixed income
International fixed income
Domestic large-cap stocks (3)
Domestic mid-cap stocks
Domestic small-cap stocks (4)
International stocks (5)
Emerging market stocks
Real estate/timber (6)
Hedge funds (7)
Private equity
Other
$
-
312
545
3,124
71
5
251
854
283
309
578
-
100
-
-
-
355
367
112
499
158
15
341
538
1
187
-
31
(94)
11
$
9,409
-
1
-
-
-
-
-
-
1
-
328
71
145
48
312
3,670
426
372
363
1,353
441
324
920
538
429
258
145
79
164
-
65
-
-
-
-
-
28
-
-
-
-
1
23
-
116
-
-
102
41
30
47
-
-
-
-
-
Total plan investments
$
2,996
6,040
594
9,630
258
359
Payable upon return of securities loaned
Net receivables (payables)
Total plan assets
(112)
21
$
9,539
-
-
-
-
-
-
-
-
-
-
-
-
-
22
22
-
-
-
-
-
-
-
-
-
-
-
-
-
22
22
169
-
179
-
-
107
46
38
82
-
-
-
-
24
645
-
-
645
187
-
181
-
-
102
41
30
75
-
-
-
-
23
639
(3)
-
636
(1) This category includes a diversified mix of assets which are being managed in accordance with a duration target of approximately 10 years and an emphasis on corporate
credit bonds combined with investments in U.S. Treasury securities and other U.S. agency and non-agency bonds.
(2) This category includes assets that are primarily intermediate duration, investment grade bonds held in investment strategies benchmarked to the Barclays Capital U.S.
Aggregate Bond Index. Includes U.S. Treasury securities, agency and non-agency asset-backed bonds and corporate bonds.
(3) This category covers a broad range of investment styles, both active and passive approaches, as well as style characteristics of value, core and growth emphasized
strategies. Assets in this category are currently diversified across seven unique investment strategies. For December 31, 2013 and 2012, respectively, approximately 15%
and 24% of the assets within this category are passively managed to popular mainstream market indexes including the Standard & Poor's 500 Index; excluding the
allocation to the S&P 500 Index strategy, no single investment manager represents more than 2.5% of total plan assets.
(4) This category consists of a highly diversified combination of four distinct investment management strategies with no single strategy representing more than 2% of total plan
assets. Allocations in this category are spread across actively managed approaches with distinct value and growth emphasized approaches in fairly equal proportions.
(5) This category includes assets diversified across six unique investment strategies providing exposure to companies based primarily in developed market, non-U.S. countries
with no single strategy representing more than 2.5% of total plan assets.
(6) This category primarily includes investments in private and public real estate, as well as timber specific limited partnerships; real estate holdings are diversified by
geographic location and sector (e.g., retail, office, apartments).
(7) This category consists of several investment strategies diversified across more than 30 hedge fund managers. Single manager allocation exposure is limited to 0.15%
(15 basis points) of total plan assets.
249
Note 20: Employee Benefits and Other Expenses (continued)
The changes in Level 3 pension plan and other benefit plan assets measured at fair value are summarized as follows:
(in millions)
of year
Realized Unrealized (1)
settlements (net)
Level 3
year
Balance
Purchases,
sales
beginning
Gains (losses)
and
Transfers
Into/(Out
of)
Balance
end of
Year ended December 31, 2013
Pension plan assets:
Long duration fixed income
International stocks
Real estate/timber
Hedge funds
Private equity
Other
Other benefits plan assets:
Other
Year ended December 31, 2012
Pension plan assets:
Long duration fixed income
Intermediate (core) fixed income
High-yield fixed income
Domestic large-cap stocks
International stocks
Real estate/timber
Hedge funds
Private equity
Other
Other benefits plan assets:
Real estate/timber
Hedge funds
Private equity
Other
$
$
$
$
$
$
$
$
1
1
328
71
145
48
594
22
22
1
6
1
2
1
355
251
129
46
792
12
8
4
23
47
-
-
27
5
19
1
52
-
-
-
-
-
-
-
22
1
8
1
32
-
-
-
-
-
-
-
52
6
6
5
69
-
-
-
-
-
-
-
2
2
10
3
17
-
-
-
-
-
-
-
(113)
56
(12)
(2)
(71)
-
-
-
-
-
-
1
(51)
8
(2)
(2)
-
-
-
14
-
-
14
-
-
-
(6)
(1)
(2)
(1)
-
(191)
-
-
(46)
(201)
(12)
(8)
(4)
(1)
(25)
-
-
-
-
-
1
1
294
152
158
52
658
22
22
1
-
-
-
1
328
71
145
48
594
-
-
-
22
22
(1) All unrealized gains (losses) relate to instruments held at period end.
VALUATION METHODOLOGIES Following is a description of
the valuation methodologies used for assets measured at fair
value.
highly liquid government securities such as U.S. Treasuries, and
registered investment companies and collective investment
funds described above.
Cash and Cash Equivalents – includes investments in collective
investment funds valued at fair value based upon the quoted
market values of the underlying net assets. The unit price is
quoted on a private market that is not active; however, the unit
price is based on underlying investments traded on an active
market. This group of assets also includes investments in
registered investment companies valued at the NAV of shares
held at year end.
Long Duration, Intermediate (Core), High-Yield, and
International Fixed Income – includes investments traded on
the secondary markets; prices are measured by using quoted
market prices for similar securities, pricing models, and
discounted cash flow analyses using significant inputs
observable in the market where available, or a combination of
multiple valuation techniques. This group of assets also includes
Domestic, International and Emerging Market Stocks –
investments in exchange-traded equity securities are valued at
quoted market values. This group of assets also includes
investments in registered investment companies and collective
investment funds described above.
Real Estate and Timber – the fair value of real estate and timber
is estimated based primarily on appraisals prepared by third-
party appraisers. Market values are estimates and the actual
market price of the real estate can only be determined by
negotiation between independent third parties in a sales
transaction. This group of assets also includes investments in
exchange-traded equity securities described above.
Hedge Funds and Private Equity – the fair values of hedge funds
are valued based on the proportionate share of the underlying
250
net assets of the investment funds that comprise the fund, based
on valuations supplied by the underlying investment funds.
Investments in private equity funds are valued at the NAV
provided by the fund sponsor. Market values are estimates and
the actual market price of the investments can only be
determined by negotiation between independent third parties in
a sales transaction.
Other – insurance contracts that are generally stated at cash
surrender value. This group of assets also includes investments
in collective investment funds and private equity described
above.
The methods described above may produce a fair value
calculation that may not be indicative of net realizable value or
reflective of future fair values. While we believe our valuation
methods are appropriate and consistent with other market
participants, the use of different methodologies or assumptions
to determine the fair value of certain financial instruments could
result in a different fair value measurement at the reporting
date.
Defined Contribution Retirement Plans
We sponsor a defined contribution retirement plan named the
Wells Fargo & Company 401(k) Plan (401(k) Plan). Under the
401(k) Plan, after one month of service, eligible employees may
contribute up to 50% of their certified compensation, subject to
statutory limits. Eligible employees who complete one year of
service are eligible for company matching contributions, which
are generally dollar for dollar up to 6% of an employee's eligible
certified compensation. As of January 1, 2010, matching
contributions are 100% vested. The 401(k) Plan includes a
discretionary profit sharing contribution feature to allow us to
make a contribution to eligible employees’ 401(k) Plan accounts.
Profit sharing contributions are vested after three years of
service. Total defined contribution retirement plan expenses
were $1.2 billion in 2013, and $1.1 billion in both 2012 and 2011.
Other Expenses
Expenses exceeding 1% of total interest income and noninterest
income in any of the years presented that are not otherwise
shown separately in the financial statements or Notes to
Financial Statements were:
(in millions)
Year ended December 31,
2013
2012
2011
Outside professional services
$
2,519 2,729 2,692
Outside data processing
Contract services
Travel and entertainment
Operating losses
Postage, stationery and supplies
Foreclosed assets
983
910
935
935 1,011 1,407
885
839
821
821 2,235 1,261
942
799
756
605 1,061 1,354
251
Note 21: Income Taxes
The components of income tax expense were:
(in millions)
Current:
Federal
State and local
Foreign
Total current
Deferred:
Federal
State and local
Foreign
Year ended December 31,
2013
2012
2011
$
4,601
736
91
9,141
1,198
61
3,352
468
52
5,428
10,400
3,872
4,457
(1,151)
3,088
522
(2)
(166)
20
471
14
Total deferred
4,977
(1,297)
3,573
Total
$
10,405
9,103
7,445
The tax effects of our temporary differences that gave rise to
significant portions of our deferred tax assets and liabilities are
presented in the following table.
Deferred taxes related to net unrealized gains (losses) on
investment securities, net unrealized gains (losses) on
derivatives, foreign currency translation, and employee benefit
plan adjustments are recorded in cumulative OCI (see Note 23).
These associated adjustments increased OCI by $2.5 billion in
2013.
We have determined that a valuation reserve is required for
2013 in the amount of $457 million predominantly attributable
to deferred tax assets in various state and foreign jurisdictions
where we believe it is more likely than not that these deferred tax
assets will not be realized. In these jurisdictions, carry back
limitations, lack of sources of taxable income, and tax planning
strategy limitations contributed to our conclusion that the
deferred tax assets would not be realizable. We have concluded
that it is more likely than not that the remaining deferred tax
assets will be realized based on our history of earnings, sources
of taxable income in carry back periods, and our ability to
implement tax planning strategies.
At December 31, 2013, we had net operating loss and credit
carry forwards with related deferred tax assets of $730 million
and $43 million, respectively. If these carry forwards are not
utilized, they will expire in varying amounts through 2033.
December 31,
At December 31, 2013, we had undistributed foreign earnings
of $1.6 billion related to foreign subsidiaries. We intend to
reinvest these earnings indefinitely outside the U.S. and
accordingly have not provided $450 million of income tax
liability on these earnings.
The following table reconciles the statutory federal income
tax expense and rate to the effective income tax expense and
rate. Our effective tax rate is calculated by dividing income tax
expense by income before income tax expense less the net
income from noncontrolling interests.
(in millions)
Deferred tax assets
Allowance for loan losses
Deferred compensation
and employee benefits
Accrued expenses
PCI loans
Basis difference in investments
Net operating loss and tax
credit carry forwards
Other
2013
2012
$
5,227
6,192
4,283
1,247
2,150
1,084
4,701
1,692
2,692
1,182
773
1,720
1,058
1,868
Total deferred tax assets
16,484
19,385
Deferred tax assets valuation allowance
(457)
(579)
Deferred tax liabilities
Mortgage servicing rights
Leasing
Mark to market, net
Intangible assets
Net unrealized gains on
investment securities
Insurance reserves
Other
(6,657)
(7,360)
(4,274)
(4,414)
(5,761)
(2,401)
(1,885)
(2,157)
(1,155)
(4,135)
(2,068)
(1,707)
(1,733)
(1,683)
Total deferred tax liabilities
(23,533) (23,857)
Net deferred tax liability (1) $
(7,506)
(5,051)
(1) Included in accrued expenses and other liabilities.
252
(in millions)
Amount
Rate
Amount
Rate
Amount
Rate
Statutory federal income tax expense and rate
$
11,299
35.0 %
$
9,800
35.0 %
$
8,160
35.0 %
2013
2012
2011
December 31,
Change in tax rate resulting from:
State and local taxes on income, net of
federal income tax benefit
Tax-exempt interest
Excludable dividends
Tax credits
Life insurance
Leveraged lease tax expense
Other
964
(490)
(49)
(967)
(173)
302
(481)
3.0
(1.5)
(0.2)
(3.0)
(0.5)
0.9
(1.5)
856
(414)
(132)
(815)
(524)
347
(15)
3.1
(1.5)
(0.5)
(2.9)
(1.9)
1.2
-
730
(334)
(247)
(735)
(222)
272
3.1
(1.4)
(1.1)
(3.2)
(1.0)
1.2
(179)
(0.7)
Effective income tax expense and rate
$
10,405
32.2 %
$
9,103
32.5 %
$
7,445
31.9 %
We are subject to U.S. federal income tax as well as income
tax in numerous state and foreign jurisdictions. We are routinely
examined by tax authorities in these various jurisdictions. The
IRS is currently examining the 2007 through 2012 consolidated
federal income tax returns of Wells Fargo & Company and its
subsidiaries. In addition, we are currently subject to examination
by various state, local and foreign taxing authorities. With few
exceptions, Wells Fargo and its subsidiaries are not subject to
federal, state, local and foreign income tax examinations for
taxable years prior to 2007. Wachovia Corporation and its
subsidiaries are no longer subject to federal examination and,
with limited exception, are no longer subject to state, local, and
foreign income tax examinations.
We are litigating or appealing various issues related to our
prior IRS examinations for the periods 1999 and 2003 through
2006, and we are appealing various issues related to IRS
examinations of Wachovia’s 2003 through 2008 tax years. We
have paid the IRS the contested income tax and interest
associated with these issues and refund claims have been filed
for the respective years. On August 22, 2013, the U.S. Court of
Appeals for the Eighth Circuit affirmed the adverse decision of
the trial court in our lease restructuring transaction and on
October 29, 2013, the Eighth Circuit denied our petition for
rehearing. We are considering whether to file a petition for
certiorari to the U.S. Supreme Court. It is possible that one or
more of these examinations, appeals or litigation may be
resolved within the next twelve months resulting in a decrease of
up to $1.5 billion to our gross unrecognized tax benefits.
The effective tax rate for 2013, included a net reduction in the
reserve for uncertain tax positions primarily due to settlements
with authorities regarding certain cross border transactions and
tax benefits recognized from the realization for tax purposes of a
previously written down investment. The 2012 effective tax rate
included a tax benefit resulting from the surrender of previously
written-down Wachovia life insurance investments. The 2011
effective tax rate included a decrease in tax expense associated
with leverage leases, as well as tax benefits related to charitable
donations of appreciated securities.
The change in unrecognized tax benefits follows:
(in millions)
Year ended
December 31,
2013
2012
Balance at beginning of year
$
6,069 5,005
Additions:
For tax positions related to the current year
For tax positions related to prior years
427
283
877
491
Reductions:
For tax positions related to prior years
Lapse of statute of limitations
Settlements with tax authorities
(540)
(114)
(74)
(23)
(637)
(167)
Balance at end of year
$
5,528 6,069
Of the $5.5 billion of unrecognized tax benefits at
December 31, 2013, approximately $3.7 billion would, if
recognized, affect the effective tax rate. The remaining
$1.8 billion of unrecognized tax benefits relates to income tax
positions on temporary differences.
We recognize interest and penalties as a component of
income tax expense. At December 31, 2013 and 2012, we have
accrued approximately $832 million and $1.0 billion for the
payment of interest and penalties, respectively. We recognized in
income tax expense in 2013 and 2012, interest and penalties of
$69 million and $92 million, respectively.
253
Consolidated Statement of Changes in Equity and Note 19 for
information about stock and options activity and terms and
conditions of warrants.
Year ended December 31,
2013
2012
2011
$
21,878
18,897
15,869
989
898
844
$
20,889
17,999
15,025
5,287.3
3.95
5,287.6
3.40
5,278.1
2.85
$
5,287.3
33.1
5,287.6
27.5
5,278.1
24.2
44.8
6.0
36.4
-
21.1
-
5,371.2
5,351.5
5,323.4
$
3.89
3.36
2.82
Note 22: 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 for discussion of private share repurchases and the
(in millions, except per share amounts)
Wells Fargo net income
Less: Preferred stock dividends and other
Wells Fargo net income applicable to common stock (numerator)
Earnings per common share
Average common shares outstanding (denominator)
Per share
Diluted earnings per common share
Average common shares outstanding
Add: Stock Options
Restricted share rights
Warrants
Diluted average common shares outstanding (denominator)
Per share
The following table presents the 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.
(in millions)
Options
Warrants
Weighted-average shares
Year ended December 31,
2013
2012
2011
11.1
-
56.4
39.2
198.8
39.4
254
Note 23: 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:
(in millions)
Investment securities:
Net unrealized gains (losses)
arising during the period (1)
Reclassification of net (gains) losses
to net income:
Before
tax
Tax
effect
2013
Net of
tax
Before
tax
Tax
effect
2012
Net of
tax
Year ended December 31,
Before
tax
Tax
effect
2011
Net of
tax
$ (7,661)
2,981
(4,680)
5,143 (1,921)
3,222
(588)
359
(229)
Net (gains) losses on debt securities
Net gains from equity investments
29
(314)
(11)
118
18
(196)
128
(399)
(48)
150
80
(249)
(54)
(642)
20
242
(34)
(400)
Subtotal reclassifications
to net income
Net change
Derivatives and hedging activities:
Net unrealized gains (losses)
arising during the period
Reclassification of net (gains) losses
to net income:
(285)
(7,946)
107
3,088
(178)
(4,858)
(271)
102
4,872 (1,819)
(169)
3,053
(696)
(1,284)
262
621
(434)
(663)
(32)
12
(20)
52
(12)
40
190
(85)
105
Interest income on loans
Interest expense on long-term debt
Noninterest income
Salaries expense
Subtotal reclassifications
(426)
91
35
4
156
(34)
(13)
(2)
(270)
57
22
2
to net income
Net change
(296)
(328)
107
119
(189)
(209)
(490)
96
-
6
(388)
(336)
185
(36)
-
(2)
(305)
60
-
4
147
135
(241)
(201)
(686)
115
-
-
(571)
(381)
259
(42)
-
-
(427)
73
-
-
217
132
(354)
(249)
Defined benefit plans adjustments:
Net actuarial gains (losses)
arising during the period
Reclassification of amounts to net periodic
benefit costs (2):
Amortization of net actuarial loss
Settlements and other
Subtotal reclassifications
1,533
(578)
955
(775)
290
(485)
(1,079)
411
(668)
151
125
(57)
(46)
94
79
141
3
(53)
(1)
88
2
92
7
(35)
(3)
57
4
to net periodic benefit costs
276
(103)
173
Net change
1,809
(681)
1,128
144
(631)
(54)
236
90
(395)
99
(980)
(38)
373
61
(607)
Foreign currency translation adjustments:
Net unrealized losses
arising during the period
Reclassification of net gains
to net income:
Noninterest income
Net change
(44)
(7)
(51)
(6)
(12)
(56)
5
(2)
(7)
(58)
(10)
(16)
2
4
6
(4)
(37)
13
(24)
(6)
(10)
-
(37)
-
13
-
(24)
Other comprehensive income (loss)
$ (6,521)
2,524
(3,997)
3,889 (1,442)
2,447
(2,682)
1,139 (1,543)
Less: Other comprehensive income (loss) from
noncontrolling interests, net of tax
Wells Fargo other comprehensive
income (loss), net of tax
267
$ (4,264)
4
2,443
(12)
(1,531)
(1) December 31, 2013, includes $46 million in unrealized gains (pre-tax) related to available-for-sale securities that were transferred 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 20 for additional details).
255
Note 23: Other Comprehensive Income (continued)
Cumulative OCI balances were:
Derivatives
and
hedging
activities
Defined
benefit
plans
adjustments
Foreign
currency
translation
adjustments
Investment
securities
739
105
(354)
(249)
-
490
40
(241)
(201)
-
289
(20)
(189)
(209)
-
80
(1,179)
(668)
61
(607)
-
(1,786)
(485)
90
(395)
-
(2,181)
955
173
1,128
-
(1,053)
112
(24)
-
(24)
(2)
90
(4)
(6)
(10)
-
80
(51)
(7)
(58)
1
21
Cumulative
other
compre--
hensive
income
4,738
(816)
(727)
(1,543)
(12)
3,207
2,773
(326)
2,447
4
5,650
(3,796)
(201)
(3,997)
267
1,386
(in millions)
Balance, December 31, 2010
$
Net unrealized gains (losses) arising during the period
Amounts reclassified to net income
Net change
Less: Other comprehensive income (loss)
from noncontrolling interests
Balance, December 31, 2011
Net unrealized gains (losses) arising during the period
Amounts reclassified to net income
Net change
Less: Other comprehensive income (loss)
from noncontrolling interests
Balance, December 31, 2012
Net unrealized gains (losses) arising during the period
Amounts reclassified to net income
Net change
Less: Other comprehensive income (loss)
from noncontrolling interests
5,066
(229)
(434)
(663)
(10)
4,413
3,222
(169)
3,053
4
7,462
(4,680)
(178)
(4,858)
266
Balance, December 31, 2013
$
2,338
256
Note 24: 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.
Commercial Electronic Office® (CEO®) portal, insurance,
corporate trust fiduciary and agency services, and investment
banking services. Wholesale Banking manages customer
investments through institutional separate accounts and mutual
funds, including the Wells Fargo Advantage Funds and Wells
Capital Management. Wholesale Banking also supports the CRE
market with products and services such as construction loans for
commercial and residential development, land acquisition and
development loans, secured and unsecured lines of credit,
interim financing arrangements for completed structures,
rehabilitation loans, affordable housing loans and letters of
credit, permanent loans for securitization, CRE loan servicing
and real estate and mortgage brokerage services.
Community Banking offers a complete line of diversified
financial products and services to consumers and small
businesses with annual sales generally up to $20 million in
which the owner generally is the financial decision maker.
Community Banking also offers investment management and
other services to retail customers and securities brokerage
through affiliates. These products and services include the
Wells Fargo Advantage FundsSM, a family of mutual funds. Loan
products include lines of credit, auto floor plan lines, equity lines
and loans, equipment and transportation loans, education loans,
origination and purchase of residential mortgage loans and
servicing of mortgage loans and credit cards. Other credit
products and financial services available to small businesses and
their owners include equipment leases, real estate and other
commercial financing, Small Business Administration financing,
venture capital financing, cash management, payroll services,
retirement plans, Health Savings Accounts, credit cards, and
merchant payment processing. Community Banking also offers
private label financing solutions for retail merchants across the
United States and purchases retail installment contracts from
auto dealers in the United States and Puerto Rico. Consumer and
business deposit products include checking accounts, savings
deposits, market rate accounts, Individual Retirement Accounts,
time deposits, global remittance and debit cards.
Community Banking serves customers through a complete
range of channels, including traditional banking stores, in-store
banking centers, business centers, ATMs, Online and Mobile
Banking, and Wells Fargo Customer Connection, a 24-hours a
day, seven days a week telephone service.
Wholesale Banking provides financial solutions to businesses
across the United States with annual sales generally in excess of
$20 million and to financial institutions globally. Wholesale
Banking provides a complete line of commercial, corporate,
capital markets, cash management and real estate banking
products and services. These include traditional commercial
loans and lines of credit, letters of credit, asset-based lending,
equipment leasing, international trade facilities, trade financing,
collection services, foreign exchange services, treasury
management, investment management, institutional fixed-
income sales, interest rate, commodity and equity risk
management, online/electronic products such as the
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.
Other includes corporate items not specific to a business
segment and 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.
257
Note 24: Operating Segments (continued)
(income/expense in millions, average balances in billions)
Banking
Banking
Retirement Other (1)
Company
Community
Wholesale
Wealth,
Brokerage
and
Consolidated
2013
Net interest income (2)
Provision (reversal of provision) for credit losses
Noninterest income
Noninterest expense
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss) before noncontrolling interests
Less: Net income from noncontrolling interests
Net income (loss) (3)
2012
Net interest income (2)
Provision (reversal of provision) for credit losses
Noninterest income
Noninterest expense
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss) before noncontrolling interests
Less: Net income from noncontrolling interests
Net income (loss) (3)
2011
Net interest income (2)
Provision (reversal of provision) for credit losses
Noninterest income
Noninterest expense
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss) before noncontrolling interests
Less: Net income from noncontrolling interests
Net income (loss) (3)
2013
Average loans
Average assets
Average core deposits
2012
Average loans
Average assets
Average core deposits
$
28,839
2,755
21,500
28,723
12,298
(445)
11,766
12,378
2,888
(16)
10,315
10,455
(1,225)
15
(2,601)
(2,714)
42,800
2,309
40,980
48,842
18,861
12,131
2,764
(1,127)
32,629
5,799
3,984
1,050
(428)
10,405
13,062
8,147
1,714
(699)
22,224
330
14
2
-
346
$
12,732
8,133
1,712
(699)
21,878
$
29,045
6,835
24,360
30,840
15,730
4,774
10,956
464
12,648
286
11,444
12,082
2,768
125
9,392
9,893
(1,231)
43,230
(29)
(2,340)
(2,417)
7,217
42,856
50,398
11,724
2,142
(1,125)
28,471
3,943
7,781
7
814
1,328
-
(428)
(697)
-
9,103
19,368
471
$
10,492
7,774
1,328
(697)
18,897
$
29,657
11,616
7,976
21,124
29,252
13,553
4,104
9,449
316
(110)
9,952
11,177
10,501
3,495
2,844
170
9,333
9,934
(1,354)
(137)
(2,224)
(970)
42,763
7,899
38,185
49,393
2,073
(2,471)
23,656
785
(939)
7,445
7,006
1,288
(1,532)
16,211
19
7
-
342
$
$
$
9,133
6,987
1,281
(1,532)
15,869
499.3
835.4
620.1
290.0
502.3
237.2
46.1
(30.4)
805.0
180.9
150.1
(70.3)
1,448.3
(65.3)
942.1
487.1
761.1
591.2
273.8
481.7
227.0
42.7
164.6
137.5
(28.4)
(65.8)
(61.8)
775.2
1,341.6
893.9
(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.
258
Note 25: Parent-Only Financial Statements
The following tables present Parent-only condensed financial
statements.
Parent-Only Statement of Income
(in millions)
Income
Dividends from subsidiaries:
Bank
Nonbank
Interest income from subsidiaries
Other interest income
Other income
Total income
Expense
Interest expense:
Indebtedness to nonbank subsidiaries
Short-term borrowings
Long-term debt
Other
Noninterest expense
Total expense
Income before income tax benefit and
equity in undistributed income of subsidiaries
Income tax benefit
Equity in undistributed income of subsidiaries
Net income
$
21,878
Year ended December 31,
2013
2012
2011
$
10,612
33
848
240
484
11,767
1,150
897
222
267
11,546
140
914
242
460
12,217
14,303
13,302
334
5
1,546
15
1,175
3,075
9,142
(570)
12,166
287
1
1,877
23
1,127
3,315
10,988
(903)
7,006
18,897
254
1
2,423
8
77
2,763
10,539
(584)
4,746
15,869
259
Note 25: Parent-Only Financial Statements (continued)
Parent-Only Statement of Comprehensive Income
(in millions)
Net income
Other comprehensive income (loss), net of tax:
Investment securities
Derivatives and hedging activities
Defined benefit plans adjustment
Equity in other comprehensive income (loss) of subsidiaries
Other comprehensive income (loss), net of tax:
2013
$
21,878
(248)
39
1,136
(5,191)
(4,264)
Total comprehensive income
$
17,614
Parent-Only Balance Sheet
(in millions)
Assets
Cash and cash equivalents due from:
Subsidiary banks
Nonaffiliates
Investment securities
Loans to subsidiaries:
Bank
Nonbank
Investments in subsidiaries:
Bank
Nonbank
Other assets
Total assets
Liabilities and equity
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Indebtedness to nonbank subsidiaries
Total liabilities
Stockholders' equity
Year ended December 31,
2012
18,897
61
31
(379)
2,730
2,443
21,340
2011
15,869
(50)
(1)
(650)
(830)
(1,531)
14,338
December 31,
2013
2012
$
42,386
3
11,652
7,140
38,504
154,577
21,852
7,329
$
283,443
$
5,121
7,241
81,721
19,218
113,301
170,142
35,697
5
7,268
-
41,068
148,693
19,492
7,880
260,103
1,592
8,332
76,233
16,392
102,549
157,554
Total liabilities and equity
$
283,443
260,103
260
Parent-Only Statement of Cash Flows
(in millions)
Cash flows from operating activities:
Net cash provided by operating activities
Cash flows from investing activities:
Available-for-sale securities:
Sales proceeds
Prepayments and maturities
Purchases
Loans:
Net repayments from subsidiaries
Capital notes and term loans made to subsidiaries
Principal collected on notes/loans made to subsidiaries
Net increase in investment in subsidiaries
Other, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings and
indebtedness to subsidiaries
Long-term debt:
Proceeds from issuance
Repayment
Preferred stock:
Proceeds from issuance
Cash dividends paid
Common stock warrants repurchased
Common stock:
Proceeds from issuance
Repurchased
Cash dividends paid
Excess tax benefits related to stock option payments
Other, net
Year ended December 31,
2013
2012
2011
$
8,607
13,365
15,049
3,606
12
(6,016)
655
(6,700)
1,472
(1,188)
461
(7,698)
6,171
30
(5,845)
9,191
(1,850)
2,462
(5,218)
(2)
4,939
11,459
-
(16,487)
1,318
(1,340)
5,779
(610)
230
349
6,732
5,456
(242)
18,714
(13,096)
16,989
(18,693)
7,058
(31,198)
3,145
(1,017)
-
2,224
(5,356)
(5,953)
271
114
1,377
(892)
(1)
2,091
(3,918)
(4,565)
226
(14)
2,501
(844)
(2)
1,296
(2,416)
(2,537)
79
-
Net cash provided (used) by financing activities
5,778
(1,944)
(26,305)
Net change in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
6,687
35,702
$
42,389
16,360
19,342
35,702
(10,907)
30,249
19,342
261
Note 26: Regulatory and Agency Capital Requirements
The Company and each of its subsidiary banks are subject to
regulatory capital adequacy requirements promulgated by
federal 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).
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 1 capital were $2.1 billion at
December 31, 2013. During first quarter 2013, we redeemed
$2.8 billion of trust preferred securities. Under applicable
regulatory capital guidelines issued by bank regulatory agencies,
upon notice of redemption, the redeemed trust preferred
securities no longer qualify as Tier 1 Capital for the Company.
This redemption was in connection with the Capital Plan the
Company submitted to the Federal Reserve Board in 2012.
Effective January 1, 2013, the Company implemented
changes to the market risk capital rule, commonly referred to as
Basel 2.5, as required by U.S. banking regulators. Basel 2.5
requires banking organizations with significant trading activities
to adjust their capital requirements to better account for the
market risks of those activities. The market risk capital rule is
reflected in the Company’s calculation of risk-weighted assets
and upon initial adoption in first quarter 2013, negatively
impacted capital ratios under Basel I by approximately 25 basis
points, but did not impact our ratio under Basel III, as its impact
has historically been included in our calculations.
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 December 31, 2013, 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.
The following table presents regulatory capital information
for Wells Fargo & Company and Wells Fargo Bank, N.A.
(in billions, except ratios)
Regulatory capital:
Tier 1
Total
Assets:
Risk-weighted
Adjusted average (2)
Capital ratios:
Tier 1 capital
Total capital
Tier 1 leverage (2)
Wells Fargo & Company
Wells Fargo Bank, N.A.
Well-
Minimum
2013
2012
2013
2012
ratios (1)
ratios (1)
December 31,
capitalized
capital
$
140.7
176.2
126.6
157.6
110.0
136.4
101.3
124.8
$ 1,141.5
1,077.1
1,466.7
1,336.4
1,057.3
1,324.0
1,002.0
1,195.9
12.33 %
15.43
9.60
11.75
14.63
9.47
10.40
12.90
8.31
10.11
12.45
8.47
6.00
10.00
5.00
4.00
8.00
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.
262
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Wells Fargo & Company:
We have audited the accompanying consolidated balance sheet of Wells Fargo & Company and Subsidiaries (the Company) as of
December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in equity, and cash
flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-
year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control –
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 26, 2014, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.
San Francisco, California
February 26, 2014
263
Quarterly Financial Data
Condensed Consolidated Statement of Income - Quarterly (Unaudited)
2013
Quarter ended
2012
Quarter ended
(in millions, except per share amounts)
Dec. 31 Sept. 30
June 30 Mar. 31
Dec. 31 Sept. 30
June 30
Mar. 31
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit
losses
Noninterest income
Service charges on deposit accounts
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains from trading activities
Net gains (losses) on debt securities
Net gains from equity investments
Lease income
Other
$
11,836
11,776
11,827
11,650
11,857
11,925
12,354
12,255
1,033
1,028
1,077
1,151
1,214
1,263
1,317
1,367
10,803
10,748
10,750
10,499
10,643
10,662
11,037
10,888
363
75
652
1,219
1,831
1,591
1,800
1,995
10,440
10,673
10,098
9,280
8,812
9,071
9,237
8,893
1,283
3,458
827
1,119
1,570
453
325
(14)
654
148
39
1,278
3,276
813
1,098
1,608
413
397
(6)
502
160
191
1,248
3,494
813
1,089
2,802
485
331
(54)
203
225
(8)
1,214
3,202
738
1,034
2,794
463
570
45
113
130
457
1,250
3,199
736
1,193
3,068
395
275
(63)
715
170
367
1,210
2,954
744
1,097
2,807
414
529
3
164
218
411
1,139
2,898
704
1,134
2,893
522
263
(61)
242
120
398
1,084
2,839
654
1,095
2,870
519
640
(7)
364
59
631
Total noninterest income
9,862
9,730
10,628
10,760
11,305
10,551
10,252
10,748
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Other
3,811
2,347
1,160
567
732
375
196
3,910
2,401
1,172
3,768
2,626
1,118
3,663
2,577
1,583
471
728
375
214
418
716
377
259
528
719
377
292
3,735
2,365
891
542
728
418
307
3,648
2,368
1,063
3,705
2,354
1,049
510
727
419
359
459
698
418
333
3,601
2,417
1,608
557
704
419
357
2,897
2,831
2,973
2,661
3,910
3,018
3,381
3,330
Total noninterest expense
12,085
12,102
12,255
12,400
12,896
12,112
12,397
12,993
Income before income tax expense
Income tax expense
Net income before
8,217
2,504
8,301
2,618
8,471
2,863
7,640
2,420
7,221
1,924
7,510
2,480
7,092
2,371
6,648
2,328
noncontrolling interests
5,713
5,683
5,608
5,220
5,297
5,030
4,721
4,320
Less: Net income from noncontrolling interests
103
105
89
49
207
93
99
72
Wells Fargo net income
$
5,610
5,578
5,519
5,171
5,090
4,937
4,622
4,248
Less: Preferred stock dividends and other
241
261
247
240
233
220
219
226
Wells Fargo net income
applicable to common stock
$
5,369
5,317
5,272
4,931
4,857
4,717
4,403
4,022
Per share information
Earnings per common share
Diluted earnings per common share
Dividends declared per common share
$
1.02
1.00
0.30
1.00
0.99
0.30
1.00
0.98
0.30
0.93
0.92
0.25
0.92
0.91
0.22
0.89
0.88
0.22
0.83
0.82
0.22
0.76
0.75
0.22
Average common shares outstanding
5,270.3
5,295.3
5,304.7
5,279.0
5,272.4
5,288.1
5,306.9
5,282.6
Diluted average common shares outstanding
5,358.6
5,381.7
5,384.6
5,353.5
5,338.7
5,355.6
5,369.9
5,337.8
Market price per common share (1)
High
Low
Quarter-end
$
45.64
40.07
45.40
44.79
40.79
41.32
41.74
36.19
41.27
38.20
34.43
36.99
36.34
31.25
34.18
36.60
32.62
34.53
34.59
29.80
33.44
34.59
27.94
34.14
(1) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
264
Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) - Quarterly (1) (2) - (Unaudited)
Quarter ended December 31,
(in millions)
Earning assets
Federal funds sold, securities purchased under
resale agreements and other short-term investments
Trading assets
Investment securities (3):
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt and equity securities
Total available-for-sale securities
Held-to-maturity securities (4)
Mortgages held for sale (5)
Loans held for sale (5)
Loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans (5)
Other
Funding sources
Deposits:
Average
balance
Yields/
rates
2013
Interest
income/
expense
Average
balance
Yields/
rates
$
205,276
45,379
0.28 % $
3.40
148
386
117,047
42,005
0.41 %
3.28
$
6,611
42,025
117,910
29,233
147,143
55,325
251,104
2,845
21,396
138
193,211
105,795
16,579
11,744
46,682
1.67
4.38
2.94
6.35
3.62
3.43
3.65
3.09
4.13
8.21
3.48
3.85
4.79
5.70
2.23
374,011
3.56
257,253
66,774
25,854
50,213
42,564
442,658
816,669
4,728
4.15
4.29
12.23
6.70
4.94
5.01
4.35
5.22
27
460
866
464
1,330
478
2,295
22
221
3
1,696
1,026
200
167
262
3,351
2,673
721
797
849
529
5,569
8,920
61
5,281
36,391
90,898
32,669
123,567
50,025
215,264
-
47,241
135
179,493
105,107
17,502
12,461
39,665
354,228
244,634
76,908
23,839
45,957
41,644
432,982
787,210
4,280
1.64
4.64
2.71
6.53
3.72
3.91
3.87
-
3.50
9.03
3.85
4.02
4.97
6.43
2.32
3.87
4.39
4.28
12.43
7.34
4.63
5.15
4.58
5.21
2012
Interest
income/
expense
121
345
22
422
617
533
1,150
490
2,084
-
413
3
1,736
1,061
218
201
231
3,447
2,686
826
745
848
485
5,590
9,037
56
Total earning assets
$
1,347,535
3.56 % $
12,056
1,213,182
3.96 % $
12,059
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
Total interest-bearing liabilities
Portion of noninterest-bearing funding sources
$
35,171
568,750
43,067
39,700
86,333
773,021
52,286
153,470
12,822
991,599
355,936
0.07 % $
0.08
0.94
0.48
0.15
0.15
0.12
1.65
2.70
0.42
-
Total funding sources
$
1,347,535
0.30
6
110
102
47
32
297
15
635
87
1,034
-
1,034
30,858
518,593
56,743
13,612
69,398
689,204
52,820
127,505
9,975
879,504
333,678
1,213,182
0.06 % $
0.10
1.27
1.51
0.15
0.23
0.21
2.30
2.27
0.55
-
0.40
5
135
181
51
27
399
28
735
56
1,218
-
1,218
Net interest margin and net interest income on
a taxable-equivalent basis (6)
Noninterest-earning assets
Cash and due from banks
Goodwill
Other
Total noninterest-earning assets
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to fund earning assets
Net noninterest-bearing funding sources
Total assets
$
$
$
$
$
15,998
25,637
119,947
161,582
287,379
60,489
169,650
(355,936)
161,582
1,509,117
3.26 % $
11,022
3.56 % $
10,841
16,361
25,637
131,876
173,874
286,924
63,025
157,603
(333,678)
173,874
1,387,056
(1) Our average prime rate was 3.25% for the quarters ended December 31, 2013 and 2012. The average three-month London Interbank Offered Rate (LIBOR) was 0.24%
and 0.32% for the same quarters, respectively.
(2) Yields/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
(4)
amounts represent amortized cost for the periods presented.
Includes $6.3 billion of federal agency mortgage-backed securities purchased during the fourth quarter of 2013 and $6.0 billion of auto asset-backed securities that were
transferred near the end of 2013 from the available-for-sale portfolio.
(5) Nonaccrual loans and related income are included in their respective loan categories.
(6)
Includes taxable-equivalent adjustments of $219 million and $198 million for the quarters ended December 31, 2013 and 2012, respectively primarily related to tax-
exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.
265
Glossary of Acronyms
ACL
Allowance for credit losses
ALCO
Asset/Liability Management Committee
ARM
Adjustable-rate mortgage
ARS
ASC
ASU
Auction rate security
Accounting Standards Codification
Accounting Standards Update
AVM
Automated valuation model
G-SIB
HAMP
HPI
HUD
LHFS
LIBOR
LIHTC
Globally systemic important bank
Home Affordability Modification Program
Home Price Index
Department of Housing and Urban Development
Loans held for sale
London Interbank Offered Rate
Low-Income Housing Tax Credit
BCBS
Basel Committee on Bank Supervision
LOCOM
Lower of cost or market value
BHC
Bank holding company
CCAR
Comprehensive Capital Analysis and Review
Certificate of deposit
LTV
MBS
MHA
Loan-to-value
Mortgage-backed security
Making Home Affordable programs
Collateralized debt obligation
MHFS
Mortgages held for sale
CD
CDO
CDS
CLO
Credit default swaps
Collateralized loan obligation
CLTV
Combined loan-to-value
CPP
CPR
CRE
DOJ
Capital Purchase Program
Constant prepayment rate
Commercial real estate
United States Department of Justice
DPD
Days past due
MSR
MTN
NAV
NPA
OCC
OCI
OTC
OTTI
Mortgage servicing right
Medium-term note
Net asset value
Nonperforming asset
Office of the Comptroller of the Currency
Other comprehensive income
Over-the-counter
Other-than-temporary impairment
ESOP
Employee Stock Ownership Plan
PCI Loans
Purchased credit-impaired loans
FAS
Statement of Financial Accounting Standards
PTPP
Pre-tax pre-provision profit
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFELP
Federal Family Education Loan Program
RBC
ROA
ROE
Risk-based capital
Wells Fargo net income to average total assets
Wells Fargo net income applicable to common stock
FHA
Federal Housing Administration
to average Wells Fargo common stockholders' equity
FHFA
Federal Housing Finance Agency
RWA
Risk-weighted assets
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FICO
Fair Isaac Corporation (credit rating)
SEC
S&P
SPE
Securities and Exchange Commission
Standard & Poor’s Ratings Services
Special purpose entity
FNMA
Federal National Mortgage Association
TARP
Troubled Asset Relief Program
FRB
FSB
FTC
Board of Governors of the Federal Reserve System
Financial Stability Board
Federal Trade Commission
GAAP
Generally accepted accounting principles
TDR
VA
VaR
VIE
Troubled debt restructuring
Department of Veterans Affairs
Value-at-Risk
Variable interest entity
GNMA
Government National Mortgage Association
WFCC
Wells Fargo Canada Corporation
GSE
Government-sponsored entity
266
Stock Performance
These graphs compare the cumulative total stockholder return
and total compound annual growth rate (CAGR) for our common
stock (NYSE: WFC) for the five- and ten-year periods ended
December 31, 2013, with the cumulative total stockholder
returns for the same periods for the Keefe, Bruyette and Woods
(KBW) Total Return Bank Index (KBW Bank Index (BKX))
and the S&P 500 Index.
The cumulative total stockholder returns (including
reinvested dividends) in the graphs assume the investment
of $100 in Wells Fargo’s common stock, the KBW Bank Index
and the S&P 500 Index.
Five Year Performance Graph
$220
$200
$180
$160
$140
$120
$100
$ 80
$ 60
$ 40
$ 20
Wells Fargo
(WFC)
S&P 500
KBW Bank
Index (BKX)
2008
$100
100
100
2009
$ 95
126
98
2010
$110
146
121
2011
$ 99
149
93
2012
$127
172
124
2013
5-year
CAGR
$173
12%
Wells Fargo
228
170
18%
S&P 500
11%
KBW Bank Index
Ten Year Performance Graph
$220
$200
$180
$160
$140
$120
$100
$ 80
$ 60
$ 40
$ 20
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Wells Fargo
(WFC)
S&P 500
KBW Bank
Index (BKX)
10-year
CAGR
$100
$109
$114
$133
$117
$119
$113
$131
$119
$151
$207
8%
Wells Fargo
100
100
111
110
116
114
135
133
142
104
90
55
113
54
130
66
133
51
154
68
204
93
7%
S&P 500
-1%
KBW Bank Index
Wells Fargo & Company
Wells Fargo & Company (NYSE: WFC) is a nationwide, diversified, community−based financial services company with $1.5 trillion in assets.
Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and
commercial finance through more than 9,000 locations, 12,000 ATMs, and the internet, and has offices in 36 countries to support customers
who conduct business in the global economy. With more than 264,000 team members, Wells Fargo serves one in three households in the
United States. Wells Fargo & Company was ranked No. 25 on Fortune’s 2013 rankings of America’s largest corporations. Wells Fargo’s vision
is to satisfy all our customers’ financial needs and help them succeed financially.
Common stock
Wells Fargo & Company is listed and trades on the
New York Stock Exchange: WFC
5,257,162,705 common shares outstanding (12/31/13)
Stock purchase and dividend reinvestment
You can buy Wells Fargo stock directly from Wells Fargo,
even if you’re not a Wells Fargo stockholder, through
optional cash payments or automatic monthly deductions
from a bank account. You can also have your dividends
reinvested automatically. It’s a convenient, economical
way to increase your Wells Fargo investment.
Call 1−877−840−0492 for an enrollment kit including
a plan prospectus.
Form 10-K
We will send Wells Fargo’s 2013 Annual Report on
Form 10−K (including the financial statements filed with
the Securities and Exchange Commission) free to any
stockholder who asks for a copy in writing. Stockholders
also can ask for copies of any exhibit to the Form 10−K.
We will charge a fee to cover expenses to prepare and send
any exhibits. Please send requests to: Corporate Secretary,
Wells Fargo & Company, One Wells Fargo Center,
MAC D1053−300, 301 S. College Street, 30th Floor,
Charlotte, North Carolina 28202.
SEC filings
Our annual reports on Form 10−K, quarterly reports
on Form 10−Q, current reports on Form 8−K, and
amendments to those reports are available free of charge
on our website (www.wellsfargo.com) as soon as practical
after they are electronically filed with or furnished to the
SEC. Those reports and amendments are also available
free of charge on the SEC’s website at www.sec.gov.
Independent registered public accounting firm
KPMG LLP
San Francisco, California
1−415−963−5100
Contacts
Investor Relations
1−415−371−2921
investorrelations@wellsfargo.com
Shareowner Services and
Transfer Agent
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164−0854
1−877−840−0492
www.shareowneronline.com
Annual Stockholders’ Meeting
8:30 a.m. Central Time
Tuesday, April 29, 2014
Hyatt Regency Hill Country
9800 Hyatt Resort Drive
San Antonio, Texas 78251
Our reputation
American Banker
Banker of the Year; Most Powerful
Women in Banking; One of America’s
Top Banking Teams (2013)
Barron’s
World’s 27th Most Respected
Company (2013)
BLACK ENTERPRISE
One of the Top 40 Best Companies
for Diversity (2012)
Brand Finance
The Most Valuable Bank Brand
in the World (2013)
Brand Z
Among the Top 20 Most Valuable
Brands in the World (2013)
CAREERS & the disABLED
Among Top 50 Employers
by Readers Choice (2013)
The Chronicle of Philanthropy
America’s #1 Most Generous
Cash Donor (2013)
DiversityInc
25th Best Company for Diversity;
Top Company for Lesbian, Gay,
Bisexual & Transgender Employees;
6th Best Company for Executive
Women (2013)
Euromoney
Best Bank Award (2013)
Forbes
12th Biggest Public Company
in the World (2013)
Fortune
World’s 38th Most Admired Company;
25th in Revenue Among All
Companies in All Industries (2013)
G.I. Jobs
36th of Top 50 Military Spouse
Friendly Employers (2013)
Global Finance
World’s Best Consumer Internet Bank
in the United States, Best Social Media
in North America (2013); World’s
Best Corporate/Institutional Internet
Bank in Trade Finance Services;
Best Investment Management Services,
Best Online Treasury Services,
Best Integrated Corporate Bank Site,
and Best in Mobile Banking in
North America (2013); Best Bank
for Payments and Collections in
North America (2013); Best Treasury
Management Systems & Services
Mobile Provider (2013); Best Insurance
Broker in North America (2013)
Hispanic Business
13th Best Companies
for Diversity (2013)
Human Rights Campaign
Perfect Score of 100 on Corporate
Equality Index (2013)
LATINAStyle
25th Best Company for Latinas (2013)
Forward−Looking Statements This Annual 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. Some of these factors are described in the Financial Review and in the Financial Statements
and related Notes. For a discussion of other factors, refer to “Forward−Looking Statements” and “Risk Factors” in the Financial Review.
268
Maine
6
Massachusetts
54
Rhode Island
6
Connecticut
101
Locations
9,004
worldwide
ATMs
12,647
wellsfargo.com
more than
23 million
active online
customers
Mobile banking
more than
12 million
active mobile
customers
Wells Fargo
Customer
Connection
450 million
customer
contacts annually
Wells Fargo’s extensive network
Washington
232
Oregon
164
Montana
58
Idaho
99
Wyoming
31
Nevada
140
Utah
149
Colorado
234
California
1,408
Alaska
55
Arizona
335
New Mexico
105
Hawaii
3
North Dakota
33
South Dakota
57
Minnesota
239
Nebraska
64
Kansas
42
Oklahoma
21
Texas
847
Wisconsin
105
Michigan
76
Vt.
6
N.H.
21
New York
232
Illinois
144
Indiana
86
Ohio
99
Pennsylvania
402
W. Virginia
19
Virginia
379
Kentucky
22
Tennessee
57
North Carolina
449
New Jersey
388
Delaware
30
Maryland
141
D.C.
45
Iowa
100
Missouri
57
Arkansas
28
Mississippi
26
Louisiana
23
Alabama
169
South Carolina
179
Georgia
365
Florida
803
Around the world
Argentina
Australia
Bahamas
Bangladesh
Brazil
Canada
Cayman Islands
Key rankings
Chile
China
Colombia
Dominican Republic
Ecuador
France
Germany
Hong Kong
India
Indonesia
Ireland
Israel
Italy
Japan
Korea
Malaysia
Mexico
Philippines
Russia
Singapore
South Africa
Spain
Taiwan
Thailand
Turkey
United Arab Emirates
United Kingdom
Vietnam
#1 Retail banking deposits 1
#1 Total stores
#1 Mortgage lender as of 3Q 2013
#1 National home loan originator to minority and low- to moderate-
income consumers and in low- to moderate-income neighborhoods
(2012 HMDA Data)
#1 Used auto lender and overall auto lender (excluding leases) based on
AutoCount data (Dec. 2012 – Nov. 2013)
#1 Small Business lender (U.S. in dollars per 2012 Community
Reinvestment Act government data)
#1 U.S. Small Business Administration’s (SBA) 7(a) lender in dollar
volume (2013)
#1 Preferred stock underwriter (FY 2013, Bloomberg)
#1 REIT preferred stock underwriter (FY 2013, Bloomberg)
#1 Oil & gas loan syndications (FY 2013, Thomson Reuters LPC)
#1 Ranked Electronic trading platform for Corporate Bonds in the U.S.
#1
In Mobile Banking for privacy and security (Keynote Mobile Banking
Scorecard 2013)
#1 Mortgage servicer as of 3Q 2013
#1 Largest crop insurance provider in the nation
#1 Largest private student loan lender among commercial banks
#1 Commercial & Multifamily Real Estate Originations (2012 Mortgage
Bankers Association)
#1 Commercial mortgage servicer (Mortgage Bankers Association,
June 2013)
#2 U.S. Deposits
#2 Debit card issuer
#2 Annuity distributor (2012 Transamerica Roundtable Survey)
#2 Real estate loan syndications (FY 2013, Thomson Reuters LPC)
#2 Asset-based loans (FY 2013, Thomson Reuters LPC)
#2 Middle market loan syndications (FY 2013, Thomson Reuters LPC)
#2 REIT common stock underwriter (FY 2013, Dealogic)
#2 Bank-affiliated equipment finance provider in the U.S. (2012 Monitor)
#3 REIT loan syndications (FY 2013, Thomson Reuters LPC)
#3 Utilities loan syndications (FY 2013, Thomson Reuters LPC)
#3 Non-investment grade loan syndications (FY 2013, Thomson Reuters LPC)
#3 Loan syndications (FY 2013, Thomson Reuters LPC)
#3 High yield bonds (FY 2013, Dealogic)
#3 Branded bank ATM owner (12,647 Wells Fargo ATMs)
#3 Retail brokerage firm — based on number of Financial Advisors
(as of 4Q13, company and competitor reports)
#4 High grade loan syndications (FY 2013, Thomson Reuters LPC)
#4 Wealth management provider (based on assets under management
of accounts greater than $5 million as of 2Q13, Barron’s)
#5 Largest insurance broker in the world (Business Insurance 2013)
#6 IRA provider (based on assets as of 3Q13 Cerulli Associates)
#8 Institutional retirement plan recordkeeper (based on assets
as of Dec. 31, 2012, PLANSPONSOR Magazine, June 2013)
#8 Family wealth provider (Based on assets as of Dec. 31, 2012, Bloomberg)
1 Source: SNL Financial. Retail deposit data 6/30/13. Pro forma for acquisitions. Caps deposits at $500 million in a single banking store and excludes credit union deposits. Non-retail deposits excluded.
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94104
1-866-878-5865 wellsfargo.com
Our Vision:
Satisfy all our customers’ financial needs and help them
succeed financially.
Nuestra Vision:
Deseamos satisfacer todas las necesidades financieras
de nuestros clientes y ayudarlos a tener éxito en el
área financiera.
Notre Vision:
Satisfaire tous les besoins financiers de nos clients
et les aider à atteindre le succès financier.
Together we’ll go far
©2014 Wells Fargo & Company. All rights reserved.
Deposit products offered through Wells Fargo Bank, N.A. Member FDIC.
CCM2533 (Rev 00, 1/each)