Earning lifelong relationships
W e l l s F a r g o & C o m p a n y A n n u a l R e p o r t 2 0 1 5
‘‘
Earning lifelong
our vision. ‘‘
relationships,
one customer
at a time,
is fundamental
to achieving
- John G. Stumpf
Chairman and
Chief Executive Officer
Contents
2 | To Our Owners
10 | Earning relationships, helping customers succeed financially
10 | It isn’t easy to talk about money
12 | From seed to sparkling success
14 | Paving the road to savings
16 | Banking and business growing in tandem
18 | House hunters find the one
20 | Retirement-plan transition goes down easy
22 | Bringing affordable solar power to the people
24 | Adopting a neighborhood
26 | Corporate Social Responsibility Highlights
27 | Board of Directors, Executive Officers, and Corporate Staff
28 | Senior Business Leaders
29 | 2015 Financial Report
- Financial Review
- Controls and Procedures
- Financial Statements
- Report of Independent Registered
Public Accounting Firm
267 | Stock Performance
2015 Annual Report | 1
To Our Owners,
One of the many things that make
Wells Fargo unique is our company’s
rich 164-year history. Wells Fargo is one
of a handful of U.S. companies dating
to the mid-1800s that is still in the same
business and operates under the same
name. In fact, our headquarters building
at 420 Montgomery St. in San Francisco
stands on the same spot where Wells Fargo
first opened for business in 1852.
You can learn more about our
past by visiting one of Wells Fargo’s
11 history museums across the U.S.
However, the most powerful expression
of our heritage isn’t in documents
or artifacts or even our stagecoach.
It is in any of the millions of relationships
we have formed over generations with
customers, team members, communities,
and shareholders. “Relationships” define
Wells Fargo.
JOHN G. STUMPF
Chairman and Chief Executive Officer
Wells Fargo & Company
2 | 2015 Annual Report
Earning lifelong relationships,
one customer at a time, is fundamental
to achieving our vision, which is to
“satisfy our customers’ financial needs
and help them succeed financially.”
Whether we’re helping a student open
a first checking account, a young
family purchase a home, a business
owner expand, or a retiree manage
investments, we are on our customers’
side, offering them the products
and services they want and need.
We believe the best way we can
earn our customers’ business is
to listen and understand their needs.
Consider Biltmore, one of America’s
most beautiful historic estates
and a popular tourist attraction,
built by George Vanderbilt in 1895
in the Blue Ridge Mountains
of North Carolina. At the turn
of the 20th century, the Vanderbilt
family used Wells Fargo for transport
along the East Coast, and they later
formed a banking relationship with
us. Through listening to and working
with The Biltmore Company, we have
provided loans and financial services
to help the business grow. Today,
Biltmore draws more than 1.4 million
visitors annually and includes not
only an inn and hotel, but also
a village with restaurants and retail
shops, a winery, branded retail
products, and a solar farm.
We are the largest lender
to mid-sized companies, and we
help large companies with their
domestic and global needs through
our offices in 36 countries.
Our leading position across many
of our businesses is important because
it reflects how well we are serving our
customers — individuals, households,
businesses, and corporations —
who make up the “real economy.”
We never take for granted the trust
our customers have placed in us,
and we understand the important
role we play in helping grow the U.S.
economy. If we serve our customers
well and manage our business
effectively and efficiently, we also
will grow and succeed as a company.
As we like to say, we never put the
stagecoach ahead of the horses!
We never take for
granted the trust
our customers have
placed in us, and
we understand the
important role we
play in helping grow
the U.S. economy.
Earning relationships and helping
customers like The Biltmore Company
are the core of our business. We are
honored to have relationships with
one in three U.S. households. We lend
more money to help individuals and
families buy homes than any other
American company. We are the nation’s
top lender to small businesses, based
on Community Reinvestment Act data.
Financial results
Our focus on customers, as well
as our diversified business model
and strong risk discipline, helped
us to produce another solid year
of financial performance in 2015,
even as we navigated the pressures
of low interest rates and global
economic volatility.
Wells Fargo generated $86.1 billion
in revenue in 2015, up 2 percent from
2014. Our time-tested business model
— which produced a balanced mix
of net interest income and noninterest
income across more than 90 businesses
— allowed us to deliver consistent
performance despite the challenging
environment.
Our 2015 net income was $22.9 billion,
and our diluted earnings per common
share of $4.12 represented a $0.02
increase from 2014. Our 2015 return
on assets was 1.31 percent, and our
return on equity was 12.60 percent.
At year-end, our total deposits reached
a record $1.2 trillion, up 5 percent from
the prior year, driven by both consumer
and commercial growth. Total loans
finished 2015 at $916.6 billion,
up 6 percent from 2014, making our
loan portfolio the largest among U.S.
banks. We saw growth in commercial
loans, residential mortgages, credit
cards, and automobile lending while
maintaining our strong credit and
pricing discipline.
In fact, the credit quality of our
portfolio proved to be about as good as
I’ve seen in my 34 years at Wells Fargo.
Credit losses of $2.9 billion improved
2 percent from 2014. Net charge-offs
as a percentage of average loans
remained near historic lows —
0.33 percent in 2015, compared
with 0.35 percent in 2014.
We also continued to strengthen
our balance sheet in 2015 and ended
the year with our highest-ever levels
of capital and liquidity. We finished
2015 with total equity of $193.9 billion,
Common Equity Tier 1 capital
of $142.4 billion, and a Common
Equity Tier 1 ratio (fully phased-in)
of 10.77 percent.1
1 For more information on our regulatory capital and related ratios, please see the “Financial Review — Capital Management” section in this Report.
2015 Annual Report | 3
Our financial performance and
balance sheet strength allowed us
to return more capital to shareholders.
In 2015, we returned $12.6 billion to our
shareholders through common stock
dividends and net share repurchases,
reflecting the fifth consecutive year
in which we returned more capital
to shareholders than in the previous
year. We increased our quarterly
common stock dividend rate
by 7 percent to $0.375 per share,
and we repurchased 78.2 million
shares of our common stock on
a net basis. And we again ended
the year as the world’s most valuable
bank by market capitalization.
We also continued to make
strides in improving our company’s
efficiency and reinvesting for the
future. In addition to simplifying our
operations, we reduced our travel
costs by 23 percent in 2015,
and we have eliminated more
than 20 million square feet of
occupied real estate since 2009.
We’re investing those savings
in areas such as innovation, risk
management, and cybersecurity.
Another benefit of our company’s
consistent performance is the ability
to be well positioned for strategic
acquisitions to support growth.
We were pleased to announce an
agreement to acquire GE Capital’s
Commercial Distribution Finance
and Vendor Finance platforms,
as well as a portion of its Corporate
Finance business. We anticipate
adding approximately $31 billion
in assets and welcoming about
2,900 GE Capital team members
to Wells Fargo when the transaction
closes. We also acquired GE Railcar
Services, a railcar finance, leasing,
and fleet management business,
on Jan. 1, 2016, and in the second
quarter of 2015 we completed a GE
Capital commercial real estate loan
portfolio transaction, which included
approximately $11.5 billion in loan
purchases and related financing.
These additions should grow
our business and provide greater
opportunities for us to expand
our relationships with customers.
4 | 2015 Annual Report
Our financial performance and
customer focus earned us external
recognition in many ways in 2015.
For example, we ranked No. 7
on Barron’s 2015 ranking of the
world’s “100 Most Respected
Companies” — the fourth year in
a row we ranked highest among
all banks on the list. Euromoney
magazine named Wells Fargo
the “Best Bank in the U.S.”
in its 2015 Awards for Excellence.
And The Banker magazine named
Wells Fargo the Best Global and
U.S. Bank of the Year.
Wells Fargo is one of the
most valuable companies
in the world
By market value as of Dec. 31, 2015
(in billions)
Apple
Alphabet
Microsoft
Berkshire Hathaway
ExxonMobil
Amazon.com
Facebook
General Electric
Johnson & Johnson
Wells Fargo
JPMorgan Chase
Ind. & Comm. Bank (China)
U.S. companies except where stated
Source: Bloomberg
$ 587
528
443
325
325
317
296
294
284
277
243
243
Relationships are
at the core of our culture
While accolades are rewarding,
our highest honor is the trust that
customers place in us. And trust
is best built through relationships.
No document better captures
our relationship-based culture and
focus on customers than The Vision
& Values of Wells Fargo, which was
first published more than 20 years
ago. (I invite you to read our
Vision & Values at wellsfargo.com.)
We bring the Vision & Values to life
each day through delivering on our
six priorities: putting customers
first, growing revenue, managing
expenses, living our vision and
values, connecting with communities
and stakeholders, and managing risk.
These priorities also support
our focus on the relationships
with customers, team members,
communities, and shareholders
that are at the heart of our culture.
Earning relationships
with our customers
We work to make every relationship
— new and old — a lasting one
by following a few simple principles.
We put our customers first and
treat them as our valued guests.
We are committed to our customers’
satisfaction and financial success
and to work in their best interest.
In short, we are on our customers’
side. You will read stories about
how we do that in the following
pages, including how we eased
an older couple’s budgeting
concerns and helped a customer
navigate the used-car buying process.
When we follow these principles,
we gain trust and earn relationships
that reach across decades and
generations. Just as our customers
trusted Wells Fargo and our
Abbot Downing-built stagecoaches
to transport their valuables in the
1800s, they trust us today with their
financial needs.
One example is the Hearst family.
We’ve nurtured a relationship with
the Hearsts for more than 100 years.
George Hearst, an entrepreneur and
mining developer, used Wells Fargo
stagecoaches and express services
to transport gold and silver to
U.S. Mints, starting in the 1860s.
His wife, Phoebe, an active investor
and philanthropist, was a Wells Fargo
investment services and trust customer.
Over the years, our relationship
with the Hearsts broadened as their
business grew from its origins
as a mining company and a single
newspaper to become one
of the world’s top private media
and information companies
encompassing more than
360 businesses in 150 countries.
We are honored to help the Hearst
family and business grow through
a broad assortment of products and
services, and today our ties are as
strong and deep as ever. Wealth and
Investment Management serves the
family’s personal financial needs, and
Wholesale Banking provides corporate
services such as credit, treasury
management, debt capital markets,
trust, and investment banking to the
Hearst Corporation.
The key to earning deep
and long-lasting relationships
is not only knowing our customers,
but also understanding how they
define financial success. We have
a sincere desire to help them succeed,
and we do so by working across our
many businesses to provide them
with the products and services
they need.
That certainly is the case in our
work with small business customers.
We appreciate the important role
that small businesses play in local
communities and the overall
economy. We have relationships
with approximately 3 million U.S.
small business owners, and in 2015,
we were the top lender of U.S. Small
Business Administration 7(a) loans
in both number of loans and dollars.
Our Wells Fargo Works for Small
Business® initiative, launched in 2014,
provides resources, guidance, and
services for small business owners,
and we are making strong progress
on our goal to extend $100 billion
in new lending to small businesses
by 2018.
One of the most rewarding aspects
of our small business relationships
is helping our customers grow and
contributing to their long-term
success. One such relationship is
with Deschutes Brewery. We provided
entrepreneur Gary Fish with an
initial loan to help open a brewpub
in Bend, Oregon, in 1998. His craft
beer quickly caught on, and today
Gary’s company employs 472 workers
and is 7.9 percent employee-owned.
As Deschutes Brewery grew, we were
with the company every step of the way,
providing capital, cash management,
and a variety of advice and ancillary
services. Now one of our Wholesale
Banking customers, the company
distributes beer — with the tagline
“Born in Bend, Oregon” — in 28 states,
and today is one of the top 10 craft
brewers in the U.S. “We have been with
Wells Fargo from the very beginning,”
Gary says. “They were the ones who
gave us a loan to get started.”
We are a relationship
company, but our
relationships with
customers are only
as strong as our
relationships with
each other.
Earning relationships
with our team members
We are a relationship company,
but our relationships with customers
are only as strong as our relationships
with each other. Products and
technology don’t fulfill the promises we
make to our customers, our people do
— people who are talented, motivated,
and, I believe, more energized than
our competitors.
Take Terri Steup as an example.
Terri is a bank store manager
in Fort Wayne, Indiana, who has
been with our company for more
than 40 years. Terri is a talented
relationship builder with her team,
and her enthusiasm is infectious.
“We are having fun; we are a family!”
she says about her team. Terri also
recognizes the importance of earning
relationships with customers.
Understanding the community’s
diversity, Terri’s team greets customers
in three languages — English, Burmese,
and Spanish — and Terri actively
recruits new team members from
among the Burmese, Vietnamese,
and Hispanic immigrant population
that her store serves.
We have always believed that
our team members are our most
valuable resource, and we want
them to be with us for the long
term. We invest in them by offering
competitive salaries, professional
training and development, leadership
opportunities, and benefits that
include affordable health care
options, work-life balance programs,
401(k) matching contributions,
tuition reimbursement, and
a discretionary profit sharing plan.
We want all our team members
to lead by bringing our vision
and values to life. That is a shared
responsibility — no matter a person’s
position in the company. As we say
in our Vision & Values, we define
leadership as the act of establishing,
sharing, and communicating our
vision, and as the art of motivating
others to understand and embrace
our vision.
Since our success depends on our
team members, we survey them each
year to hear what they think. This is
important because the more connected
team members feel to the company,
the more likely they are to form lasting
relationships with our customers.
In 2015, our overall team member
“engagement” score continued
to increase, measuring 4.25 out
of a possible 5, an increase over
our 2014 score of 4.22. The Gallup
Organization, which conducts our
annual surveys, named Wells Fargo
a “Gallup Great Workplace Award”
winner in 2014 and 2015, which
distinguishes the world’s most
engaged and productive companies.
This recognition is rewarding in that
it reflects our Culture of CaringSM
approach in the relationships our
team members build with our
customers and with each other.
A key part of that approach
is working together, using what’s
in our hearts, not just in our heads,
to care for and earn relationships
with our customers.
A recent letter from a customer
brought home to me the power
of relationships to change lives.
Five years ago, this customer
would regularly come into one
of our Portland, Oregon, bank
stores to cash his paychecks.
He gradually formed a relationship
with Store Manager Ruvim Kruzhkov.
2015 Annual Report | 5
Our Performance
$ in millions, except per share amounts
2015
2014
% 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 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 total deposits
Average consumer and small business banking deposits 3
Net interest margin
AT YEAR-END
Investment securities
Loans
Allowance for loan losses
Goodwill
Assets
Deposits
Common stockholders’ equity
Wells Fargo stockholders’ equity
Total equity
Capital ratios 4:
Total equity to assets
Risk-based capital:
Common Equity Tier 1
Tier 1 capital
Total capital
Tier 1 leverage
Common shares outstanding
Book value per common share 5
Team members (active, full-time equivalent)
$
22,894
21,470
4.12
23,057
21,821
4.10
1.31%
1.45%
$
12.60
58.1
86,057
36,083
1.475
5,136.5
5,209.8
$ 885,432
1,742,919
1,194,073
680,221
13.41
58.1
84,347
35,310
1.350
5,237.2
5,324.4
834,432
1,593,349
1,114,144
639,196
2.95%
3.11%
$ 347,555
916,559
11,545
25,529
1,787,632
1,223,312
172,036
192,998
193,891
312,925
862,551
12,319
25,705
1,687,155
1,168,310
166,433
184,394
185,262
10.85%
10.98%
11.07
12.63
15.45
9.37
5,092.1
33.78
264,700
$
11.04
12.45
15.53
9.45
5,170.3
32.19
264,500
(1)
(2)
-
(10)
(6)
-
2
2
9
(2)
(2)
6
9
7
6
(5)
11
6
(6)
(1)
6
5
3
5
5
(1)
-
1
(1)
(1)
(2)
5
-
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 Consumer and small business banking deposits are total deposits excluding mortgage escrow and wholesale deposits.
4 See the “Financial Review — Capital Management” section and Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
5 Book value per common share is common stockholders’ equity divided by common shares outstanding.
6 | 2015 Annual Report
Ruvim realized that the customer
needed the security of a bank
account despite challenges with
his credit history. He worked with
the customer to open an Opportunity
Checking Account, a type of account
we created especially for customers
with credit challenges. Over the
years, the customer has improved
his credit to qualify for a regular
account, a credit card, and later
a home mortgage and a line of credit
for his growing business. He wrote
to tell me, “I attribute much of that
growth to Ruvim's support over the
years… . All I can say is that there is
a true feeling of care at Wells Fargo.”
We also are on our customers’
side when emergencies occur.
For example, after the Memorial Day
2015 floods in the Houston area,
our company donated $275,000
for relief efforts, and our team
members staffed a specially
designed mobile response unit
six days a week, up to 10 hours
a day, for customers. That allowed
us to provide cash and mortgage
assistance, insurance claim check
processing, and help in starting
the recovery process. We also
provided grants and services
to support disaster-relief efforts
in other areas affected by
devastating events such as
wildfires in the West and in
Alaska, the earthquake in Nepal,
and flooding in South Carolina.
Earning relationships
with our communities
At Wells Fargo, we earn long-term
relationships with our communities
by creating a positive, lasting
connection. We are a Main Street
bank, and we are committed
to strengthening our communities
through our operations, business
practices, employment opportunities,
philanthropy, and community
engagement.
Our team members volunteer their
time and donate to nonprofits and
causes important to them. In 2015,
Wells Fargo team members volunteered
1.8 million hours and contributed
$98.8 million to nonprofits and schools.
United Way Worldwide has ranked
our workplace-giving campaign the
largest in the U.S. each of the past
seven years.
H&B Elevators, which is African-
American owned, is providing design
and manufacturing services for the
buildings’ elevator cab interiors.
In addition to the generous donations
from our team members, Wells Fargo
is one of the top corporate cash
donors among U.S. companies.
Over the past five years (2011 – 2015),
Wells Fargo has donated $1.4 billion
to support and revitalize communities,
help charitable organizations, and
grow local economies.
In our communities we particularly
focus on social, economic, and
environmental programs and
activities. Here are some examples:
Social: We are focused on supporting
the varied needs of our global
customer base. One of our most
important commitments as
a company is to support those
in the military who have served
or continue to serve our country.
Since 2012, we have donated
more than $66 million in the form
of assistance to nonprofits, education,
job training, and property, including
more than 300 mortgage-free houses
to wounded veterans and their
families. We employ more than
8,000 self-identified veterans and
are committed to hiring more.
Our long-term community
relationship with the Metropolitan
Economic Development Association
(MEDA) is a terrific example of how
we work with nonprofit partners
to strengthen our communities.
Wells Fargo co-founded MEDA
with other business leaders in
1971 in Minneapolis to support the
development of minority-owned
businesses, break down barriers,
and provide equal economic
opportunities.
Since its start, MEDA has helped
more than 19,000 entrepreneurs
and assisted in the start-up
of nearly 500 businesses.
One of its clients, H&B Elevators,
is a subcontractor for the
construction of our new
Minneapolis office buildings.
We are delighted to work with
diverse suppliers such as H&B
Elevators and, in 2015, surpassed our
goal of spending at least 10 percent
of our annual procurement budget
with diverse vendors.
Economic: We are focused
on strengthening individuals’
financial knowledge and
opportunities for underserved
communities. We continue
to provide free financial education
courses to thousands of military
members, seniors, small business
owners, and youth each year
through Hands on Banking®,
now in its 13th year. Homeownership
and access to safe, sustainable
housing continue to be critical
community needs. Our team members
have volunteered more than 4.7 million
hours through the Wells Fargo
Housing Foundation since 1993,
mobilizing to build and rehabilitate
nearly 5,600 homes. We also have
long-term relationships with Habitat
for Humanity affiliates across the U.S.
Additionally, our LIFT programs
have helped create more than
10,725 homeowners in 39 communities
since 2012, through more than
$278 million of down payment and
other financial assistance. We’re also
working to create more Hispanic
homebuyers through our support
of the National Association of
Hispanic Real Estate Professionals’
Hispanic Wealth Project. In support
of this project, Wells Fargo Home
Mortgage has a goal of originating
$125 billion in mortgages to our
Hispanic homebuying customers
during the next 10 years by
increasing our presence in diverse
communities, working with referral
sources, and providing products
and programs that support diverse
homeownership.
Environmental: We also work
to accelerate the transition
to a lower-carbon economy
2015 Annual Report | 7
and reduce the impact of climate
change. Our Environmental Solutions
for Communities five-year grant
program, begun in 2012, has funded
more than $9.8 million in grants
to more than 250 nonprofits to
date that promote conservation
and environmental sustainability
in communities across the U.S.
We work hard to make our
internal operations more efficient
by minimizing waste and using
renewable sources of energy.
Today, more than 20 million
square feet of office space across
418 bank stores and other locations
is Leadership in Energy and
Environmental Design (LEED)
certified. The U.S. Green Building
Council recognized our leadership,
naming us the “green” building leader
among financial institutions in 2015.
More information about our
community efforts is available
in our Corporate Social Responsibility
Report at wellsfargo.com under
“About Wells Fargo.”
Earning relationships
with our shareholders
We also work to build long-term
relationships with our shareholders
and earn their confidence through
our performance over time.
We believe that we attract
shareholders and sustain
relationships through the many
long-term advantages that we offer
investors, including our leading
market share in cornerstone products;
diversified and balanced revenue
sources; strong risk discipline;
experienced management team;
and consistent culture.
These advantages and our
financial performance have enabled
us to continue to return more capital
to our shareholders than in the
previous year. I noted earlier that
in 2015 we returned $12.6 billion
through common stock dividends
and net share repurchases.
Further reinforcing the long-term
nature of our commitment, Wells Fargo
leads in total shareholder return among
8 | 2015 Annual Report
our bank peer group over the past
five- and 10-year periods (ended
Dec. 31, 2015).
Actively preparing for the future
While we take great pride in the
relationships we are earning today,
and those we’ve earned over our
history, we are hardly anchored
to the past. The world is changing
rapidly, and one of the ways we
keep the customer at the center
of all we do is by innovating.
In addition to the six priorities
I mentioned earlier, which
we concentrate on daily, we have
identified four drivers that we
believe are critical to our
future success:
Creating exceptional
customer experiences
Customer experience is at the
core of our Culture of Caring focus,
in how we treat our customers and
each other. As our team members
do their jobs, they demonstrate
a positive and caring attitude for
customers every day. This mindset
is so important to our success that
I like to say we hire for attitude and
train for aptitude.
Exceptional customer experiences
also stem from a can-do mindset.
If there’s a better way, we’ll work
hard to find it for our customers.
For example, we enhanced the
account-opening process for our
retail banking customers in 2015
through our “Steps to Better Banking”
program. The program provides
information about how to avoid
service fees, explains choosing and
setting up numerous types of text
alerts, and offers other key resources
— all within an hour of opening
an account.
A third mindset of caring for
our customers is realizing that
at Wells Fargo, we are better together.
That means communicating clearly
with our customers, such as sending
timely alerts on account transactions.
And we provide free retirement
assessments and online educational
resources such as our Smarter
Credit™ center and My Money MapSM,
Total Shareholder Return (annualized)
Ended Dec. 31, 2015
5yr Rank
10yr Rank
Wells Fargo
14.7%
1 8.5%
1
Bank of America
5.4%
11
-7.6%
10
BB&T
Capital One
10.5%
12.4%
6
2.7%
2
-0.4%
5
6
Citigroup
2.0%
12 -18.6%
12
Fifth Third Bancorp
9.2%
8
-3.5%
8
2
9
3
7
4
12.1%
10.3%
11.9%
4
7.9%
7
-6.3%
5
7.1%
7.9%
10
-9.5%
11
JPMorgan Chase
KeyCorp
PNC Financial
Services
Regions
Financial
SunTrust
9.1%
9
-3.0%
U.S. Bancorp
12.1%
3 6.6%
S&P 500 (SPX)
KBW
Nasdaq bank
index (BKX)
12.5%
9.1%
7.3%
-1.0%
Source: Bloomberg, includes share price
appreciation and reinvested dividends
an online tool that enables customers
to track spending, budgeting, and
savings in easy-to-understand charts.
We care deeply for our customers
and want to do all we can to help
them achieve financial success.
Digitizing the enterprise
We continue to make new
technology offerings and channels
available throughout our businesses.
Our customers have responded
enthusiastically to text and email alerts,
payment solutions like Apple Pay™
and Android Pay™, and pilots
of biometric customer authentication
for both business and retail customers
that we expect to roll out later
this year. We introduced the
yourLoanTrackerSM service in 2015
to allow our customers to monitor
the status of their loans throughout
the home-financing process using
their computer, smartphone, or tablet.
We are careful not to create new
technologies in isolation; the value
of innovation is when technology
is aligned. This means that all
of our distribution channels
— locations, phone banks, ATMs,
online, and mobile banking —
work together, integrated with
our products, to benefit customers.
In 2015, we brought together
team members from existing
Wells Fargo teams to form a new
Innovation Group, a cross-functional
organization to help keep us at
the leading edge of technological
innovation in financial services.
Key focuses of the Innovation Group
include research and development,
payment strategies, design and
delivery, and analytics.
Making diversity and
inclusion part of our DNA
As a Main Street bank, it’s critical
that our team members reflect the
makeup of our communities so
we can better understand and serve
the different needs of our customers.
Our company is characterized by
diversity — from our board of directors
to customer-facing team members.
Overall, 57 percent of U.S.-based team
members are women, and 41 percent
are ethnically/racially diverse.
Women head two of our four major
businesses, and our board is among
the most diverse in the industry
(44 percent women and 31 percent
ethnically/racially diverse).
Our goals of recognizing and
serving all customers include
those customers with disabilities,
and we are especially focused on
using technology to eliminate
accessibility barriers. We were
the first bank to offer voice-enabled
ATMs to assist our visually impaired
customers, and these ATMs now
speak in English and Spanish.
We also offer credit and debit cards
in Braille.
I am delighted by the recognition
we’ve received by outside organizations
that monitor diversity and inclusion.
For example, in 2015 we were
recognized by DiversityInc as the
No. 1 Company for LGBT Employees,
7th Top Company for Veterans,
and as the 11th Top Company
for Diversity; and by LATINA Style
as the 8th Best Company for Latinas.
Additionally, we received a perfect
score of 100 percent on the 2016
Corporate Equality Index, a national
benchmarking survey and report
on corporate policies and practices
related to LGBT workplace equality.
This is the 13th consecutive year
that Wells Fargo has earned
a 100 percent score.
At Wells Fargo,
every team member
is responsible for
managing risk.
Leading the way in risk management
and operational excellence
Effective risk management practices
help us better serve our customers,
maintain and improve our position
in the market, and protect the
long-term safety, soundness,
and reputation of Wells Fargo.
We understand that trust is the
core of any meaningful relationship.
At Wells Fargo, every team member
is responsible for managing risk.
Protecting our customers’ assets
and providing financial security
are key principles in our risk-focused
culture. We continue to invest heavily
in risk management and information
security to meet our goals of protecting
our customers’ information and
assets, safeguarding our infrastructure
and systems, and setting the global
standard for risk management
excellence among financial institutions.
Operational excellence is part
of our Vision & Values and is a
key driver in the value we provide
shareholders. We apply it at every
level of the company, focusing on
creating sustainable improvement
for our business, enhancing the
customer experience, mitigating
risk, and increasing efficiency.
In closing
Our Annual Report would not
be complete without recognizing
the hard work of our board
of directors. Their knowledge,
experience, and leadership are
integral to Wells Fargo’s success.
I want to acknowledge Judy Runstad,
who will be retiring from the board
at our annual meeting of stockholders
in April. Judy joined our board in
1998, and she has been an outstanding
director. We will miss her many
contributions, and I thank her
for her service.
As our company moves forward,
we will continue to focus on earning
and building lifelong relationships.
That is how we have done business
for the past 164 years, and that focus
is at the heart of our culture.
I am thankful for the leadership
of 265,000 team members who are
focused on creating and sustaining
relationships with our customers
and on putting our customers’
interests first. And I thank customers
for allowing us to help them with their
financial needs. I am grateful to our
community partners that work
with us to improve our communities.
And I appreciate our shareholders,
who show their trust by investing
in our company.
Thanks for your part in allowing
us to earn and nurture the relationships
that are core to both our past and
future successes.
John G. Stumpf
Chairman and Chief Executive Officer
Wells Fargo & Company
February 1, 2016
2015 Annual Report | 9
10 | 2015 Annual Report
Julian Salazar and Paulette Drake
Portland, Oregon
Building confidence
when ‘it isn’t easy
to talk about money’
Retirees Paulette and Chris Drake
medical care for his young son,
live on a fixed income and realized they
Julian said the tool has helped
needed help budgeting. They knew online
his family manage its money
tools were an option, but entering their
more effectively.
financial information on a website they
weren’t familiar with was a concern.
Once they gained confidence
using Budget Watch, the Drakes set
Enter Personal Banker Julian Salazar,
budgeting goals and said they found
who met with Paulette and Chris at their
it easier to manage transactions online.
local Wells Fargo in Portland, Oregon.
A year later, Paulette said, “It’s taken
He introduced them to a Wells Fargo
a lot of pressure off of me because
online tool to help the couple track
I don’t have to manually calculate our
their spending.
“Julian took the time on that first
visit — and subsequent visits —
budget and save every receipt. Along
with Julian’s guidance, it’s helped ease
our financial concerns.”
Paulette and Chris Drake
to answer my questions,” Paulette
Because they’re now tracking their
said. “I loved that he really listened
spending online, they say they’re
to me and made me feel comfortable.
more confident about the future.
That’s so important, because it isn’t
easy to talk about money.”
Julian checks in with the Drakes
each quarter to discuss their financial
Julian found it easy to connect
goals and how they’re doing. He said,
with the Drakes because he, too,
“I’m just glad the Drakes benefit from
uses Budget Watch, part of Wells Fargo’s
our guidance and online tools.”
free online tool My Money MapSM.
Having moved to Portland for better
Learn more at wellsfargo.com/stories.
2015 Annual Report | 11
Paulette Drake
John Martinelli
Watsonville, California
12 |
2015 Annual Report
Fruits of family’s
labor: From seed
to sparkling success
In 1859, Stephen G. Martinelli moved
“The Wells Fargo team has served
from Switzerland to California’s fertile
us really well — even internationally
Central Coast, where his brother had
— as we prepare to directly manage
started farming apples a few years
potential currency risks,” said CFO
earlier. Because they didn’t have a way
Gun Ruder.
to preserve apple juice, Stephen started
to experiment with hard apple cider
and developed an effervescent version.
John said, “Wells Fargo has helped
fund every one of our major projects,
including property purchases,
Today, Stephen’s great-grandson,
buildings, bottling equipment,
John, runs S. Martinelli & Company,
and apple presses, as well as
a Wells Fargo customer best known
working capital needs.”
for Martinelli’s Gold Medal apple juice
and nonalcoholic sparkling ciders.
As S. Martinelli & Company
looks to vertically integrate and
“My grandfather, Stephen G. Martinelli
expand its operations, Wells Fargo
Jr., also was a pioneer. A couple
has been a valuable consultant.
years before Prohibition would have
Relationship Manager Ryan
rendered our primary product illegal,
Pacheco said, “We’ve been talking
he developed a pasteurization process
with Martinelli’s about agriculture
to preserve apple juice products,”
lending and lines of credit for
said John. “If it wasn’t for his work,
crops, which can be essential
John Martinelli
we wouldn’t have been able to transition
as the company integrates its
to a nonalcoholic sparkling cider,
growing operations to secure
which is now our No. 1 product.”
its apple supply.”
Wells Fargo has worked with
Gun concluded, “Wells Fargo
S. Martinelli & Company for more
is flexible and responsive and
than 100 years — from when it was
has developed an excellent
a small, regional producer to today
understanding of our business.”
as a major national brand with export
markets in Mexico, South Korea,
Canada, Japan, and elsewhere.
Learn more at wellsfargo.com/stories.
2015 Annual Report | 13
Gun Ruder, Ryan Pacheco,
and John Martinelli
Shyam A. Maharaj
Fort Lauderdale, Florida
14 | 2015 Annual Report
Refinancing paves the
road to more savings —
and a second car
As a physical therapist who sees patients
So Kyle helped him refinance his
in their homes, Shyam A. Maharaj had
SUV loan and save enough money
put a good deal of wear and tear on his
to make another vehicle possible.
sport utility vehicle while making house
Shyam, who lives in Fort Lauderdale,
calls. As a result, he thought it was time
Florida, said at first he didn’t even
to get a second car to avoid wearing
realize that Kyle worked 2,300 miles
out the SUV.
away in Chandler, Arizona.
In his quest to find the best used
A telephone sales specialist for
vehicle, Shyam credits Wells Fargo’s
an inbound and outbound sales
Kyle Fleeger, an auto-loan sales
team, Kyle said more of his customers
consultant, who helped at every step
are using phone sales and support
along the way. Shyam said he even
in the car-buying process. “We put
called Kyle while he was on the road,
them in a position to have some fun
shopping for a car, to check on pricing
in their shopping,” he said.
and the vehicle’s value, and ultimately
to make sure his preapproval would
cover the car he was considering.
“Kyle went above and beyond
what I could have hoped for
in dealing with my situation,”
“It was very convenient for me,
said Shyam, a long-time Wells Fargo
given that I work long hours and
customer. “He took the time to research
have to travel all over for my job.
everything, and I knew he was really
It was great working with Kyle
working hard on what I needed.”
on the phone,” said Shyam.
Shyam’s first priority was to find
a way to afford a second vehicle.
Shyam Maharaj
Learn more at wellsfargo.com/stories.
2015 Annual Report | 15
Larry Chavez
Albuquerque, New Mexico
16 | 2015 Annual Report
Banking relationship
and business grow in
tandem over the years
Larry Chavez’s relationship with
Wells Fargo plays a big role
his bank is as old as his business,
in the company’s future, he said,
Dreamstyle Remodeling of Albuquerque,
noting that bankers Katrina Tracy
New Mexico. And since 1989, both his
and Laurie Cini-Donovan “know my
business and his relationship with
business inside and out, and they’re
Wells Fargo have flourished.
responsive to all my business needs.”
“The day I started this company,
Dreamstyle Remodeling’s relationship
I opened an account at Wells Fargo,”
with Wells Fargo stretches from multiple
Larry said. “We’ve had pretty dramatic
commercial accounts to financing,
growth since, and Wells Fargo has been
merchant services, personal accounts,
an important collaborator throughout.”
and investments. The company also
In the past five years, the home-
remodeling company has expanded
from 110 employees to 360, and annual
relies on Wells Fargo to provide
consumer finance options to
its customers.
sales have increased substantially.
“It goes beyond the bank accounts
Wells Fargo helped finance the
and financing,” Larry said. “Everything
Larry Chavez and
Laurie Cini-Donovan
company's recent expansion into
we’ve done with Wells Fargo has
Southern California, Arizona, Idaho,
increased our efficiency.”
and west Texas, which included three
new facilities.
Laurie said, “Knowing his business
so well has deepened our relationship.
Just like the customers who
Larry sees the potential and benefits
want to enhance their homes for
in thinking of us as if we were true
the future, Larry is intent on securing
business consultants.”
Dreamstyle Remodeling’s future.
“We’re very focused on the company’s
succession, and we have the best people
in place to lead us,” Larry said.
Learn more at wellsfargo.com/stories.
2015 Annual Report | 17
Larry Chavez
18 | 2015 Annual Report
Jaejung and
Gary Cohen
Livingston, New Jersey
House hunters find the
one, with an assist from
halfway across the U.S.
Gary and Jaejung Cohen of Livingston,
called yourLoanTracker℠. The tool
New Jersey, hunted relentlessly for the
lets customers check the status
right house with just the right features
of their mortgage on their computers
in the school district they wanted for
or mobile devices. The Cohens also
their two young daughters. Twice they
used the tool to electronically file
canceled contracts for houses they
select documents and received
decided ultimately didn’t quite
email and text alerts about
measure up to their expectations.
important milestones.
The third time was a charm, however,
Jaejung, a risk manager for
thanks, in part, to Wells Fargo’s
an insurance company, said,
Shane Parker and Brittany Taylor —
“Shane and Brittany did a great
both halfway across the U.S.
job of working with us throughout
in Des Moines, Iowa.
the process.”
“We had worked with Shane as our
Shane said, “As phone-based
mortgage consultant six years ago
mortgage consultants, we find
Gary Cohen and daughter Jyetta
when we refinanced our home,”
that our role is growing every day
said Gary, a lawyer in metro New York.
as we preserve the human touch
“It went so well then that we called him
with customers while also using
again this time for a preapproval —
technology to shorten the distance
even before we started house shopping.
between us. We have the ability not
He helped it go smoothly.”
only to help customers walk through
Once the Cohens had made an offer
on a home, Brittany, a loan processor,
helped them streamline their
the process, but also to put more time
into building relationships with them,
which is just as important.”
paperwork using an online tool
Learn more at wellsfargo.com/stories.
2015 Annual Report | 19
Jaejung Cohen and daughter Rayel
20 | 2015 Annual Report
Paul Hartman and
Cheryl Beckman
Louisville, Kentucky
Smooth transition
of retirement plan
goes down easy
When a company is helping its
Together, Brown-Forman and
employees plan for a comfortable
Wells Fargo devised detailed
retirement, establishing trust
communication plans, including
is essential.
That’s one reason Brown-Forman —
an American-owned spirits and
wine company in Louisville, Kentucky
— chose Wells Fargo Institutional
Retirement and Trust as its 401(k)
plan provider.
“Wells Fargo made our more than
4,100 employees feel at ease,”
said Cheryl Beckman, director
of Global Benefits at Brown-Forman,
“tailoring transition communications
based on where they are in their careers.”
Wells Fargo’s Paul Hartman said
there are a lot of synergies between
the two companies “in terms of how we
view our relationships with customers,
vendors, and team members.”
informational sessions for employees
at all the company’s major locations,
from corporate offices to barrel-making
facilities to vineyards. Some sessions
were conducted in both English
and Spanish.
Andrew Simon, Brown-Forman’s
director of People Development
and Rewards, said, “We’re a growing
company but have a small-company
feel and strive to provide a premium
experience for our employees. So giving
them multiple ways to learn about
retirement planning was important.”
That, plus enhanced plan options
such as the addition of a Roth
feature and an employer-matching
contribution, led to success:
Brown-Forman has seen an
Brown-Forman, founded in 1870, is the
11 percent increase in employees
maker of many spirit brands, such as
raising their contribution percentage
Jack Daniel’s, Old Forester, Woodford
to take advantage of the full
Reserve, Finlandia Vodka, Sonoma–Cutrer
company match.
wines, and others. The company started
working with Institutional Retirement
and Trust in 2014 after more than
a decade of working with the
Corporate Banking team on lines
of credit and foreign exchange.
“When Wells Fargo commits
something to us, it’s going to
happen,” Andrew said.
Learn more at wellsfargo.com/stories.
2015 Annual Report | 21
Andrew Simon and Cheryl
Beckman
Paul Hartman, Cheryl Beckman
and Andrew Simon
Karen Spotted Tail
Rosebud, South Dakota
22 | 2015 Annual Report
Teaming up to bring
affordable solar power
to the people
In a six-year period, members of the
the organization with $4 million
Rosebud Sioux Tribe in South Dakota
in grants, helping it expand services
saw their electricity costs increase
from its home base in California
by 50 percent. As a result, Karen
to locations across the U.S.
Spotted Tail, a member of the tribe,
struggled to pay her bills.
And Wells Fargo team members
have joined in as well. They have
In October 2015, GRID Alternatives —
helped install panels for 58 families
a nonprofit that makes renewable
and volunteered more than 3,500 hours
energy accessible to low-income
in the past 10 years.
communities — donated and installed
solar panels on Karen’s roof. After two
months, the cost of her utilities had
dropped significantly.
Erica Mackie, GRID Alternatives
CEO and co-founder, said, “Wells Fargo
is a long-term supporter and a trusted
advisor, helping us expand our reach
Such success has helped create
to make renewable energy accessible
awareness of solar energy across
to people who need it most.”
the tribal community, according
to Ken Haukaas, a consultant for
the tribe’s utility commission.
GRID Alternatives also provides
job training and employment
opportunities in solar installation.
Since 2007, Wells Fargo has provided
Karen said, “I just wish everybody
could receive this help.”
Learn more at wellsfargo.com/stories.
2015 Annual Report | 23
Karen Spotted Tail
Darnell Shields
Chicago, Illinois
24 |
2015 Annual Report
Adopting a neighborhood:
Where rough streets rule,
revitalization now resides
In one of Chicago’s most economically
Neighborhood Network Initiative,
challenged neighborhoods, residents
which supports the work of more than
and community groups have teamed
60 community organizations in Austin,
up to change its reputation.
led by Austin Coming Together.
“As the westernmost neighborhood
“We want to make a real difference
of the city, Austin is the gateway
in Austin,” said Lisa Johnson,
to Chicago for many,” said Darnell
Wells Fargo Commercial Banking
Shields of the nonprofit Austin
Midwest division manager. “Building
Coming Together. “We want to live
up this community is one way we can
up to the greatness of our city.”
bring to life everything we value
One focus is on improving
as a company.”
student success in third grade, a key
And aside from financial support,
indicator of educational advancement.
Wells Fargo team members also
Darnell Shields, Lisa Johnson,
and United Way's Wendy DuBoe
But instead of looking solely at student
actively volunteer — at Austin
achievement, organizers are taking
schools, health care providers,
a long-term, comprehensive approach
food banks, job readiness programs,
— understanding that preparing kids
and more. In fact, local team members
for success in school starts with
have selected the neighborhood
access to quality day care, economic
as the beneficiary of a majority
opportunities for family members,
of their philanthropic and
and a safe neighborhood.
community support efforts.
Wells Fargo has joined the effort,
Learn more at wellsfargo.com/stories.
donating $300,000 to United Way
of Metropolitan Chicago’s
Wendy DuBoe, Lisa Johnson,
and Darnell Shields
2015 Annual Report | 25
Corporate Social
Responsibility Highlights
Caring for our communities is part of our culture. We strive to create a positive,
lasting impact — socially, environmentally, and economically — through earning
lifelong relationships with community partners and other stakeholders.
$7B
in community development loans and investments
in 2015 to support low and moderateincome neighborhoods
Recreation
Center
Dry
Cleaner
U.S. Military
School
Condo
Local Shop
Utilities
Company
$281.3M
donated to
nonprofits
in 2015
$278M
committed to
Wells Fargo
LIFT programs
since 2012,
helping more
than 10,725
people and
families buy
homes
$15B
in environmental
loans and
investments
in 2015
$18.8B
in new loan
commitments
extended to small
business customers*
in 2015
8,000
team members
identify as military
veterans, including
1,542 hired in 2015
$1.2B
spent with
diverse
suppliers
in 2015,
representing
12 percent
of our annual
procurement
budget
30%
reduction in absolute greenhouse
gas emissions since 2008 and
47% increase in water efficiency
since 2012
20%
of total square footage in leased
and owned buildings is LEED certified
For more information, please visit wellsfargo.com/about/csr/reports.
* Primarily businesses with annual revenues less than $20 million
2626 || 2015 Annua
eport
2015 Annual Rl Report
Board of Directors
John D. Baker II 1, 2, 3
Executive Chairman
FRP Holdings, Inc.
Jacksonville, Florida
(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 Chairman, CEO
BlackBerry Limited
Waterloo, Ontario, Canada
(Wireless communications)
Lloyd H. Dean 2, 5, 6 , 7
President, CEO
Dignity Health
San Francisco, California
(Healthcare)
Elizabeth A. Duke 3, 4, 7
Former member of Federal
Reserve Board of Governors
Virginia Beach, Virginia
(U.S. regulatory agency)
Susan E. Engel 3, 4, 6
Retired CEO
Portero, Inc.
New York, New York
(Online luxury retailer)
Enrique Hernandez Jr. 2, 4, 7
Chairman, CEO
Inter-Con Security Systems, Inc.
Pasadena, California
(Security services)
Donald M. James 4, 6
Retired Chairman
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, 7
Senior Advisor
Vestar Capital Partners
Denver, Colorado
(Private equity)
James H. Quigley 1, 3, 7
CEO Emeritus
Deloitte
New York, New York
(Audit, tax, financial advisory)
Judith M. Runstad 2, 3, 4
Of Counsel
Foster Pepper PLLC
Seattle, Washington
(Law firm)
Stephen W. Sanger * 5, 6 , 7
Retired Chairman
General Mills, Inc.
Minneapolis, Minnesota
(Packaged foods)
John G. Stumpf
Chairman, CEO
Wells Fargo & Company
San Francisco, California
Susan G. Swenson 1, 5
Chair, CEO
Novatel Wireless, Inc.
San Diego, California
(Wireless solutions)
Suzanne M. Vautrinot 1, 3
President
Kilovolt Consulting, Inc.
San Antonio, Texas
(Cyber and technology
consulting)
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 and Corporate Staff
Wells Fargo Operating Committee
pictured (left to right):
Carrie L. Tolstedt, John R.
Shrewsberry, Avid Modjtabai,
Timothy J. Sloan, John G.
Stumpf, James M. Strother,
David M. Carroll, David M.
Julian, Hope A. Hardison,
and Michael J. Loughlin
John G. Stumpf
Chairman and CEO *
Anthony R. Augliera
Corporate Secretary
J. Rich Baich
Chief Information
Security Officer
Neal A. Blinde
Treasurer
Karl E. Byers
Head of Enterprise Risk
Jon R. Campbell
Head of Government and
Community Relations
Julie Circio Caperton
Head of Corporate
Development
David M. Carroll
Head of Wealth and
Investment Management *
Christine A. Deakin
Head of Corporate Strategy
* “Executive officers” according
to Securities and Exchange
Commission rules
Scott A. Dillon
Chief Technology Officer
Michael J. Loughlin
Chief Risk Officer *
Eric D. Shand
Chief Loan Examiner
Stephen M. Ellis
Head of Innovation Group
Avid Modjtabai
Head of Consumer Lending *
John R. Shrewsberry
Chief Financial Officer *
Gerald A. Enos Jr.
Head of Operations
Derek A. Flowers
Chief Credit Officer
Hope A. Hardison
Chief Administrative
Officer, Human Resources
Director *
Richard C. Henderson
Head of Corporate
Properties
Yvette R.
Hollingsworth Clark
Chief Compliance Officer
David M. Julian
Chief Auditor
Richard D. Levy
Controller *
Jamie Moldafsky
Chief Marketing Officer
Kevin D. Oden
Chief Market Risk Officer
Joseph J. Rice
Chief Operational
Risk Officer
James R. Richards
Bank Secrecy Act Officer
and Head of Financial
Crimes
Charles D. Roberson
Head of Enterprise
Efficiency
James H. Rowe
Head of Investor Relations
Timothy J. Sloan
President, Chief Operating
Officer, Head of Wholesale
Banking *
James M. Strother
General Counsel *
Oscar Suris
Head of Corporate
Communications
A. Charles Thomas
Chief Data Officer
Carrie L. Tolstedt
Head of Community
Banking *
2015 Annual Report | 27
Senior Business Leaders
COMMUNITY BANKING
Group Head
Carrie L. Tolstedt
Deposit Products Group
Daniel I. Ayala, Global
Remittance Services
Edward M. Kadletz, Debit
and Prepaid Products
Wells Fargo Virtual Channels
James P. Smith
Regional Banking
Regional Presidents
Michelle Y. Lee, Eastern
Scott Coble, Florida
Joe A. Atkinson, South Florida
David Guzman, West Florida
Derek L. Jones, Central Florida
Kelly A. Smith, North Florida
Darryl Harmon, Southeast
Leigh Vincent Collier, Mid-South
Michael S. Donnelly, Atlanta
Chadwick A. (Chad) Gregory,
Greater Georgia
Kendall K. Alley, Carolinas West
Andrew M. Bertamini, Maryland
Ravi Chandra, Western Virginia
Jack O. Clayton, Piedmont East
Michael L. Golden, Greater
Washington D.C.
Glen M. Kelley, Greater Virginia
Larisa F. Perry, Northeast
Frederick A. Bertoldo, Northern
New Jersey
Joseph F. Kirk, New York,
Connecticut
Brenda K. Ross-Dulan, Southern
New Jersey
Gregory S. Redden, Greater
Philadelphia, Delaware
Gregory S. White, Greater
Pennsylvania
John K. Sotoodeh, Southwest
Pamela M. Conboy, Arizona,
Utah, Nevada
Deborah (Dee) E. O’Donnell, Utah
Kirk V. Clausen, Nevada
David A. Galasso, Northern and
Sanjiv Sanghvi, Western Region
Central California
Reza Razzaghipour, Pacific Coast
Jeff S. Rademann, Santa Clara Valley
David R. Kvamme, Great Lakes
Mary E. Bell, Indiana, Ohio
Dave R. Golden, Mountain Division
Paul D. Kalsbeek, Southern Region
John P. Manning, Eastern Region
Laura S. Oberst, Central Region
Kyle G. Hranicky,
Sang Kim, Wisconsin, Michigan
Corporate Banking Group
Donald (Joe) Ravens, Minnesota
J. Nicholas Cole, Wells Fargo Restaurant
Peter A. Gilbertson, North Region,
Insurance Brokerage and Consulting
Tom C. Longhta, South Region,
Insurance Brokerage and Consulting
Laurie B. Nordquist, Personal and
Small Business Insurance
Tim Prichard, Employee Benefits
National Practice
Frank Newman III, Rocky Mountain
Joy N. Ott, Montana, Wyoming
Don M. Melendez, Idaho
Donald J. Pearson, Great Plains
Kirk L. Kellner, Tristate
Daniel P. Murphy, North Dakota,
South Dakota
Marc Bernstein, Enterprise
Small Business Segment
Todd Reimringer, Business
Payroll Services
CONSUMER LENDING
Group Head
Avid Modjtabai
Consumer Credit Solutions
Shelley S. Freeman
Consumer Financial Services
John P. Rasmussen,
Personal Lending Group
Dealer Services
Dawn Martin Harp
Finance; Gaming Division
James D. Heinz, U.S. Corporate Banking;
Healthcare Group
Bart Schouest, Energy & Power Groups
John R. Hukari, Equity Funds Group
Brian J. Van Elslander,
Financial Sponsors Group
Daniel P. Weiler,
Financial Institutions Group
Hugh C. Long, Business Banking Group
David L. Pope, Business Banking Sales
and Service
Donna J. Serres, SBA Lending
Dean A. Rennell,
Southwest Division Manager
Don A. Fracchia,
Midwest Division Manager
Lucia D. Gibbons,
East Division Manager
Daniel C. Peltz, Treasury
Management Group
Debra B. Rossi, Merchant Services
David B. Trotter, Treasury Management
Sales & Delivery
Keith K. Theisen,
Treasury Management Products
Secil T. Watson,
Jerry Bowen, Commercial Dealer Services
Wholesale Internet Solutions
William Katafias, Indirect Auto Finance
Phil D. Smith, Government and
Home Lending
Franklin R. Codel
Bradley W. Blackwell, Portfolio Lending
Michael J. DeVito, Mortgage Production
Perry J. Hilzendeger,
Home Lending Servicing
Peter R. Diliberti, Capital Markets
WEALTH AND INVESTMENT
MANAGEMENT
Group Head
David M. Carroll
Darrell L. Cronk, Wells Fargo
Investment Institute
Institutional Banking
Erin S. Gore, Education and
Nonprofit Banking
William H. Morgan, Healthcare
Financial Services
Kathleen S. McClure-Wight,
Government Banking West
Lee M. Hanna,
Government Banking East
Mara Holley, Government Banking,
Specialty Sectors
Marty Bingham, WFS Sales & Trading
Peter Hill, Public Finance
Commercial Real Estate
Mark L. Myers
International Group
Richard J. Yorke
Sara Wardell-Smith, Foreign Exchange and
International Treasury Management
Frank A. Pizzo,
EMEA Regional President
Christopher G. Lewis,
International Trade Services
John V. Rindlaub,
Asia Pacific Regional President
Charles H. Silverman,
Global Financial Institutions
Principal Investments
George D. Wick
Ross M. Berger, Corporate Credit
Rosy Le Cohen and Arthur Evans,
Municipal Bonds
David Florian, Reinsurance
Philip A. Hopkins and Barry Neal,
Renewable Energy and
Environmental Finance
Jeff T. Nikora, Alternative
Investment Management
John Walbridge and Cecilia Fok,
Structured Products
Specialized Lending and Investment
J. Edward Blakey
Adam Davis, Structured Real Estate
Alan Kronovet,
Commercial Mortgage Servicing
Douglas J. Mazer,
Real Estate Capital Markets
Kara McShane, Commercial Real Estate
Capital Markets and Finance
Mary Katherine DuBose and Chris Pink,
Asset Backed Finance
Troy Kilpatrick, Corporate Trust Services
William J. Mayer,
Wells Fargo Equipment Finance
Lesley A. Milovich, Community Lending
and Investment
Alan Wiener, Multifamily Housing
Kathy J. Heffley, South Carolina
Dan L. Abbott, Retail Services
Forrest R. (Rick) Redden III, Atlantic
Beverly J. Anderson,
John T. Gavin, Dallas-Fort Worth
Mary T. Mack, Wells Fargo Advisors
Darryl Montgomery, Houston
Michael J. Niedermeyer, Wells Fargo
Lisa J. Riley, New Mexico,
Western Border
Asset Management
John M. Papadopulos, Retirement
Jeffrey Schumacher, Central Texas
James P. Steiner, Abbot Downing
Kenneth A. Telg, Greater Texas
Jay S. Welker, Wealth Management
Lisa J. Stevens, Pacific Midwest
Ben F. Alvarado, Southern California
Celia C. Lanning, Greater San Diego
WHOLESALE BANKING
President, Chief Operating Officer,
David DiCristofaro, Greater Los
Angeles
Marla M. Clemow, Los Angeles Metro
James W. Foley, Pacific North
Tracy Curtis, Oregon
Joseph C. Everhart, Alaska
Gregory L. Morgan, San Francisco
Micky S. Randhawa, Greater Bay
Patrick G. Yalung, Washington
Group Head
Timothy J. Sloan
Commercial Banking, Corporate
Banking, Business Banking Group,
Government & Institutional Banking,
and Treasury Management
Perry G. Pelos
John C. Adams, Commercial Banking
MaryLou Barreiro,
Specialty Industry Banking
28 | 2015 Annual Report
William M. Cotter, Northeast Region
Christopher J. Jordan, Hospitality Finance
Wells Fargo Capital Finance
Henry K. Jordan
and Senior Housing
Michael F. Marino,
Southern California Region
David M. Martin, New York Metro Region
Robin W. Michel, Southwest Region and
Homebuilder Banking
Gregory J. Wolkom, REIT Finance
William A. Vernon, Midwest, Southeast,
International Region and Real Estate
Merchant Banking
Cynthia Wilusz Lovell, Northwest Region
Insurance Group
Laura L. Schupbach
Kevin M. Brogan, Property and
Casualty National Practice and
Safehold Special Risk
Guy Fuchs
Scott R. Diehl, Global Capital
Solutions Group
Steven V. Macko, Industries Group
Kurt Marsden, Corporate Finance Group
Wells Fargo Securities
Jonathan G. Weiss
Walter E. Dolhare, Markets Division
Robert A. Engel, Investment Banking
and Capital Markets
Benjamin V. Lambert, Eastdil Secured, LLC
Roy H. March, Eastdil Secured, LLC
Diane Schumaker-Krieg,
Research, Economics and Strategy
Jack S. (Sam) Elliott Jr., West Region,
Insurance Brokerage and Consulting
Wholesale Risk
David J. Weber
Wells Fargo & Company
2015 Financial Report
Financial Review
Overview
Earnings Performance
Balance Sheet Analysis
Off-Balance Sheet Arrangements
Risk Management
Capital Management
Regulatory Reform
152
3
Cash, Loan and Dividend Restrictions
153
154
162
180
182
193
4
5
6
7
8
9
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
Critical Accounting Policies
196
10
Intangible Assets
Current Accounting Developments
197
11
Deposits
Forward-Looking Statements
198
12
Short-Term Borrowings
Risk Factors
199
13
Long-Term Debt
201
14
Guarantees, Pledged Assets and Collateral
Controls and Procedures
206
15
Legal Actions
Disclosure Controls and Procedures
208
16
Derivatives
Internal Control Over Financial Reporting
Management's Report on Internal Control over
Financial Reporting
Report of Independent Registered Public
Accounting Firm
216
17
Fair Values of Assets and Liabilities
239
18
Preferred Stock
242
19
Common Stock and Stock Plans
246
20
Employee Benefits and Other Expenses
Financial Statements
252
21
Income Taxes
Consolidated Statement of Income
Consolidated Statement of Comprehensive
Income
Consolidated Balance Sheet
Consolidated Statement of Changes in
Equity
254
22
Earnings Per Common Share
255
23
Other Comprehensive Income
257
24
Operating Segments
259
25
Parent-Only Financial Statements
Consolidated Statement of Cash Flows
262
26
Regulatory and Agency Capital Requirements
30
34
53
56
58
102
108
110
114
115
117
131
131
131
132
133
134
135
136
140
Notes to Financial Statements
Summary of Significant Accounting Policies
Business Combinations
141
151
1
2
263
264
266
Report of Independent Registered
Public Accounting Firm
Quarterly Financial Data
Glossary of Acronyms
Wells Fargo & Company
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, 2015
(2015 Form 10-K).
When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries
(consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. When we refer to “legacy Wells Fargo,” we mean
Wells Fargo excluding Wachovia Corporation (Wachovia). See the Glossary of Acronyms for terms used throughout this Report.
Financial Review
Overview
Wells Fargo & Company is a diversified, community-based
financial services company with $1.8 trillion in assets. Founded
in 1852 and headquartered in San Francisco, we provide
banking, insurance, investments, mortgage, and consumer and
commercial finance through 8,700 locations, 13,000 ATMs, the
internet (wellsfargo.com) and mobile banking, and we have
offices in 36 countries to support our customers who conduct
business in the global economy. With approximately 265,000
active, full-time equivalent team members, we serve one in three
households in the United States and ranked No. 30 on
Fortune’s 2015 rankings of America’s largest corporations. We
ranked third in assets and first in the market value of our
common stock among all U.S. banks at December 31, 2015.
We use our Vision and Values to guide us toward growth
and success. Our vision is to satisfy 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. We aspire to create deep and
enduring relationships with our customers by providing them
with an exceptional experience and by discovering their needs
and delivering the most relevant products, services, advice, and
guidance.
We have five primary values, which are based on our vision
and provide the foundation for everything we do. First, we value
and support our people as a competitive advantage and strive to
attract, develop, retain and motivate the most talented people we
can find. Second, we strive for the highest ethical standards with
our team members, our customers, our communities and our
shareholders. Third, with respect to our customers, we strive to
base our decisions and actions on what is right for them in
everything we do. Fourth, for team members we strive to build
and sustain a diverse and inclusive culture – one where they feel
valued and respected for who they are as well as for the skills and
experiences they bring to our company. Fifth, we also look to
each of our team members to be leaders in establishing, sharing
and communicating our vision. In addition to our five primary
values, one of our key day-to-day priorities is to make risk
management a competitive advantage by working hard to ensure
appropriate controls are in place to reduce risks to our
customers, maintain and increase our competitive market
position, and protect Wells Fargo’s long-term safety, soundness
and reputation.
Financial Performance
In 2015, we generated $22.9 billion of net income and record
diluted earnings per common share (EPS) of $4.12 and ended
the year as the world's most valuable bank by market
capitalization. We produced strong loan and deposit growth,
grew the number of customers we serve, improved credit quality,
enhanced our risk management practices, increased our capital
and liquidity levels and rewarded our shareholders by increasing
our dividend and continuing to repurchase shares of our
common stock. Our achievements during 2015 continued to
demonstrate the benefit of our diversified business model and
our continued focus on the real economy. Our contribution to
the real economy in 2015 was broad based and included
originating $213.2 billion in residential mortgage loans,
$31.1 billion of auto loans, $18.8 billion in new loan
commitments to our small business customers, who primarily
have less than $20 million in annual revenue, and $34.4 billion
of middle market loans.
•
•
•
•
•
•
•
•
Noteworthy items included:
revenue of $86.1 billion, up 2% from 2014;
pre-tax pre-provision profit (PTPP) of $36.1 billion, up 2%;
an increase in loans of $54.0 billion, up 6%, even with the
planned runoff in our non-strategic/liquidating portfolios,
and growth in our core loan portfolio of $62.8 billion, up
8%;
strong customer deposit growth generated by our deposit
franchise, with total deposits up $55.0 billion, or 5%;
strong credit performance as our net charge-off ratio
declined to 33 basis points of average loans;
loan loss allowance releases declined from $1.6 billion in
2014 to $450 million in 2015;
strengthening our capital levels as our Common Equity
Tier I ratio (fully phased-in) was 10.77%; and
returning $12.6 billion in capital to our shareholders, our
5th consecutive year of increased returns, through increased
common stock dividends and additional net share
repurchases.
Balance Sheet and Liquidity
Our balance sheet grew 6% in 2015 to $1.8 trillion, as we
increased our liquidity position, improved the quality of our
assets and held more capital. We grew deposits by 5% while
reducing our deposit costs by two basis points. We also grew our
loans each quarter on a year-over-year basis to end 2015 with
our 18th consecutive quarter of growth (for the past 15 quarters
year-over-year loan growth has been 3% or greater) despite the
planned runoff from our non-strategic/liquidating portfolios.
Our non-strategic/liquidating loan portfolios decreased
$8.8 billion during the year (to less than 6% of total loans) and
30
Wells Fargo & Company
our core loan portfolios increased $62.8 billion from the prior
year. Our core loan portfolio growth included $11.5 billion from
the GE Capital commercial real estate loan purchase and related
financing transaction announced in first quarter 2015. We grew
our investment securities portfolio by $34.6 billion in 2015 and
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 $11.7 billion,
or 5%, during the year. While we believe our liquidity position
continued to remain strong with increased regulatory
expectations, we have added to our position over the past year.
The strength of our balance sheet during 2015 positioned us
for the agreement we announced in third quarter 2015 to
purchase GE Capital's Commercial Distribution Finance and
Vendor Finance businesses as well as a portion of its Corporate
Finance business – an acquisition that will help us serve more
markets and meet more of our customers' financial needs. The
acquisition is expected to include total assets of approximately
$31 billion and is expected to close in two phases. The North
American portion, which represents approximately 90% of total
assets to be acquired, is expected to close late in first quarter
2016. The international portion is expected to close in second
quarter 2016. Also, in January 2016 we closed our purchase of
GE Railcar Services, which included $4.0 billion of operating
and capital leases, comprised of 77,000 railcars and just over
1,000 locomotives that were added to our existing First Union
Rail business. During fourth quarter 2015 we issued long-term
debt to partially fund the anticipated closing of these GE Capital
acquisitions.
Deposit growth remained strong with period-end deposits
up $55.0 billion from 2014. This increase reflected solid growth
across both our commercial and consumer businesses. We grew
our primary consumer checking customers by 5.6% and primary
small business and business banking checking customers by
4.8% from a year ago (November 2015 compared with November
2014). Our ability to grow primary customers is important to our
results because these customers have more interactions with us
and are significantly more profitable than non-primary
customers.
Credit Quality
Credit quality remained strong in 2015, demonstrating the
benefit of our diversified loan portfolio. Solid performance in
several of our commercial and consumer loan portfolios was
evidenced by losses remaining near historically low levels,
reflecting our long-term risk focus. Net charge-offs of
$2.9 billion were 0.33% of average loans, down 2 basis points
from a year ago. Net losses in our commercial portfolio were
$387 million, or 9 basis points of average loans. Net consumer
losses declined to 55 basis points in 2015 from 65 basis points in
2014. Our commercial real estate portfolios were in a net
recovery position for each quarter of the last three years,
reflecting our conservative risk discipline and improved market
conditions. Losses on our consumer real estate portfolios
declined $497 million, or 44%, from a year ago. The consumer
loss levels reflected the benefit of the improving housing market
and our continued focus on originating high quality loans.
Approximately 67% of the consumer first mortgage portfolio was
originated after 2008, when new underwriting standards were
implemented.
Our provision for credit losses in 2015 was $2.4 billion
compared with $1.4 billion a year ago reflecting a release of
$450 million from the allowance for credit losses, compared with
a release of $1.6 billion a year ago. We did not release or build
our allowance in the last half of 2015 as the credit improvement
in our residential real estate portfolios was offset by higher
commercial allowance reflecting deterioration in our oil and gas
portfolio. Total loans in the oil and gas portfolio were down 6%
from a year ago and are now less than 2% of our total loans
outstanding. Approximately $1.2 billion of the allowance at
December 31, 2015 was allocated to our oil and gas portfolio;
however the entire allowance is available to absorb credit losses
inherent in the total loan portfolio. If oil prices remain low for a
prolonged period of time, there could be additional performance
deterioration in our oil and gas portfolio resulting in higher
criticized assets, nonperforming loans, allowance levels and
ultimately credit losses. Deteriorated performance can take the
form of increased downgrades, borrower defaults, potentially
higher commitment drawdowns prior to default, and
downgraded borrowers being unable to fully access the capital
markets. Furthermore, our loan exposure in communities where
the employment base has a concentration in the oil and gas
sector may experience some credit challenges.
Future allowance levels may increase or decrease based on a
variety of factors, including loan growth, portfolio performance
and general economic conditions.
In addition to lower net charge-offs, nonperforming assets
(NPAs) through the end of 2015 have declined for 13 consecutive
quarters and were down $2.7 billion, or 17%, from 2014.
Nonaccrual loans declined $1.5 billion from the prior year while
foreclosed assets were down $1.2 billion from 2014.
Capital
Our capital levels remained strong in 2015, even as we returned
more capital to our shareholders, with total equity increasing to
$193.9 billion at December 31, 2015, up $8.6 billion from the
prior year. We returned $12.6 billion to shareholders in 2015
($12.5 billion in 2014) through common stock dividends and net
share repurchases and our net payout ratio (which is the ratio of
(i) common stock dividends and share repurchases less
issuances and stock compensation-related items, divided by (ii)
net income applicable to common stock) was 59%. During 2015
we increased our quarterly common stock dividend by 7% to
$0.375 per share. In 2015, our common shares outstanding
declined by 78.2 million shares as we continued to reduce our
common share count through the repurchase of 163.4 million
common shares during the year. We also entered into a
$500 million forward repurchase contract with an unrelated
third party in December 2015 that settled in January 2016 for
9.2 million shares. In addition, we entered into a $750 million
forward repurchase contract with an unrelated third party in
January 2016 that settled in first quarter 2016 for 15.9 million
shares. We expect our share count to continue to decline in 2016
as a result of anticipated net share repurchases.
We believe an important measure of our capital strength is
the Common Equity Tier 1 ratio on a fully phased-in basis, which
increased to 10.77% in 2015 from 10.43% a year ago. Likewise,
our other regulatory capital ratios remained strong. See the
“Capital Management” section in this Report for more
information regarding our capital, including the calculation of
our regulatory capital amounts.
Wells Fargo & Company
31
—
—
—
(31)
—
13
5
13
13
13
49
15
4
(13)
1
7
8
5
9
(10)
9
Overview (continued)
Table 1: Six-Year Summary of Selected Financial Data
2015
2014
2013
2012
2011
2010
%
Change
2015/
2014
Five-year
compound
growth
rate
(in millions, except per share
amounts)
Income statement
Net interest income
Noninterest income
Revenue
Provision for credit losses
Net income before noncontrolling
interests
Less: Net income from
noncontrolling interests
Noninterest expense
49,974
49,037
48,842
$ 45,301
40,756
86,057
2,442
43,527
40,820
84,347
1,395
42,800
40,980
83,780
2,309
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
4%
—
2
75
2
23,276
23,608
22,224
19,368
16,211
12,663
(1)
382
551
346
471
342
301
Wells Fargo net income
22,894
23,057
21,878
18,897
15,869
12,362
Earnings per common share
Diluted earnings per common share
4.18
4.12
4.17
4.10
3.95
3.89
3.40
3.36
2.85
2.82
2.23
2.21
Dividends declared per common
share
Balance sheet (at year end)
1.475
1.350
1.150
0.880
0.480
0.200
(31)
(1)
—
—
9
Investment securities
$ 347,555
312,925
264,353
235,199
222,613
172,654
11%
Loans
916,559
862,551
822,286
798,351
769,631
757,267
Allowance for loan losses
Goodwill
Assets
Deposits
11,545
25,529
12,319
25,705
14,502
25,637
17,060
25,637
19,372
25,115
23,022
24,770
1,787,632
1,687,155
1,523,502
1,421,746
1,313,867
1,258,128
1,223,312
1,168,310
1,079,177
1,002,835
920,070
847,942
Long-term debt
199,536
183,943
152,998
127,379
125,354
156,983
Wells Fargo stockholders' equity
192,998
184,394
170,142
157,554
140,241
126,408
Noncontrolling interests
893
868
866
1,357
1,446
1,481
Total equity
193,891
185,262
171,008
158,911
141,687
127,889
6
(6)
(1)
6
5
8
5
3
5
32
Wells Fargo & Company
Table 2: Ratios and Per Common Share Data
Profitability ratios
Wells Fargo net income to average assets (ROA)
1.31%
1.45
1.51
Wells Fargo net income applicable to common stock to average Wells Fargo common
Year ended December 31,
2015
2014
2013
stockholders' equity (ROE)
Efficiency ratio (1)
Capital ratios (2)(3)
At year end:
Wells Fargo common stockholders' equity to assets
Total equity to assets
Risk-based capital:
Common Equity Tier 1
Tier 1 capital
Total capital
Tier 1 leverage
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
12.60
58.1
9.62
10.85
11.07
12.63
15.45
9.37
9.78
10.99
35.8
$
33.78
58.77
47.75
54.36
13.41
58.1
9.86
10.98
11.04
12.45
15.53
9.45
10.22
11.32
32.9
32.19
55.95
44.17
54.82
13.87
58.3
10.17
11.22
10.82
12.33
15.43
9.60
10.41
11.41
29.6
29.48
45.64
34.43
45.40
(1)
(2)
(3)
(4)
(5)
The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
The risk-based capital ratios presented at December 31, 2015, were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III
with Transition Requirements. Accordingly, the total capital ratio was calculated under the Advanced Approach and the other ratios were calculated under the Standardized
Approach. The risk-based capital ratios were calculated under the Basel III General Approach at December 31, 2014, and under Basel I at December 31, 2013.
See the "Capital Management" section and Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
Dividends declared per common share as a percentage of diluted earnings per common share.
Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
Wells Fargo & Company
33
Earnings Performance
Wells Fargo net income for 2015 was $22.9 billion ($4.12 diluted
earnings per common share), compared with $23.1 billion
($4.10 diluted per share) for 2014 and $21.9 billion
($3.89 diluted per share) for 2013. Our 2015 earnings reflected
continued strong execution of our business strategy as well as
growth in many of our businesses. Our financial performance in
2015 benefited from a $1.8 billion increase in net interest
income, which was offset by a $1.0 billion increase in our
provision for credit losses and a $937 million increase in
noninterest expense.
Revenue, the sum of net interest income and noninterest
income, was $86.1 billion in 2015, compared with $84.3 billion
in 2014 and $83.8 billion in 2013. The increase in revenue for
2015 compared with 2014 was predominantly due to an increase
in net interest income, reflecting increases in income from
trading assets, investment securities, and loans. Our diversified
sources of revenue generated by our businesses continued to be
balanced between net interest income and noninterest income.
In 2015, net interest income of $45.3 billion represented 53% of
revenue, compared with $43.5 billion (52%) in 2014 and
$42.8 billion (51%) in 2013.
Noninterest income was $40.8 billion in 2015, representing
47% of revenue, compared with $40.8 billion (48%) in 2014 and
$41.0 billion (49%) in 2013. Noninterest income was relatively
stable in 2015 compared with a year ago, reflecting our
continued ability to generate fee income despite fluctuations in
market sensitive revenue.
Noninterest expense was $50.0 billion in 2015, compared
with $49.0 billion in 2014 and $48.8 billion in 2013. The
increase in noninterest expense in 2015, compared with 2014,
reflected higher compensation expense and operating losses.
Noninterest expense as a percentage of revenue (efficiency ratio)
was 58.1% in 2015, 58.1% in 2014 and 58.3% in 2013, reflecting
our expense management efforts.
Table 3 presents the components of revenue and noninterest
expense as a percentage of revenue for year-over-year results.
34
Wells Fargo & Company
Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
(in millions)
Interest income (on a taxable equivalent basis)
Trading assets
Investment securities
Mortgages held for sale (MHFS)
Loans held for sale (LHFS)
Loans
Other interest income
Total interest income (on a taxable equivalent basis)
$
Interest expense
Deposits
Short-term borrowings
Long-term debt
Other interest expense
Total interest expense
Net interest income (on a taxable-equivalent basis)
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
Total noninterest income (B)
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
Revenue (A) + (B)
2015
% of
revenue
2014
% of
revenue
2013
% of
revenue
Year ended December 31,
2,010
9,906
785
19
36,663
990
50,373
963
64
2,592
357
3,976
46,397
(1,096)
45,301
5,168
14,468
3,720
4,324
6,501
1,694
614
952
2,230
621
464
40,756
15,883
10,352
4,446
2,063
2,886
1,246
973
12,125
49,974
2% $
12
1
—
43
1
59
1
—
4
—
5
54
(1)
53
6
16
4
5
7
2
1
1
3
1
1
47
19
12
5
2
3
1
1
15
58
1,712
9,253
767
78
35,715
932
48,457
1,096
62
2,488
382
4,028
44,429
(902)
43,527
5,050
14,280
3,431
4,349
6,381
1,655
1,161
593
2,380
526
1,014
2% $
11
1
—
42
1
57
1
—
3
—
4
53
(1)
52
6
17
4
5
8
2
1
1
3
1
1
1,406
8,841
1,290
13
35,618
724
47,892
1,337
71
2,585
307
4,300
43,592
(792)
42,800
5,023
13,430
3,191
4,340
8,774
1,814
1,623
(29)
1,472
663
679
40,820
48
40,980
15,375
9,970
4,597
1,973
2,925
1,370
928
11,899
49,037
18
12
5
2
3
2
1
14
58
15,152
9,951
5,033
1,984
2,895
1,504
961
11,362
48,842
2%
11
2
—
43
1
57
2
—
3
—
5
52
(1)
51
6
16
4
5
10
2
2
—
2
1
1
49
18
12
6
2
3
2
1
14
58
$
86,057
$
84,347
$
83,780
(1) See Table 7 – Noninterest Income in this Report for additional detail.
(2) See Table 8 – Noninterest Expense in this Report for additional detail.
Wells Fargo & Company
35
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 $142.4 billion in 2015
from a year ago, as average investment securities increased
$55.1 billion and average federal funds sold and other short-term
investments increased $25.6 billion for the same period,
respectively. In addition, average loans increased $51.0 billion in
2015, compared with a year ago.
Deposits are an important low-cost source of funding and
affect both net interest income and the net interest margin.
Deposits include noninterest-bearing deposits, interest-bearing
checking, market rate and other savings, savings certificates,
other time deposits, and deposits in foreign offices. Average
deposits rose to $1.2 trillion in 2015, compared with $1.1 trillion
in 2014, and funded 135% of average loans compared with 134%
a year ago. Average deposits decreased to 76% of average earning
assets in 2015, compared with 78% 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.
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 2015, are
analyzed in Table 6.
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.
Net interest income on a taxable-equivalent basis was
$46.4 billion in 2015, compared with $44.4 billion in 2014, and
$43.6 billion in 2013. The net interest margin was 2.95% in
2015, down 16 basis points from 3.11% in 2014, which was down
29 basis points from 3.40% in 2013. The increase in net interest
income for 2015, compared with 2014, was primarily driven by
loan growth, the benefit of swapping a portion of our variable
rate commercial loans to fixed rate, securities purchases, higher
trading balances, and reduced deposit costs. Strong growth in
commercial loans, retained first lien real estate loans and credit
cards contributed to higher net interest income as originations
more than replaced runoff in the non-strategic/liquidating
portfolios. This increase was partially offset by the impact of
increased interest expense on higher long-term debt balances
and reduced interest income from loans held for sale (LHFS)
following the sale of substantially all of the government
guaranteed student loan portfolio in 2014. Funding costs in 2015
remained relatively flat compared with 2014 due to lower
deposit costs as a result of disciplined pricing, partially offset by
increased long-term debt interest expense. The decline in net
interest margin in 2015, compared with 2014, was primarily due
to customer-driven deposit growth and higher long-term debt
balances, partially offset by growth in loans and securities. The
growth in customer-driven deposits and funding balances during
2015 kept cash, federal funds sold, and other short-term
investments elevated, which diluted net interest margin but was
essentially neutral to net interest income. During fourth quarter
2015, we issued long-term debt to partially fund the previously
announced acquisition of certain commercial lending businesses
and assets from GE Capital, with the majority of assets
anticipated to close in first quarter 2016.
36
Wells Fargo & Company
Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earnings Assets
Year ended December 31,
(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 - U.S.
Commercial and industrial - Non U.S.
Real estate mortgage
Real estate construction
Lease financing
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 (1)
Other
Total earning assets
Funding sources
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
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.
Average
balance
266,832
66,679
32,093
47,404
100,218
22,490
122,708
49,752
251,957
74,048
21,603
573
237,844
46,028
116,893
20,979
12,301
434,045
268,560
56,242
31,307
57,766
37,512
451,387
885,432
4,947
2015
% of
earning
assets
Average
balance
17%
$
241,282
4
2
3
6
2
8
3
16
5
2
—
15
3
7
1
1
27
17
4
2
4
2
29
56
—
55,140
10,400
43,138
114,076
26,475
140,551
47,488
241,577
29,319
19,018
4,226
204,819
42,661
112,710
17,676
12,257
390,123
261,620
62,510
27,491
53,854
38,834
444,309
834,432
4,673
2014
% of
earning
assets
17%
4
1
3
8
2
10
3
17
2
2
—
14
3
8
1
1
27
18
4
2
4
3
31
58
—
$
1,572,071
100%
$
1,429,667
100%
$
38,640
625,549
31,887
51,790
107,138
855,004
87,465
185,078
16,545
1,144,092
427,979
2%
$
40
2
3
7
54
6
12
1
73
27
39,729
585,854
38,111
51,434
95,889
811,017
60,111
167,420
14,401
1,052,949
376,718
3%
41
3
3
7
57
4
12
1
74
26
$
1,572,071
100%
$
1,429,667
100%
$
$
$
$
$
17,327
25,673
127,848
170,848
339,069
68,174
191,584
(427,979)
170,848
1,742,919
16,361
25,687
121,634
163,682
303,127
56,985
180,288
(376,718)
163,682
1,593,349
Wells Fargo & Company
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
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:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Federal agency mortgage-backed securities
Other debt securities
Held-to-maturity securities
Total investment securities
Mortgages held for sale (4)
Loans held for sale (4)
Loans:
Commercial:
Commercial and industrial - U.S.
Commercial and industrial - non U.S.
Real estate mortgage
Real estate construction
Lease financing
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 (4)
Other
Average
balance
Yields/
rates
2015
Interest
income/
expense
Average
balance
Yields/
rates
2014
Interest
income/
expense
$
266,832
0.28% $
66,679
3.01
32,093
47,404
100,218
22,490
122,708
49,752
251,957
44,173
2,087
21,967
5,821
74,048
326,005
21,603
573
237,844
46,028
116,893
20,979
12,301
434,045
268,560
56,242
31,307
57,766
37,512
451,387
885,432
4,947
1.58
4.23
2.73
5.73
3.28
3.42
3.27
2.19
5.40
2.23
1.73
2.26
3.04
3.63
3.25
3.29
1.90
3.41
3.57
4.70
3.23
4.10
4.25
11.70
5.84
5.89
5.02
4.14
5.11
738
2,010
505
2,007
2,733
1,289
4,022
1,701
8,235
968
113
489
101
1,671
9,906
785
19
7,836
877
3,984
749
577
14,023
11,002
2,391
3,664
3,374
2,209
22,640
36,663
252
241,282
55,140
10,400
43,138
114,076
26,475
140,551
47,488
241,577
17,239
246
5,921
5,913
29,319
270,896
19,018
4,226
204,819
42,661
112,710
17,676
12,257
390,123
261,620
62,510
27,491
53,854
38,834
444,309
834,432
4,673
0.28% $
3.10
673
1,712
1.64
4.29
2.84
6.03
3.44
3.66
3.56
2.23
4.93
2.55
1.85
2.24
3.42
4.03
1.85
3.35
2.03
3.64
4.21
5.63
3.40
4.19
4.30
11.98
6.27
5.48
5.05
4.28
5.54
171
1,852
3,235
1,597
4,832
1,741
8,596
385
12
151
109
657
9,253
767
78
6,869
867
4,100
744
690
13,270
10,961
2,686
3,294
3,377
2,127
22,445
35,715
259
Total earning assets
$ 1,572,071
3.20% $
50,373
1,429,667
3.39% $
48,457
Funding sources
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
Total interest-bearing liabilities
Portion of noninterest-bearing funding sources
Total funding sources
Net interest margin and net interest income on a taxable-
equivalent basis (5)
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
$
38,640
625,549
31,887
51,790
107,138
855,004
87,465
185,078
16,545
1,144,092
427,979
$ 1,572,071
$
17,327
25,673
127,848
$
170,848
$
339,069
68,174
191,584
(427,979)
$
170,848
$ 1,742,919
0.05% $
0.06
0.63
0.45
0.13
0.11
0.07
1.40
2.15
0.35
—
0.25
20
367
201
232
143
963
64
2,592
357
3,976
—
3,976
39,729
585,854
38,111
51,434
95,889
811,017
60,111
167,420
14,401
1,052,949
376,718
1,429,667
0.07% $
0.07
0.85
0.40
0.14
0.14
0.10
1.49
2.65
0.38
—
0.28
26
403
323
207
137
1,096
62
2,488
382
4,028
—
4,028
2.95% $
46,397
3.11% $
44,429
16,361
25,687
121,634
163,682
303,127
56,985
180,288
(376,718)
163,682
1,593,349
(1)
Our average prime rate was 3.26% for the year ended December 31, 2015, and 3.25% for the years ended December 31, 2014, 2013, 2012, and 2011, respectively. The
average three-month London Interbank Offered Rate (LIBOR) was 0.32%, 0.23%, 0.27%, 0.43%, and 0.34% for the same years, respectively.
Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
Wells Fargo & Company
(2)
38
Average
balance
Yields/
rates
$
154,902
0.32% $
44,745
3.14
6,750
39,922
107,148
30,717
137,865
55,002
239,539
—
—
701
16
717
240,256
35,273
163
185,813
40,987
107,316
16,537
12,373
363,026
254,012
70,264
24,757
48,476
42,135
439,644
802,670
4,354
1.66
4.38
2.83
6.47
3.64
3.53
3.68
—
—
3.09
1.99
3.06
3.68
3.66
7.95
3.66
2.03
3.94
4.76
6.10
3.70
4.22
4.29
12.46
6.94
4.80
5.05
4.44
5.39
2013
Interest
income/
expense
489
1,406
112
1,748
3,031
1,988
5,019
1,940
8,819
—
—
22
—
22
8,841
1,290
13
6,807
832
4,233
787
755
13,414
10,717
3,014
3,084
3,365
2,024
22,204
35,618
235
Average
balance
Yields/
rates
84,081
41,950
3,604
34,875
92,887
33,545
126,432
49,245
214,156
—
—
—
—
—
214,156
48,955
661
173,913
38,838
105,492
18,047
13,067
349,357
235,011
80,887
22,809
44,986
42,174
425,867
775,224
4,438
0.45% $
3.29
1.31
4.48
3.12
6.75
4.08
4.04
4.09
—
—
—
—
—
4.09
3.73
6.22
4.01
2.34
4.19
4.97
7.18
4.05
4.55
4.28
12.68
7.54
4.57
5.25
4.71
4.70
2012
Interest
income/
expense
378
1,380
47
1,561
2,893
2,264
5,157
1,992
8,757
—
—
—
—
—
8,757
1,825
41
6,981
910
4,416
897
939
14,143
10,704
3,460
2,892
3,390
1,928
22,374
36,517
209
Average
balance
Yields/
rates
87,186
39,737
5,503
24,035
74,665
31,902
106,567
38,625
174,730
—
—
—
—
—
174,730
37,232
1,104
157,608
35,042
102,320
21,672
13,223
329,865
227,676
90,755
21,556
43,834
43,458
427,279
757,144
4,929
0.40% $
3.68
1.25
5.09
4.36
8.20
5.51
5.03
5.21
—
—
—
—
—
5.21
4.42
5.25
4.37
2.13
4.07
4.88
7.52
4.20
4.90
4.33
13.04
8.14
4.56
5.49
4.93
4.12
2011
Interest
income/
expense
345
1,463
69
1,223
3,257
2,617
5,874
1,941
9,107
—
—
—
—
—
9,107
1,644
58
6,894
745
4,167
1,057
994
13,857
11,156
3,930
2,811
3,568
1,980
23,445
37,302
203
$
1,282,363
3.73% $
47,892
1,169,465
4.20% $
49,107
1,102,062
4.55% $
50,122
$
35,570
550,394
49,510
28,090
76,894
740,458
54,716
134,937
12,471
942,582
339,781
$
1,282,363
$
$
$
16,272
25,637
121,711
163,620
280,229
58,178
164,994
(339,781)
$
$
163,620
1,445,983
0.06% $
0.08
1.13
0.69
0.15
0.18
0.13
1.92
2.46
0.46
—
0.33
22
450
559
194
112
1,337
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
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
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
3.40% $
43,592
3.76% $
43,931
3.94% $
43,459
16,303
25,417
130,450
172,170
263,863
61,214
151,142
(304,049)
172,170
1,341,635
17,388
24,904
125,911
168,203
215,242
57,399
137,251
(241,689)
168,203
1,270,265
The average balance amounts represent amortized cost for the periods presented.
Nonaccrual loans and related income are included in their respective loan categories.
(3)
(4)
(5)
Includes taxable-equivalent adjustments of $1.1 billion, $902 million, $792 million, $701 million and $696 million for 2015, 2014, 2013, 2012 and 2011, respectively,
primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.
Wells Fargo & Company
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
Table 6: Analysis of Changes of Net Interest Income
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.
(in millions)
Volume
Rate
Total
Volume
Rate
Total
Increase (decrease) in interest income:
Federal funds sold, securities purchased under resale agreements and
2015 over 2014
Year ended December 31,
2014 over 2013
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:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Federal agency mortgage-backed securities
Other debt securities
Total held-to-maturity securities
Mortgages held for sale
Loans held for sale
Loans:
Commercial:
Commercial and industrial - U.S.
Commercial and industrial - non U.S.
Real estate mortgage
Real estate construction
Lease financing
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
Other
Total increase (decrease) in interest income
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
Total increase (decrease) in interest expense
Increase (decrease) in net interest income on a taxable-equivalent
basis
$
65
349
340
181
(381)
(232)
(613)
79
(13)
590
100
359
(2)
1,047
98
(95)
1,092
66
149
127
2
1,436
283
(265)
448
237
(74)
629
2,065
14
3,530
(1)
26
(47)
1
16
(5)
23
258
52
328
—
(51)
(6)
(26)
(121)
(76)
(197)
(119)
(348)
(7)
1
(21)
(6)
(33)
(80)
36
(125)
(56)
(265)
(122)
(115)
(683)
(242)
(30)
(78)
(240)
156
(434)
(1,117)
(21)
65
298
334
155
(502)
(308)
(810)
(40)
(361)
583
101
338
(8)
1,014
18
(59)
967
10
(116)
5
(113)
753
41
(295)
370
(3)
82
195
948
(7)
(1,614)
1,916
(5)
(62)
(75)
24
(10)
(128)
(21)
(154)
(77)
(380)
(6)
(36)
(122)
25
6
(133)
2
104
(25)
(52)
252
324
60
140
193
(262)
(69)
(270)
(139)
385
12
137
109
643
(643)
82
664
35
203
52
(7)
947
320
(335)
332
354
(167)
504
1,451
17
1,987
2
21
(114)
117
32
58
7
551
50
666
$
3,202
(1,234)
1,968
1,321
(68)
(18)
(1)
(36)
11
(129)
(118)
71
(84)
—
—
(8)
—
(8)
120
(17)
(602)
—
(336)
(95)
(58)
(1,091)
(76)
7
(122)
(342)
270
(263)
(1,354)
7
(1,422)
2
(68)
(122)
(104)
(7)
(299)
(16)
(648)
25
(938)
(484)
184
306
59
104
204
(391)
(187)
(199)
(223)
385
12
129
109
635
(523)
65
62
35
(133)
(43)
(65)
(144)
244
(328)
210
12
103
241
97
24
565
4
(47)
(236)
13
25
(241)
(9)
(97)
75
(272)
837
40
Wells Fargo & Company
Noninterest Income
Table 7: Noninterest Income
(in millions)
2015
Service charges on deposit accounts
$
5,168
Trust and investment fees:
Brokerage advisory, commissions
and other fees
Trust and investment management
Investment banking
9,435
3,394
1,639
Total trust and investment fees
14,468
Card fees
Other fees:
3,720
Y
ear ended Dec
ember 31,
2014
5,050
2013
5,023
9,183
3,387
1,710
14,280
3,431
8,395
3,289
1,746
13,430
3,191
Charges and fees on loans
1,228
1,316
1,540
Merchant processing fees (1)
Cash network fees
Commercial real estate
brokerage commissions
Letters of credit fees
All other fees
Total other fees
Mortgage banking:
607
522
618
353
996
726
507
469
390
941
669
493
338
410
890
4,324
4,349
4,340
Servicing income, net
2,441
3,337
1,920
Net gains on mortgage loan
origination/sales activities
Total mortgage banking
Insurance
Net gains from trading activities
Net gains (losses) on debt securities
Net gains from equity investments
Lease income
Life insurance investment income
All other (1)
4,060
6,501
1,694
614
952
2,230
621
579
(115)
3,044
6,381
1,655
1,161
593
2,380
526
558
456
6,854
8,774
1,814
1,623
(29)
1,472
663
566
113
Total
$ 40,756
40,820
40,980
(1)
Reflects deconsolidation of the Company's merchant services joint venture in
fourth quarter 2015. The Company's proportionate share of earnings is now
reflected in all other income.
Noninterest income of $40.8 billion represented 47% of revenue
for 2015, compared with $40.8 billion, or 48%, for 2014 and
$41.0 billion, or 49%, for 2013. The small decline in noninterest
income in 2015 was primarily driven by lower gains from trading
activity and all other income, mostly offset by growth in many of
our businesses, including credit and debit cards, mortgage,
commercial banking, commercial real estate brokerage, multi-
family capital, reinsurance, municipal products, and retail
brokerage. The decrease in noninterest income in 2014
compared with 2013 was primarily due to a decline in mortgage
banking, partially offset by growth in many of our other
businesses.
Service charges on deposit accounts were $5.2 billion in
2015, up from $5.1 billion in 2014 due to account growth, higher
commercial deposit product sales and commercial deposit
product re-pricing, partially offset by lower overdraft fees driven
by changes we implemented in early October 2014. Service
charges on deposits increased $27 million in 2014 from 2013 due
to account growth, new commercial deposit product sales and
commercial deposit product re-pricing, partially offset by lower
overdraft fees driven by changes we implemented in early
October 2014 designed to provide customers with more real time
information to manage their deposit accounts and avoid
overdrafts.
Brokerage advisory, commissions and other fees are
received for providing full-service and discount brokerage
services predominantly to retail brokerage clients. Income from
these brokerage-related activities include asset-based fees for
advisory accounts, which are based on the market value of the
client’s assets, and transactional commissions based on the
number and size of transactions executed at the client’s
direction. These fees increased to $9.4 billion in 2015, from
$9.2 billion and $8.4 billion in 2014 and 2013, respectively. The
increase in these fees for 2015 was primarily due to growth in
asset-based fees driven by higher average advisory account
assets in 2015 than 2014. The increase for 2014 was
predominantly due to higher asset-based fees as a result of
higher market values and growth in advisory account assets.
Retail brokerage client assets totaled $1.39 trillion at
December 31, 2015, compared with $1.42 trillion and
$1.36 trillion at December 31, 2014 and 2013, respectively, with
all retail brokerage services provided by our Wealth and
Investment Management (WIM) operating segment. For
additional information on retail brokerage client assets, see the
discussion and Tables 9d and 9e in the "Operating Segment
Results – Wealth and Investment Management – Retail
Brokerage Client Assets" section in this Report.
We earn trust and investment management fees from
managing and administering assets, including mutual funds,
institutional separate accounts, corporate trust, personal trust,
employee benefit trust and agency assets. Trust and investment
management fee income is predominantly from client assets
under management (AUM) for which the fees are determined
based on a tiered scale relative to the market value of the AUM.
AUM consists of assets for which we have investment
management discretion. Our AUM totaled $653.4 billion at
December 31, 2015, compared with $661.6 billion and
$647.2 billion at December 31, 2014 and 2013, respectively, with
substantially all of our AUM managed by our WIM operating
segment. Additional information regarding our WIM operating
segment AUM is provided in Table 9f and the related discussion
in the "Operating Segment Results – Wealth and Investment
Management – Trust and Investment Client Assets Under
Management" section in this Report. In addition to AUM we
have client assets under administration (AUA) that earn various
administrative fees which are generally based on the extent of
the services provided to administer the account. Our AUA
totaled $1.4 trillion at December 31, 2015, compared with
$1.5 trillion and $1.4 trillion at December 31, 2014 and 2013,
respectively. Trust and investment management fees of
$3.4 billion in 2015 remained stable compared with 2014, but
increased $98 million in 2014 compared with 2013, substantially
due to growth in AUM reflecting higher market values.
We earn investment banking fees from underwriting debt
and equity securities, arranging loan syndications, and
performing other related advisory services. Investment banking
fees decreased to $1.6 billion in 2015 from $1.7 billion in 2014,
driven by reductions in equity capital markets and loan
syndications partially offset by increased fees in advisory
services and investment-grade debt origination. Investment
banking fees remained unchanged at $1.7 billion in 2014
compared with 2013 as higher advisory services results were
offset by lower loan syndication and origination fees.
Card fees were $3.7 billion in 2015, compared with
$3.4 billion in 2014 and $3.2 billion in 2013. Card fees increased
in 2015 and 2014 primarily due to account growth and increased
purchase activity.
Other fees of $4.3 billion in 2015 were unchanged compared
with 2014 as increases in commercial real estate brokerage
commissions were offset by lower charges and fees on loans
primarily due to the phase out of the direct deposit advance
product during the first half of 2014, and lower merchant
processing fees. The decrease in merchant processing fees
reflected deconsolidation of our merchant services joint venture
in fourth quarter 2015, which resulted in our proportionate
Wells Fargo & Company
41
Earnings Performance (continued)
share of that income now being reported in all other income.
Other fees in 2014 were unchanged compared with 2013 as a
decline in charges and fees on loans was offset by an increase in
commercial real estate brokerage commissions. Commercial real
estate brokerage commissions increased to $618 million in 2015
compared with $469 million in 2014 and $338 million in 2013,
driven by increased sales and other property-related activities
including financing and advisory services.
Mortgage banking income, consisting of net servicing
income and net gains on loan origination/sales activities, totaled
$6.5 billion in 2015, compared with $6.4 billion in 2014 and
$8.8 billion in 2013.
In addition to servicing fees, 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 $2.4 billion for 2015 included a $885 million
net MSR valuation gain ($214 million increase in the fair value
of the MSRs and a $671 million hedge gain). Net servicing
income of $3.3 billion for 2014 included a $1.4 billion net MSR
valuation gain ($2.1 billion decrease in the fair value of the MSRs
offset by a $3.5 billion hedge gain), and 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 MSRs offset by a
$2.9 billion hedge loss). The decrease in net MSR valuation
gains in 2015, compared with 2014, was primarily attributable to
lower hedge gains. The lower net MSR valuation gain in 2013,
compared with 2014, was attributable to MSR valuation
adjustments associated with higher prepayments and increases
in servicing and foreclosure costs.
Our portfolio of loans serviced for others was $1.78 trillion
at December 31, 2015, $1.86 trillion at December 31, 2014, and
$1.90 trillion at December 31, 2013. At December 31, 2015, the
ratio of MSRs to related loans serviced for others was 0.77%,
compared with 0.75% at December 31, 2014 and 0.88% at
December 31, 2013. See the “Risk Management – Asset/Liability
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
$4.1 billion in 2015, compared with $3.0 billion in 2014 and
$6.9 billion in 2013. The increase in 2015 compared to 2014 was
primarily driven by increased origination volumes and margins.
The decrease in 2014 from 2013 was primarily driven by lower
origination volume and margins. Mortgage loan originations
were $213 billion in 2015, compared with $175 billion for 2014
and $351 billion for 2013. The production margin on residential
held-for-sale mortgage originations, which represents net gains
on residential mortgage loan origination/sales activities divided
by total residential held-for-sale mortgage originations, provides
a measure of the profitability of our residential mortgage
origination activity. Table 7a presents the information used in
determining the production margin.
Table 7a: Selected Residential Mortgage Production Data
Year ended December 31,
2015
2014
2013
Net gains on mortgage
loan origination/sales
activities (in millions):
Residential
Commercial
Residential pipeline
and unsold/
repurchased loan
management (1)
(A)
$ 2,861
2,217
6,227
362
285
356
837
542
271
Total
$ 4,060
3,044
6,854
Residential real estate
originations (in
billions):
Held-for-sale
(B)
$ 155
58
$ 213
129
46
175
300
51
351
Held-for-investment
Total
Production margin on
residential held-for-
sale mortgage
originations
(A)/(B)
1.84%
1.72
2.08
(1) Primarily includes the results of GNMA loss mitigation activities, interest rate
management activities and changes in estimate to the liability for mortgage loan
repurchase losses.
The production margin was 1.84% for 2015, compared with
1.72% for 2014 and 2.08% for 2013. Mortgage applications were
$311 billion in 2015, compared with $262 billion in 2014 and
$438 billion in 2013. The 1-4 family first mortgage unclosed
pipeline was $29 billion at December 31, 2015, compared with
$26 billion at December 31, 2014 and $25 billion at
December 31, 2013. For additional information about our
mortgage banking activities and results, see the “Risk
Management – Asset/Liability 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 adjustments to the mortgage repurchase liability.
Mortgage loans are repurchased from third parties based on
standard representations and warranties, and early payment
default clauses in mortgage sale contracts. For 2015, we released
a net $159 million from the repurchase liability, compared with
a net release of $140 million for 2014 and a provision of
$428 million for 2013. 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.
42
Wells Fargo & Company
All other income was $(115) million for 2015 compared with
$456 million in 2014 and $113 million in 2013. All other income
includes ineffectiveness recognized on derivatives that qualify
for hedge accounting, the results of certain economic hedges,
losses on low-income housing tax credit investments, foreign
currency adjustments and income from investments accounted
for under the equity method, any of which can cause decreases
and net losses in other income. The decrease in other income in
2015 compared with 2014 primarily reflected changes in
ineffectiveness recognized on interest rate swaps used to hedge
our exposure to interest rate risk on long-term debt and cross-
currency swaps, cross-currency interest rate swaps and forward
contracts used to hedge our exposure to foreign currency risk
and interest rate risk involving non-U.S. dollar denominated
long-term debt. The decline in other income in 2015 resulting
from these changes in ineffectiveness was partially offset by our
proportionate share of earnings from a merchant services joint
venture that we deconsolidated in 2015. Higher other income for
2014 compared with 2013 primarily reflected larger hedge
ineffectiveness gains on derivatives that qualify for hedge
accounting, a gain on sale of government-guaranteed student
loans in fourth quarter 2014, and a gain on sale of 40 insurance
offices in second quarter 2014 partially offset by lower income
from equity method investments.
We engage in trading activities primarily to accommodate
the investment activities of our customers, and to execute
economic hedging to manage certain components of our balance
sheet risks. Net gains (losses) from trading activities, which
reflect unrealized changes in fair value of our trading positions
and realized gains and losses, were $614 million in 2015,
$1.2 billion in 2014 and $1.6 billion in 2013. The decrease in
2015 was driven by lower economic hedge income, lower trading
from customer accommodation activity, and lower deferred
compensation gains (offset in employee benefits expense). The
decrease in 2014 from 2013 was driven by lower trading from
customer accommodation activity within our capital markets
business and lower deferred compensation gains (offset in
employee benefits 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. For additional information about trading activities,
see the “Risk Management – Asset/Liability Management –
Market Risk – Trading Activities” section in this Report.
Net gains on debt and equity securities totaled $3.2 billion
for 2015 and $3.0 billion and $1.4 billion for 2014 and 2013,
respectively after other-than-temporary impairment (OTTI)
write-downs of $559 million, $322 million and $344 million,
respectively, for the same periods. The increase in OTTI write-
downs in 2015 mainly reflected deterioration in energy sector
corporate debt and nonmarketable equity investments. The
increase in net gains on debt and equity securities in 2015
compared with 2014 was due to higher net gains on debt
securities combined with continued strong equity markets
throughout the majority of 2015. The increase in net gains on
debt and equity securities in 2014 compared with 2013 reflected
the benefit of strong public and private equity markets.
Wells Fargo & Company
43
Outside professional services in 2015 were flat compared
with 2014, which was up 7% compared with 2013. Many
noninterest expense categories in 2015, including outside
professional services, reflected continued investments in our
products, technology and service delivery, as well as costs for the
heightened industry focus on regulatory compliance and
evolving cybersecurity risk.
Operating losses were up $622 million, or 50%, in 2015
compared with 2014, and up $428 million, or 52%, in 2014
compared with 2013, predominantly due to litigation expense in
each year for various legal matters.
Travel and entertainment expense was down $212 million,
or 23%, in 2015 compared with 2014, primarily driven by travel
expense reduction initiatives. Travel and entertainment expense
remained relatively stable in 2014 compared with 2013.
Foreclosed assets expense was down $202 million, or 35%,
compared with 2014, primarily driven by higher gains on sales of
foreclosed properties, lower write-downs and lower operating
expenses.
All other noninterest expense in 2015 included a
$126 million contribution to the Wells Fargo Foundation.
Our full year 2015 efficiency ratio was 58.1%, compared with
58.1% in 2014 and 58.3% in 2013. The Company expects to
operate at the higher end of its targeted efficiency ratio range of
55-59% for full year 2016.
Income Tax Expense
The 2015 annual effective tax rate was 31.2% compared with
30.9% in 2014 and 32.2% in 2013. The effective tax rate for 2015
included net reductions in reserves for uncertain tax positions
primarily due to audit resolutions of prior period matters with
U.S. federal and state taxing authorities. The effective tax rate for
2014 included a net reduction in the reserve for uncertain tax
positions primarily due to the resolution of prior period matters
with state taxing authorities. 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. See Note 21 (Income Taxes) to Financial
Statements in this Report for additional information about our
income taxes.
Earnings Performance (continued)
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
Operating losses
Outside data processing
Contract services
Postage, stationery and supplies
Travel and entertainment
Advertising and promotion
Insurance
Telecommunications
Foreclosed assets
Operating leases
All other
Total
Year ended December 31,
2015
2014
2013
$ 15,883
15,375
15,152
10,352
4,446
2,063
2,886
1,246
973
2,665
1,871
985
978
702
692
606
448
439
381
278
9,970
4,597
1,973
2,925
1,370
928
2,689
1,249
1,034
975
733
904
653
422
453
583
220
9,951
5,033
1,984
2,895
1,504
961
2,519
821
983
935
756
885
610
437
482
605
204
2,080
1,984
2,125
$ 49,974
49,037
48,842
Noninterest expense was $50.0 billion in 2015, up 2% from
$49.0 billion in 2014, which was up slightly from $48.8 billion in
2013. The increase in 2015 was driven predominantly by higher
personnel expenses ($30.7 billion, up from $29.9 billion in
2014) and higher operating losses ($1.9 billion, up from
$1.2 billion in 2014), partially offset by lower travel and
entertainment expense ($692 million, down from $904 million
in 2014) and lower foreclosed assets expense ($381 million,
down from $583 million in 2014). The increase in 2014 from
2013 was driven by higher operating losses and higher outside
professional services, partially offset by lower personnel
expenses.
Personnel expenses, which include salaries, commissions,
incentive compensation and employee benefits, were up
$739 million, or 2%, compared with 2014, due to annual salary
increases, staffing growth across various businesses, and higher
revenue-related incentive compensation. Lower employee
benefits expense was predominantly due to lower deferred
compensation expense (offset in trading revenue), partially
offset by increases in other employee benefits. Personnel
expenses were down 1% in 2014, compared with 2013, due to
lower employee benefits expense, reduced staffing and lower
volume-related compensation in our mortgage business,
partially offset by increased personnel expenses in our non-
mortgage businesses.
44
Wells Fargo & Company
Operating Segment Results
We are organized for management reporting purposes into three
operating segments: Community Banking; Wholesale Banking;
and Wealth and Investment Management (WIM) (formerly
Wealth, Brokerage and Retirement). These segments are defined
by product type and customer segment and their results are
based on our management accounting process, for which there is
no comprehensive, authoritative financial accounting guidance
equivalent to generally accepted accounting principles (GAAP).
During 2015, we realigned our asset management business from
Wholesale Banking to WIM; our reinsurance business from WIM
to Wholesale Banking; and our strategic auto investments,
business banking and merchant payment services businesses
from Community Banking to Wholesale Banking. These
realignments are part of our regular course of business as we are
always looking for ways to better align our businesses, deepen
existing customer relationships, and create a best-in-class
structure to benefit both our customers and our shareholders.
Results for these operating segments were revised for prior
periods to reflect the impact of these realignments. The following
discussion presents our methodology for measuring cross-sell
for each of our operating segments, and along with Tables 9, 9a,
9b and 9c, present our results by operating segment. For
additional financial information and the underlying
management accounting process, see Note 24 (Operating
Segments) to Financial Statements in this Report.
Table 9: Operating Segment Results – Highlights
(in millions, except average balances which are in billions)
2015
Revenue
Provision (reversal of provision) for credit losses
Net income (loss)
Average loans
Average deposits
2014
Revenue
Provision (reversal of provision) for credit losses
Net income (loss)
Average loans
Average deposits
2013
Revenue
Provision (reversal of provision) for credit losses
Net income (loss)
Average loans
Average deposits
Year ended December 31,
Community
Banking
Wholesale
Wealth and
Investment
Banking Management
Other (1)
Consolidated
Company
$
49,341
25,904
15,777
(4,965)
86,057
2,427
13,491
$
475.9
654.4
27
8,194
397.3
438.9
(25)
13
2,442
2,316
(1,107)
22,894
60.1
172.3
(47.9)
(71.5)
885.4
1,194.1
$
48,158
25,398
15,269
(4,478)
1,796
13,686
468.8
614.3
$
(382)
8,199
355.6
404.0
(50)
2,060
52.1
163.5
31
(888)
(42.1)
(67.7)
$
47,679
25,847
14,330
(4,076)
2,841
12,147
465.1
494.7
$
(521)
8,752
329.0
353.8
(16)
1,766
46.2
158.9
5
(787)
(37.6)
(65.3)
84,347
1,395
23,057
834.4
1,114.1
83,780
2,309
21,878
802.7
942.1
(1)
Includes items not assigned to a specific 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 WIM customers served through Community Banking distribution channels.
Wells Fargo & Company
45
Products included in our retail banking household cross-sell
metrics must be retail products and have the potential for
revenue generation and long-term viability. Products and
services that generally do not meet these criteria – such as ATM
cards, online banking and direct deposit – are not included. In
addition, multiple holdings by a WIM customer within an
investment category, such as common stock, mutual funds or
bonds, are counted as a single product. We may periodically
update the products included in our cross-sell metrics to
account for changes in our product offerings.
For Wholesale Banking, the cross-sell metric represents the
average number of Wholesale Banking (non-retail) products
used per Wholesale Banking customer relationship. What we
include as products in the cross-sell metric comes from a defined
set of revenue generating products within the following product
families: credit, treasury management, deposits, risk
management, foreign exchange, capital markets and advisory,
investments, insurance, trade financing, and trust and servicing.
The number of customer relationships is based on tax
identification numbers adjusted to combine those entities under
common ownership or another structure indicative of a single
relationship and includes only relationships that produced
revenue for the period of measurement.
Earnings Performance (continued)
Cross-sell We aspire to create deep and enduring relationships
with our customers by providing them with an exceptional
experience and by discovering their needs and delivering the
most relevant products, services, advice, and guidance. An
outcome of offering customers the products and services they
need, want and value is that we earn more opportunities to serve
them, or what we call cross-sell. Cross-sell is the result of serving
our customers well, understanding their financial needs and
goals over their lifetimes, and ensuring we innovate our
products, services and channels so that we earn more of their
business and help them succeed financially. Our approach to
cross-sell is needs-based as some customers will benefit from
more products, and some may need fewer. We believe there is
continued opportunity to meet our customers' financial needs as
we build lifelong relationships with them. One way we track the
degree to which we are satisfying our customers' financial needs
is through our cross-sell metrics, which are based on whether the
customer is a retail banking household or has a wholesale
banking relationship. A retail banking household is a household
that uses at least one of the following retail products – a demand
deposit account, savings account, savings certificate, individual
retirement account (IRA) certificate of deposit, IRA savings
account, personal line of credit, personal loan, home equity line
of credit or home equity loan. A household is determined based
on aggregating all accounts with the same address. For our
wholesale banking relationships, we aggregate all related entities
under common ownership or control.
We report cross-sell metrics for Community Banking and
WIM based on the average number of retail products used per
retail banking household. For Community Banking the cross-sell
metric represents the relationship of all retail products used by
customers in retail banking households. For WIM the cross-sell
metric represents the relationship of all retail products used by
customers in retail banking households who are also WIM
customers.
46
Wells Fargo & Company
Operating Segment Results
The following discussion provides a description of each of our
operating segments, including cross-sell metrics and financial
results.
COMMUNITY BANKING offers a complete line of diversified
financial products and services for consumers and small
businesses including checking and savings accounts, credit and
debit cards, and auto, student, and small business lending. These
products also 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. The Community Banking segment also
includes the results of our Corporate Treasury activities net of
allocations in support of the other operating segments and
results of investments in our affiliated venture capital
partnerships. Our retail banking household cross-sell
Table 9a: Community Banking
was 6.11 products per household in November 2015, compared
with 6.17 in November 2014 and 6.16 in November 2013. The
November 2015 retail banking household cross-sell ratio reflects
the impact of the sale of government guaranteed student loans in
fourth quarter 2014. The November 2014 cross-sell ratio
included the acquisition of an existing private label and co-
branded credit card loan portfolio in connection with a new
program agreement with Dillard's, Inc., a major retail
department store. Table 9a provides additional financial
information for Community Banking, with prior periods revised
to reflect the realignment of our strategic auto investments,
business banking and merchant payment services businesses
from Community Banking to Wholesale Banking in 2015.
(in millions, except average balances which are in billions)
2015
2014 % Change
2013 % Change
Year ended December 31,
$ 29,242
27,999
4 % $ 27,123
3%
3,014
3,071
(2)
3,155
(3)
Net interest income
Noninterest income:
Service charges on deposit accounts
Trust and investment fees:
Brokerage advisory, commissions and other fees (1)
Trust and investment management (1)
Investment banking (2)
Total trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains (losses) from trading activities
Net gains (losses) on debt securities
Net gains from equity investments (3)
Other income of the segment
Total noninterest income
Total revenue
Provision for credit losses
Noninterest expense:
Personnel expense
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Outside professional services
Operating losses
Other expense of the segment
Total noninterest expense
Income before income tax expense and noncontrolling interests
Income tax expense
Net income from noncontrolling interests (4)
2,044
855
(123)
2,776
3,381
1,446
6,056
96
(146)
556
1,714
1,206
1,796
817
(80)
2,533
3,119
1,545
6,011
127
136
255
1,731
1,631
20,099
20,159
49,341
48,158
2,427
1,796
17,574
16,979
1,914
2,104
573
549
1,012
1,503
1,752
26,981
19,933
6,202
240
1,809
2,154
620
526
1,011
1,052
2,139
26,290
20,072
6,049
337
14
5
(54)
10
8
(6)
1
(24)
(207)
118
(1)
(26)
—
2
35
4
6
(2)
(8)
4
—
43
(18)
3
(1)
3
(29)
1,604
754
(77)
2,281
2,918
1,735
8,336
130
246
(78)
1,033
800
20,556
47,679
12
8
(4)
11
7
(11)
(28)
(2)
(45)
427
68
104
(2)
1
2,841
(37)
17,549
1,795
2,105
689
561
1,011
706
2,674
27,090
17,748
5,442
159
(3)
1
2
(10)
(6)
—
49
(20)
(3)
13
11
112
13%
1%
24
Net income
Average loans
Average deposits
$ 13,491
13,686
(1)% $ 12,147
$ 475.9
654.4
468.8
614.3
2 % $
465.1
7
494.7
(1)
(2)
(3)
(4)
Represents income on products and services for Wealth and Investment Management customers served through Community Banking distribution channels and is eliminated
in consolidation.
Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.
Predominantly represents gains resulting from venture capital investments.
Reflects results attributable to noncontrolling interests primarily associated with the Company’s consolidated venture capital investments.
Wells Fargo & Company
47
Earnings Performance (continued)
Community Banking reported net income of $13.5 billion in
2015, down $195 million, or 1%, from $13.7 billion in 2014,
which was up 13% from $12.1 billion in 2013. Revenue was
$49.3 billion in 2015, an increase of $1.2 billion, or 2%,
compared with $48.2 billion in 2014, which was up 1%
compared with $47.7 billion in 2013. The increase in revenue for
2015 was primarily driven by higher net interest income, gains
on sale of debt securities, debit and credit card fees, and trust
and investment fees, partially offset by lower gains from trading
activities, deferred compensation plan investment gains (offset
in employee benefits expense) and other income. Lower other
income in 2015, compared with 2014, reflected a gain on sale of
government guaranteed student loans in 2014 and lower
ineffectiveness gains in 2015 on derivatives that qualify for
hedge accounting. The increase in revenue for 2014, compared
with 2013, was primarily driven by higher net interest income,
gains on sale of equity investments and debt securities, higher
trust and investment fees, and higher card fees, partially offset
by lower mortgage banking revenue, the phase out of the direct
deposit advance product during the first half of 2014, and lower
deferred compensation plan investment gains (offset in
employee benefits expense). Higher other income for 2014
compared with 2013 reflected larger ineffectiveness gains on
derivatives that qualify for hedge accounting and a gain on sale
of government guaranteed student loans in fourth quarter 2014.
Average deposits increased $40.1 billion in 2015, or 7%, from
2014, which increased $119.6 billion, or 24%, from 2013.
Noninterest expense increased $691 million in 2015, or 3%, from
2014, which declined $800 million, or 3%, from 2013. The
increase in noninterest expense for 2015 largely reflected higher
personnel expense, operating losses, equipment expense, and a
$126 million donation to the Wells Fargo Foundation, partially
offset by lower deferred compensation expense (offset in
revenue), foreclosed assets, travel, data processing, occupancy
and various other expenses. The decrease in noninterest expense
for 2014 largely reflected lower mortgage volume-related
expenses and deferred compensation expense (offset in
revenue), partially offset by higher operating losses. The
provision for credit losses of $2.4 billion in 2015 was
$631 million, or 35%, higher than 2014, which was $1.0 billion,
or 37%, lower than 2013. The increase in provision in 2015 was
due to $1.1 billion lower allowance release, partially offset by
$403 million lower net charge-offs related to improvement in
the consumer real estate portfolio. The decrease in provision in
2014 was due to $1.5 billion lower net charge-offs related to the
consumer real estate portfoli0, partially offset by $454 million
lower allowance release.
WHOLESALE BANKING provides financial solutions to
businesses across the United States and globally with annual
sales generally in excess of $5 million. Products and businesses
include Business Banking, 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, and Asset Backed Finance. Wholesale Banking
cross-sell is reported on a one-quarter lag and for fourth quarter
2015 was 7.3 products per relationship, up from 7.2 for fourth
quarter 2014 and 7.1 for fourth quarter 2013. Wholesale Banking
cross-sell does not reflect Business Banking relationships, which
were realigned from Community Banking to Wholesale Banking
effective fourth quarter 2015. Table 9b provides additional
financial information for Wholesale Banking, with prior periods
revised to reflect the realignment of our asset management
business from Wholesale Banking to WIM; our reinsurance
business from WIM to Wholesale Banking; and our strategic
auto investments, business banking and merchant payment
services businesses from Community Banking to Wholesale
Banking in 2015.
48
Wells Fargo & Company
31
(9)
(2)
(1)
14
8
(13)
(9)
(19)
596
49
(90)
(1)
(2)
27
4
(14)
(2)
(8)
3
10
169
9
6
(10)
(19)
20
Table 9b: Wholesale Banking
(in millions, except average balances which are in billions)
2015
2014 % Change
2013 % Change
Year ended December 31,
$ 14,350
14,073
2 % $ 14,353
(2)%
2,153
1,978
9
1,867
6
Net interest income
Noninterest income:
Service charges on deposit accounts
Trust and investment fees:
Brokerage advisory, commissions and other fees
Trust and investment management
Investment banking
Total 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
Other income of the segment
Total noninterest income
Total revenue
285
407
1,762
2,454
337
2,872
447
1,598
719
396
511
67
255
374
1,803
2,432
310
2,798
370
1,528
886
334
624
65
11,554
11,325
25,904
25,398
12
9
(2)
1
9
3
21
5
(19)
19
(18)
3
2
2
195
411
1,839
2,445
271
2,599
425
1,684
1,092
48
420
643
11,494
25,847
Provision (reversal of provision) for credit losses
27
(382)
107
(521)
Noninterest expense:
Personnel expense
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Outside professional services
Operating losses
Other expense of the segment
Total noninterest expense
Income before income tax expense and noncontrolling interest
Income tax expense
Net income from noncontrolling interest
Net income
Average loans
Average deposits
6,936
6,660
97
452
347
352
837
152
106
446
391
328
834
70
4,943
4,996
14,116
11,761
3,424
143
$ 8,194
$ 397.3
438.9
13,831
11,949
3,540
210
8,199
355.6
404.0
4
(8)
1
(11)
7
—
117
(1)
2
(2)
(3)
(32)
6,398
123
455
423
320
759
26
4,573
13,077
13,291
4,364
175
— % $
8,752
12 % $
329.0
9
353.8
(6)%
8 %
14
Wholesale Banking reported net income of $8.2 billion in
2015, down $5 million from 2014, which was down 6% from
$8.8 billion in 2013. The year over year decrease in net income
for 2015 was the result of increased revenues being more than
offset by increased noninterest expense and higher loan loss
provision. The year over year decrease in net income during
2014 compared with 2013 was the result of lower revenues,
increased noninterest expense and higher provision for credit
losses. Revenue in 2015 of $25.9 billion increased $506 million,
or 2%, from $25.4 billion in 2014, on growth in Wells Fargo
Securities' markets division, treasury management, asset backed
finance, principal investing, commercial real estate brokerage,
multi-family capital, reinsurance, and municipal products.
Revenue in 2014 of $25.4 billion decreased $449 million, or 2%,
from $25.8 billion in 2013, as growth in asset backed finance,
commercial real estate brokerage, corporate banking, equipment
finance, international, principal investing and treasury
management was more than offset by lower PCI resolution
income as well as lower crop insurance fee income. Net interest
income of $14.4 billion in 2015 increased $277 million, or 2%,
from 2014, which was down 2% from 2013. The increase in 2015
was due to strong loan and other earning asset growth. The
decrease in 2014 was due to lower PCI resolution income and net
interest margin compression due to declining loan yields and
fees that was partially offset by increased interest income
primarily from strong loan growth. Average loans of
$397.3 billion in 2015 increased $41.7 billion, or 12%, from
$355.6 billion in 2014, which was up 8% from $329.0 billion in
2013. Loan growth in 2015 and 2014 was broad based across
many Wholesale Banking businesses. Average deposits of
$438.9 billion in 2015 increased $34.9 billion, or 9%, from 2014
which was up 14% from 2013, reflecting continued strong
customer liquidity for both years. Noninterest income of
$11.6 billion in 2015 increased $229 million, or 2%, from 2014
driven by growth in treasury management, reinsurance,
commercial real estate brokerage fees, multi-family capital,
municipal products, principal investing, corporate trust and
business banking, partially offset by lower customer
Wells Fargo & Company
49
Earnings Performance (continued)
accommodation-related gains on trading assets and lower gains
on equity investments. Noninterest income of $11.3 billion in
2014 decreased $169 million, or 1%, from 2013 as business
growth in commercial real estate brokerage, corporate banking,
equipment finance, international, principal investing and
treasury management was more than offset by lower customer
accommodation related gains on trading assets, lower insurance
income related to a decline in crop insurance fee income, the
2014 divestiture of 40 insurance offices, and lower other income.
Noninterest expense in 2015 increased $285 million, or 2%,
compared with 2014, which was up 6%, or $754 million, from
2013. The increase in both 2015 and 2014 was due to higher
personnel and non-personnel expenses related to growth
initiatives and compliance and regulatory requirements as well
as increased operating losses. The provision for credit losses
increased $409 million from 2014 due primarily to increased
losses in the oil and gas portfolio as well as lower recoveries. The
provision for credit losses increased $139 million from 2013 due
primarily to strong commercial loan growth in 2014.
Table 9c: Wealth and Investment Management
WEALTH AND INVESTMENT MANAGEMENT (WIM)
(formerly Wealth, Brokerage and Retirement) provides a full
range of personalized wealth management, investment and
retirement products and services to clients across U.S. based
businesses including Wells Fargo Advisors, The Private Bank,
Abbot Downing, Wells Fargo Institutional Retirement and Trust,
and Wells Fargo Asset Management. We deliver financial
planning, private banking, credit, investment management and
fiduciary services to high-net worth and ultra-high-net worth
individuals and families. We also serve clients’ brokerage needs,
supply retirement and trust services to institutional clients and
provide investment management capabilities delivered to global
institutional clients through separate accounts and the
Wells Fargo Funds. WIM cross-sell was 10.55 products per retail
banking household in November 2015, up from 10.49 in
November 2014 and 10.42 in November 2013. Table 9c provides
additional financial information for WIM, with prior periods
revised to reflect the realignment of our asset management
business from Wholesale Banking to WIM and our reinsurance
business from WIM to Wholesale Banking in 2015.
(in millions, except average balances which are in billions)
2015
2014 % Change
2013 % Change
Year ended December 31,
$ 3,478
3,032
15% $
2,797
8%
Net interest income
Noninterest income:
Service charges on deposit accounts
Trust and investment fees:
Brokerage advisory, commissions and other fees
Trust and investment management
Investment banking (1)
Total trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains from trading activities
Net gains on debt securities
Net gains from equity investments
Other income of the segment
Total noninterest income
Total revenue
Reversal of provision for credit losses
Noninterest expense:
Personnel expense
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Outside professional services
Operating losses
Other expense of the segment
Total noninterest expense
Income before income tax expense and noncontrolling interest
Income tax expense
19
18
6
2
(1)
9,154
3,017
—
8,933
3,045
(13)
100
12,171
11,965
5
17
(7)
—
41
—
5
48
4
17
1
—
139
4
25
64
12,299
12,237
15,777
15,269
(25)
(50)
7,820
7,851
57
447
326
123
846
229
2,219
12,067
3,735
1,420
62
435
359
126
877
134
2,149
11,993
3,326
1,262
2
25
—
(800)
NM
(71)
(100)
(80)
(25)
1
3
50
—
(8)
3
(9)
(2)
(4)
71
3
1
12
13
17
8,207
2,911
(16)
11,102
4
20
(24)
—
288
1
19
106
11,533
14,330
6
9
5
19
8
—
(15)
104
NM
(52)
300
32
(40)
6
7
(16)
(213)
7,602
72
426
392
135
782
99
1,978
11,486
2,860
1,082
12
3
(14)
2
(8)
(7)
12
35
9
4
16
17
(67)
17%
13%
3
Net income (loss) from noncontrolling interest
(1)
4
(125)
Net income
Average loans
Average deposits
$ 2,316
$
60.1
172.3
2,060
52.1
163.5
12% $
1,766
15% $
46.2
5
158.9
NM - Not meaningful
(1)
Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.
50
Wells Fargo & Company
WIM reported net income of $2.3 billion in 2015, up
$256 million, or 12%, from 2014, which was up 17% from
$1.8 billion in 2013. Net income growth in 2015 and 2014 was
primarily driven by growth in net interest income, as well as
noninterest income. Revenue of $15.8 billion in 2015 increased
$508 million from 2014, which was up 7% from $14.3 billion in
2013. The increase in revenue for both 2015 and 2014 was due to
growth in both net interest income and noninterest income. Net
interest income increased 15% in 2015 and 8% in 2014 due to
growth in investment portfolios and loan balances. Average loan
balances of $60.1 billion in 2015 increased 15% from
$52.1 billion in 2014, which was up 13% from $46.2 billion in
2013. Average deposits in 2015 of $172.3 billion increased 5%
from $163.5 billion in 2014, which was up 3% from
$158.9 billion in 2013. Noninterest income increased 1% in 2015
from 2014, primarily due to growth in asset-based fees driven by
higher average client assets in 2015 than 2014, partially offset by
lower gains on deferred compensation plan investments (offset
in employee benefits expense). Noninterest income increased 6%
in 2014 from 2013, largely due to strong growth in asset-based
fees from higher client assets driven by net client asset inflows
and favorable market performance, partially offset by lower
brokerage transaction revenue. Noninterest expense of
$12.1 billion for 2015 was up 1% from $12.0 billion in 2014,
which was up 4% from $11.5 billion in 2013. The increase in 2015
was predominantly due to higher non-personnel expenses and
increased broker commissions, partially offset by lower deferred
compensation plan expense (offset in trading revenue). The
increase in 2014 was predominantly due to increased broker
Table 9d: Retail Brokerage Client Assets
(in billions)
Retail brokerage client assets
Advisory account client assets
Advisory account client assets as a percentage of total client assets
Retail Brokerage advisory accounts include assets that are
financial advisor-directed and separately managed by third-
party managers, as well as certain client-directed brokerage
assets where we earn a fee for advisory and other services, but do
not have investment discretion. These advisory accounts
generate fees as a percentage of the market value of the assets,
which vary across the account types based on the distinct
services provided, and are affected by investment performance
commissions and higher non-personnel expenses. The provision
for credit losses increased $25 million in 2015, driven primarily
by lower allowance releases. The provision for credit losses
decreased $34 million in 2014, driven by lower net charge-offs
and continued improvement in credit quality.
The following discussions provide additional information
for client assets we oversee in our retail brokerage advisory and
trust and investment management business lines.
Retail Brokerage Client Assets Brokerage advisory,
commissions and other fees are received for providing full-
service and discount brokerage services predominantly to retail
brokerage clients. Offering advisory account relationships to our
brokerage clients is an important component of our broader
strategy of meeting their financial needs. Although most of our
retail brokerage client assets are in accounts that earn brokerage
commissions, the fees from those accounts generally represent
transactional commissions based on the number and size of
transactions executed at the client’s direction. Fees earned from
advisory accounts are asset-based and depend on changes in the
value of the client’s assets as well as the level of assets resulting
from inflows and outflows. A major portion of our brokerage
advisory, commissions and other fee income is earned from
advisory accounts. Table 9d shows advisory account client assets
as a percentage of total retail brokerage client assets at
December 31, 2015, 2014 and 2013.
Year ended December 31,
2015
$
1,386.9
419.9
30%
2014
1,421.8
422.8
30
2013
1,363.6
374.8
27
as well as asset inflows and outflows. For the years ended
December 31, 2015, 2014 and 2013, the average fee rate by
account type ranged from 80 to 120 basis points. Table 9e
presents retail brokerage advisory account client assets activity
by account type for the years ended December 31, 2015, 2014
and 2013.
Wells Fargo & Company
51
Earnings Performance (continued)
Table 9e: Retail Brokerage Advisory Account Client Assets
(in billions)
Balance, December 31, 2012
Inflows (5)
Outflows (6)
Market impact (7)
Balance, December 31, 2013
Inflows (5)
Outflows (6)
Market impact (7)
Balance, December 31, 2014
Inflows (5)
Outflows (6)
Market impact (7)
Client
directed (1)
Financial
advisor
directed (2)
Separate
accounts (3)
Mutual fund
advisory (4)
Total advisory
client assets
$
$
$
119.3
42.8
(31.2)
13.6
144.5
41.6
(31.8)
5.5
159.8
38.7
(37.3)
(6.5)
54.5
16.8
(11.7)
12.0
71.6
18.4
(13.4)
8.8
85.4
20.7
(17.5)
3.3
91.9
77.1
24.0
(15.7)
14.5
99.9
23.1
(18.3)
6.0
110.7
21.6
(20.5)
(1.4)
110.4
46.8
13.3
(8.7)
7.4
58.8
14.6
(9.7)
3.2
66.9
10.4
(12.2)
(2.2)
62.9
297.7
96.9
(67.3)
47.5
374.8
97.7
(73.2)
23.5
422.8
91.4
(87.5)
(6.8)
419.9
Balance, December 31, 2015
$
154.7
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Investment advice and other services are provided to client, but decisions are made by the client and the fees earned are based on a percentage of the advisory account
assets, not the number and size of transactions executed by the client.
Professionally managed portfolios with fees earned based on respective strategies and as a percentage of certain client assets.
Professional advisory portfolios managed by Wells Fargo asset management advisors or third-party asset managers. Fees are earned based on a percentage of certain client
assets.
Program with portfolios constructed of load-waived, no-load and institutional share class mutual funds. Fees are earned based on a percentage of certain client assets.
Inflows include new advisory account assets, contributions, dividends and interest.
Outflows include withdrawals, closed accounts’ assets and client management fees.
Market impact reflects gains and losses on portfolio investments.
Trust and Investment Client Assets Under Management
We earn trust and investment management fees from managing
and administering assets, including mutual funds, institutional
separate accounts, personal trust, employee benefit trust and
agency assets through our asset management, wealth and
retirement businesses. Our asset management business is
conducted by Wells Fargo Asset Management (WFAM), which
offers Wells Fargo proprietary mutual funds and manages
institutional separate accounts. Our wealth business manages
assets for high net worth clients, and our retirement business
Table 9f: WIM Trust and Investment – Assets Under Management
provides total retirement management, investments, and trust
and custody solutions tailored to meet the needs of institutional
clients. Substantially all of our trust and investment
management fee income is earned from AUM where we have
discretionary management authority over the investments and
generate fees as a percentage of the market value of the AUM.
Table 9f presents AUM activity for the years ended
December 31, 2015, 2014 and 2013.
(in billions)
Assets Managed by WFAM (1)
Money Market
Funds (2)
Other Assets
Managed
Assets Managed
by Wealth and
Retirement (3)
Total Assets
Under
Management
Balance, December 31, 2012
$
120.6
Inflows (4)
Outflows (5)
Market impact (6)
5.4
—
0.2
Balance, December 31, 2013
$
126.2
Inflows (4)
Outflows (5)
Market impact (6)
—
(3.1)
—
Balance, December 31, 2014
$
123.1
Inflows (4)
Outflows (5)
Market impact (6)
0.5
—
—
Balance, December 31, 2015
$
123.6
331.5
104.0
(101.0)
26.4
360.9
100.6
(99.3)
10.4
372.6
93.5
(97.0)
(3.0)
366.1
147.6
31.4
(31.5)
11.9
159.4
34.2
(31.2)
2.9
165.3
36.2
(34.1)
(5.3)
162.1
599.7
140.8
(132.5)
38.5
646.5
134.8
(133.6)
13.3
661.0
130.2
(131.1)
(8.3)
651.8
(1)
Assets managed by Wells Fargo Asset Management consist of equity, alternative, balanced, fixed income, money market, and stable value, and include client assets that
are managed or sub-advised on behalf of other Wells Fargo lines of business.
(2)
Money Market fund activity is presented on a net inflow or net outflow basis, because the gross flows are not meaningful nor used by management as an indicator of
performance.
Includes $8.2 billion, $8.9 billion and $8.7 billion as of December 31, 2015, 2014 and 2013, respectively, of client assets invested in proprietary funds managed by WFAM.
Inflows include new managed account assets, contributions, dividends and interest.
Outflows include withdrawals, closed accounts’ assets and client management fees.
Market impact reflects gains and losses on portfolio investments.
(3)
(4)
(5)
(6)
52
Wells Fargo & Company
Balance Sheet Analysis
At December 31, 2015, our assets totaled $1.8 trillion, up
$100.5 billion from December 31, 2014. The predominant areas
of asset growth were in investment securities, which increased
$34.6 billion, and loans, which increased $54.0 billion
(including $11.5 billion from the GE Capital commercial real
estate loan purchase and related financing transaction that
settled in second quarter 2015). Federal funds sold and other
short-term investments, which increased $11.7 billion, combined
with deposit growth of $55.0 billion, an increase in short-term
borrowings of $34.0 billion, and total equity growth of
$8.6 billion from December 31, 2014, were the predominant
Investment Securities
Table 10: Investment Securities – Summary
sources that funded our asset growth for 2015. Equity growth
was driven by $13.8 billion in retained earnings net of dividends
paid.
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.
December 31, 2015
December 31, 2014
(in millions)
Available-for-sale securities:
Debt securities
Marketable equity securities
Total available-for-sale securities
264,376
2,982
267,358
Held-to-maturity debt securities
80,197
370
80,567
Total investment securities (1)
$ 344,573
3,352
347,925
Amortized
Cost
Net
unrealized
gain
Fair
value
Amortized
Cost
Net
unrealized
gain
$ 263,318
2,403
265,721
247,747
1,058
579
1,637
Fair
value
253,766
3,676
257,442
56,359
6,019
1,770
7,789
876
8,665
313,801
1,906
249,653
55,483
305,136
(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.
portfolio consists of high quality U.S. Treasury debt, securities
issued by U.S. states and political subdivisions, agency MBS,
asset-backed securities (ABS) primarily collateralized by auto
loans and leases, and collateralized loan obligations where our
intent is to hold these securities to maturity and collect the
contractual cash flows. The held-to-maturity portfolio may also
provide yield enhancement over short-term assets.
We analyze securities for other-than-temporary impairment
(OTTI) quarterly or more often if a potential loss-triggering
event occurs. Of the $559 million in OTTI write-downs
recognized in earnings in 2015, $183 million related to debt
securities and $2 million related to marketable equity securities,
which are each included in available-for-sale securities. Another
$374 million in OTTI write-downs were related to
nonmarketable equity investments, which are included in other
assets. OTTI write-downs recognized in earnings related to
energy investments totaled $287 million in 2015, of which
$104 million related to corporate debt investment securities, and
$183 million related to nonmarketable equity investments. For a
discussion of our OTTI accounting policies and underlying
considerations and analysis, see Note 1 (Summary of Significant
Accounting Policies) and Note 5 (Investment Securities) to
Financial Statements in this Report.
Table 10 presents a summary of our investment securities
portfolio, which increased $34.6 billion from December 31, 2014,
primarily due to purchases of U.S. Treasury securities and
federal agency mortgage-backed securities. The total net
unrealized gains on available-for-sale securities were $3.0 billion
at December 31, 2015, down from $7.8 billion at December 31,
2014, primarily due to higher long-term interest rates, widening
credit spreads, and realized securities gains.
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
predominantly consists of liquid, high quality U.S. Treasury and
federal agency debt, agency mortgage-backed securities (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
Wells Fargo & Company
53
Balance Sheet Analysis (continued)
At December 31, 2015, investment securities included
$52.2 billion of municipal bonds, of which 93.9% 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 substantially all
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. The credit quality of our
municipal bond holdings are monitored as part of our ongoing
impairment analysis.
The weighted-average expected maturity of debt securities
available-for-sale was 6.1 years at December 31, 2015. Because
47.9% of this portfolio is MBS, the expected remaining maturity
is shorter than the remaining contractual maturity because
borrowers generally have the right to prepay obligations before
the underlying mortgages mature. The estimated effects of a
200 basis point increase or decrease in interest rates on the fair
value and the expected remaining maturity of the MBS available-
for-sale portfolio are shown in Table 11.
Table 11: Mortgage-Backed Securities Available for Sale
(in billions)
At December 31, 2015
Fair
value
Net
unrealized
gain (loss)
Expected
remaining
maturity
(in years)
Actual
127.2
2.0
Assuming a 200 basis point:
Increase in interest rates
Decrease in interest rates
115.5
132.0
(9.7)
6.8
5.6
7.1
2.7
The weighted-average expected maturity of debt securities
held-to-maturity was 6.5 years at December 31, 2015. See Note 5
(Investment Securities) to Financial Statements in this Report
for a summary of investment securities by security type.
54
Wells Fargo & Company
Loan Portfolio
Total loans were $916.6 billion at December 31, 2015, up
$54.0 billion from December 31, 2014. Table 12 provides a
summary of total outstanding loans by core and non-strategic/
liquidating loan portfolios. Loans in the core portfolio grew
$62.8 billion from December 31, 2014, primarily due to growth
in commercial and industrial and real estate mortgage loans
within the commercial loan portfolio segment, which included
$11.5 billion from the GE Capital commercial real estate loan
purchase and related financing transaction that settled in second
Table 12: Loan Portfolios
quarter 2015. Non-strategic/liquidating portfolios decreased by
$8.8 billion compared with a $20.1 billion decrease in 2014,
which included $10.7 billion primarily due to sale of our
government guaranteed student loan portfolio. Additional
information on the non-strategic and liquidating loan portfolios
is included in Table 18 in the “Risk Management – Credit Risk
Management” section in this Report.
December 31, 2015
December 31, 2014
(in millions)
Commercial
Consumer
Total loans
Core
Non-strategic
and liquidating
$
456,115
408,489
864,604
468
51,487
51,955
Change from prior year
$
62,841
(8,833)
Total
456,583
459,976
916,559
54,008
Core
413,701
388,062
801,763
60,343
Non-strategic
and liquidating
1,125
59,663
60,788
(20,078)
Total
414,826
447,725
862,551
40,265
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 the contractual distribution of loans in those
categories to changes in interest rates.
(in millions)
Selected loan maturities:
December 31, 2015
December 31, 2014
Within
one
year
After
one year
through
five years
After
five
years
Total
Within
one
year
After
one year
through
five years
After
five
years
Total
Commercial and industrial
$ 91,214
184,641
24,037
299,892
76,216
172,801
22,778
271,795
Real estate mortgage
Real estate construction
18,622
68,391
35,147
122,160
17,485
61,092
33,419
111,996
7,455
13,284
1,425
22,164
6,079
11,312
1,337
18,728
Total selected loans
$ 117,291
266,316
60,609
444,216
99,780
245,205
57,534
402,519
Distribution of loans to changes in interest
rates:
Loans at fixed interest rates
$ 16,819
27,705
23,533
68,057
15,574
25,429
20,002
61,005
Loans at floating/variable interest rates
100,472
238,611
37,076
376,159
84,206
219,776
37,532
341,514
Total selected loans
$ 117,291
266,316
60,609
444,216
99,780
245,205
57,534
402,519
Deposits
Deposits grew $55.0 billion during 2015 to just over $1.2 trillion,
reflecting continued broad-based growth across commercial and
consumer businesses. Table 14 provides additional information
regarding deposits. Information regarding the impact of deposits
on net interest income and a comparison of average deposit
balances is provided in “Earnings Performance – Net Interest
Income” and Table 5 earlier in this Report.
Wells Fargo & Company
55
Balance Sheet Analysis (continued)
Table 14: Deposits
($ in millions)
Noninterest-bearing
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices (1)
Total deposits
Dec 31,
2015
% of
total
deposits
Dec 31,
2014
% of
total
deposits
% Change
$
351,579
29%
$
321,963
27%
40,115
651,563
28,614
49,032
102,409
3
54
2
4
8
41,737
604,999
35,354
56,828
107,429
4
52
3
5
9
$ 1,223,312
100% $ 1,168,310
100%
9
(4)
8
(19)
(14)
(5)
5
(1)
Includes Eurodollar sweep balances of $71.1 billion and $69.8 billion at December 31, 2015 and 2014, respectively.
Equity
Total equity was $193.9 billion at December 31, 2015 compared
with $185.3 billion at December 31, 2014. The increase was
predominantly driven by a $13.8 billion increase in retained
earnings from earnings net of dividends paid, and a $3.0 billion
increase in preferred stock, partially offset by a net reduction in
common stock due to repurchases.
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
and purchase securities, 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 and Purchase Securities
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 used 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. We also enter into commitments to
purchase securities under resale agreements. For more
information on these commitments, see Note 4 (Federal Funds
Sold, Securities Purchased under Resale Agreements and Other
Short-Term Investments) to Financial Statements in this Report.
Transactions with Unconsolidated Entities
We routinely enter into various types of on- and off-balance
sheet transactions with special purpose entities (SPEs), which
are corporations, trusts or partnerships that are established for a
limited purpose. Generally, SPEs are formed in connection with
securitization transactions. For more information on
securitizations, including sales proceeds and cash flows from
securitizations, see Note 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, written put options,
recourse obligations for loans and mortgages sold, and other
types of arrangements.
For more information on guarantees and certain contingent
arrangements, see Note 14 (Guarantees, Pledged Assets and
Collateral) to Financial Statements in this Report.
Derivatives
We primarily use derivatives to manage exposure to market risk,
including interest rate risk, credit risk and foreign currency risk,
and to assist customers with their risk management objectives.
Derivatives are recorded on the balance sheet at fair value and
volumes 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.
56
Wells Fargo & Company
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: Contractual Cash Obligations
Table 15 summarizes these contractual obligations as of
December 31, 2015, 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.
(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
years
11
$
81,846
7, 13
31,904
7
21
3,143
1,131
115
2,154
575
9,192
44,914
4,823
1,928
—
509
483
3,321
41,638
3,650
1,409
—
57
185
December 31, 2015
Indeterminate
maturity
Total
1,124,798
1,223,312
—
—
—
2,581
—
—
199,536
26,985
6,702
2,696
2,720
1,325
More
than
5 years
4,155
81,080
15,369
2,234
—
—
82
Total contractual obligations
$ 120,868
61,849
50,260
102,920
1,127,379
1,463,276
(1)
(2)
(3)
(4)
(5)
Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
Balances are presented net of unamortized debt discounts and premiums and purchase accounting adjustments.
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
$25.7 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, 2015, 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.
Includes unfunded commitments to purchase debt and equity investments, excluding trade date payables, of $573 million and $2.1 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 predominantly all of 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.
Represents agreements related to unrecognized obligations 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) 850 requires disclosure of material related
party transactions, other than compensation arrangements,
expense allowances and other similar items in the ordinary
course of business. Based on ASC 850, we had no transactions
required to be reported for the years ended December 31, 2015,
2014 and 2013. The Company has included within its disclosures
information on its equity investments, relationships with
variable interest entities, and employee benefit plan
arrangements. See Note 7 (Premises, Equipment, Lease
Commitments and Other Assets), Note 8 (Securitizations and
Variable Interest Entities) and Note 20 (Employee Benefits and
Other Expenses) to Financial Statements in this Report.
Wells Fargo & Company
57
Risk Management
Wells Fargo manages a variety of risks that can significantly
affect our financial performance and our ability to meet the
expectations of our customers, stockholders, regulators and
other stakeholders. Among the risks that we manage are
operational risk, credit risk, and asset/liability management
risk, which includes interest rate risk, market risk, 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 our customers’ financial needs and helping them
succeed financially, our business practices and operating model
must support prudent risk management practices.
Risk Culture
Wells Fargo's risk culture is designed to promote
understanding of our risk profile, transparency of risks across
the Company, effective transfer of information (including the
escalation of important risk issues), and more informed
decision-making. Our risk culture also seeks to foster an
environment that encourages and promotes robust
communication and cooperation among the Company’s three
lines of defense – (1) Wells Fargo’s lines of business and certain
other corporate functions, (2) Corporate Risk, our Company’s
primary second-line of defense led by our Chief Risk Officer
who reports to the Board’s Risk Committee, and (3)
Wells Fargo Audit Services, our internal audit function which is
led by our Chief Auditor who reports to the Board’s Audit and
Examination Committee (A&E Committee). Our risk culture
begins with our Vision and Values and is demonstrated by
setting the appropriate tone at the top, fostering credible
challenge within and among each of our lines of defense, and
developing and maintaining sound incentive compensation risk
management practices.
•
Our Vision and Values outlines our vision and our
Company’s six priorities, including putting customers first
and managing risk. Our focus is on earning our customers’
trust, establishing and maintaining deep and enduring
customer relationships, and providing exceptional
Wells Fargo customer experiences, which also means that
we must proactively protect our customers’ financial
security through a risk-focused culture.
A strong risk culture starts with the tone at the top,
which is set by the Company’s Board of Directors, CEO,
Operating Committee (which consists of our Chief Risk
Officer and other senior executives) and other members of
senior management, and emphasizes a prudent approach
to taking and managing risk. In addition, our business and
risk leaders work with Wells Fargo’s lines of business and
other corporate functions to understand the risks inherent
in our businesses and to consider those risks when making
business and strategic planning decisions.
We believe a key component of an effective risk
•
•
management function is the degree to which all team
members are accountable for risk management and have
the ability to provide credible challenge to business and
risk management decisions, such as communicating an
alternative view, opinion, or strategy, or offering ideas or
alternative approaches that may be equally or more
effective in mitigating risk.
•
Wells Fargo’s incentive-based compensation
practices are designed to balance risk and financial
reward in a manner that does not provide team members
with an incentive to take inappropriate risk or act in a way
that is not in the best interest of customers.
Our risk culture is further supported by our Code of Ethics
and Business Conduct. We require all team members to adhere
to the highest standards of ethics and business conduct and
comply with all applicable laws and regulations.
•
•
•
•
Risk Framework
The Company’s primary risk management objectives are: (a) to
support the Board as it carries out its risk oversight
responsibilities; (b) to support members of senior management
in achieving the Company's strategic objectives and priorities
by maintaining and enhancing our risk framework; and (c) to
maintain and continually promote Wells Fargo’s strong risk
culture, which emphasizes each team member’s accountability
for appropriate risk management. Key elements of our risk
program include:
•
Cultivating a strong risk culture, which emphasizes
each team member’s accountability for appropriate risk
management and the Company’s bias for conservatism
through which we strive to maintain a conservative
financial position measured by satisfactory asset quality,
capital levels, funding sources, and diversity of revenues.
Defining and communicating across the Company an
enterprise-wide statement of risk appetite which
serves to guide business and risk leaders as they manage
risk on a daily basis. The enterprise-wide statement of risk
appetite describes the nature and magnitude of risk that
Wells Fargo is willing to assume in pursuit of its strategic
and business objectives.
Maintaining a risk management governance
structure, including escalation protocols and a
management-level committee structure, that enables the
comprehensive oversight of the Company’s risk program
and the effective and efficient escalation of risk issues to
the appropriate level of the Company for information and
decision-making.
Designing risk frameworks, policies, standards,
procedures, controls, processes, and practices that
are effective and aligned, and facilitate the active and
timely management of current and emerging risks across
the Company.
Structuring an effective and independent Corporate
Risk function whose primary responsibilities include:
(a) establishing and maintaining an effective risk
framework, (b) maintaining a comprehensive perspective
on the Company’s current and emerging risks, (c) credibly
challenging the intended business and risk management
actions of Wells Fargo’s first-line of defense, and (d)
reviewing risk management programs and practices across
the Company to confirm appropriate coordination and
consistency in the application of effective risk
management approaches.
•
Maintaining an independent internal audit function
that is primarily responsible for adopting a systematic,
disciplined approach to evaluating the effectiveness of risk
management, control and governance processes and
activities as well as evaluating risk framework adherence
to relevant regulatory guidelines and appropriateness for
Wells Fargo’s size and risk profile.
58
Wells Fargo & Company
In addition to providing a forum for risk issues at the
Board level, the Risk Committee provides oversight of the
Company's Corporate Risk function and plays an active role in
approving and overseeing the Company’s enterprise-wide risk
management framework established by management to
manage risk, and the functional framework and oversight
policies established by management for each key risk type. The
Risk Committee and the full Board review and approve the
enterprise statement of risk appetite annually, and the Risk
Committee also actively monitors the risk profile relative to the
approved risk appetite.
The full Board receives reports at each of its meetings from
the Board committee chairs about committee activities,
including risk oversight matters, and receives a quarterly
report from the management-level Enterprise Risk
Management Committee regarding current or emerging risk
issues.
The Board and the Operating Committee have overall and
ultimate responsibility to provide oversight for our three lines
of defense and the risks we take, and carry out their oversight
through governance committees with specific risk management
responsibilities described below.
Board Oversight of Risk
The business and affairs of the Company are managed under
the direction of the Board, whose responsibilities include
overseeing the Company’s risk management structure. The
Board carries out its risk oversight responsibilities directly and
through the work of its seven standing committees, which all
report to the full Board.
Each Board Committee has defined authorities and
responsibilities for considering a specific set of risk issues, as
outlined in each of their charters and as summarized in Table
16, and works closely with management to understand and
oversee the Company’s key risk exposures. Allocating risk
responsibilities among each Board committee increases the
overall amount of attention devoted to risk management.
The Risk Committee serves as a focal point for enterprise-
wide risk issues, overseeing all key risks facing the Company.
In this role, the Risk Committee supports and assists the
Board's other standing committees as they consider their
specific risk issues. The Risk Committee includes the chairs of
each of the Board’s other standing committees so that it does
not duplicate the risk oversight efforts of other Board
committees and to provide it with a comprehensive perspective
on risk across the Company and across all individual risk types.
Wells Fargo & Company
59
Risk Management (continued)
Table 16: Key Risk Responsibilities of Board Committees
Risk Committee
Oversight includes:
• Enterprise-wide risk
management
framework and
structure, including
through approval of the
risk management
framework which
outlines the Company’s
approach to risk
management and the
policies, processes and
governance structures
necessary to execute
the risk management
program
• Risk functional
framework and
oversight policies,
which outline roles and
responsibilities for
managing key risk
types and the most
significant cross-
functional risk areas,
including counterparty
credit risk
• Corporate Risk
function, including
performance of the
Chief Risk Officer
• Risk coverage
statement
• Aggregate enterprise-
wide risk profile and
alignment of risk profile
with Company strategy,
objectives, and risk
appetite
• Risk appetite
statement, including
changes in risk
appetite, and
adherence to risk limits
• Risks associated with
acquisitions and
significant new
business or strategic
initiatives
• Liquidity and funding
risks, emerging risk,
strategic risk, and other
selected risk topics and
enterprise-wide risk
issues, including model
risk
• Volcker compliance
program
• Through joint meetings
with the Audit &
Examination
Committee, information
security risk (including
cyber) and technology
risk
Board of Directors
Annually approves overall enterprise risk appetite statement
Board Committees
Audit & Examination
Committee
Oversight includes:
• Internal control over
financial reporting
• Disclosure framework
for financial and risk
reports prepared for
the Board,
management and
bank regulatory
agencies
• External auditor
performance
• Internal audit
function, including
performance of the
Chief Auditor
• Operational risk,
compliance with legal
and regulatory
requirements,
financial crimes risk
(BSA/AML),
information security
risk (including cyber),
and technology risk,
including through
approval (and
recommendation to
the Risk Committee)
of the relevant
functional framework
and oversight policies
• Ethics, business
conduct, and conflicts
of interest program
• Resolution planning
Corporate
Responsibility
Committee
Oversight includes:
• Reputation risk,
including through
approval (and
recommendation to
the Risk Committee)
of the reputational
risk functional
framework and
oversight policy
• Customer service
and complaint
matters, including
related to the
Company’s culture
and its team
members’ focus on
serving customers
• Fair and responsible
mortgage and other
consumer lending
reputational risks
• Social responsibility
risks, including
political and
environmental risks
Credit Committee
Oversight includes:
• Credit risk, including
through approval (and
recommendation to
the Risk Committee)
of the credit risk
functional framework
and oversight policy
• Allowance for credit
losses, including
governance and
methodology
• Adherence to
enterprise credit risk
appetite metrics and
concentration limits
• Credit quality plan
• Compliance with
credit risk framework,
policies and
underwriting
standards
• Credit stress testing
framework and
results (including
credit modeling
issues)
• Risk Asset Review
organization,
resources, and
structure, and its
examinations of credit
portfolios, processes,
and practices
Human Resources
Committee
Oversight includes:
• Overall incentive
compensation strategy
and incentive
compensation practices
• Compensation risk
management
• Talent management and
succession planning
Governance & Nominating
Committee
Oversight includes:
• Corporate governance
compliance
• Board and committee
performance
Finance Committee
Oversight includes:
• Interest rate risk,
including the MSR
• Market risk, including
trading and derivative
activities
• Approval (and
recommendation to the
Risk Committee) of the
interest rate risk and
market risk functional
framework and
oversight policies
• Investment risk,
including fixed-income
and equity portfolios
• Capital position and
planning, including
capital levels relative to
budgets and forecasts
and the Company’s risk
profile, capital adequacy
assessment and
planning, and stress
testing activities
• Financial risk
management policies
used to assess and
manage market, interest
rate, liquidity and
investment risks
• Annual financial plan
• Recovery planning
60
Wells Fargo & Company
Certain of these governance committees have dual escalation
and/or informational reporting paths to the Board committee
primarily responsible for the oversight of the specific risk type.
In addition, certain management-level risk committees,
including those that oversee risk for Community Banking,
Consumer Lending, WIM, and Wholesale Banking, report into
the Enterprise Risk Management Committee.
While the Enterprise Risk Management Committee and
the committees that report to it serve as the focal point for the
management of enterprise-wide risk issues, the management of
specific risk types is supported by additional management-level
governance committees. These committees include the:
•
Ethics & Integrity Oversight Committee, Regulatory and
Risk Reporting Oversight Committee, Capital Reporting
Committee, and SOX Disclosure Committee, which all
report to the Board’s A&E Committee
Corporate Asset and Liability Committee, Economic
Scenario Approval Committee, and Stress Testing
Oversight Committee, which all report to the Board’s
Finance Committee
Allowance for Credit Losses Approval Committee, which
reports to the Board’s Credit Committee
Incentive Compensation Committee, which reports to the
Board’s Human Resources Committee
•
•
•
The Company’s management-level governance committees
collectively help management facilitate enterprise-wide
understanding and monitoring of risks and challenges faced by
the Company.
Management’s Corporate Risk organization, which is the
Company’s primary second-line of defense, is headed by the
Company's Chief Risk Officer who, among other things, is
responsible for setting the strategic direction and driving the
execution of Wells Fargo’s risk management activities.
The Chief Risk Officer, as well as the Chief Risk Officer’s
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.
Management Oversight of Risk
In addition to the Board committees that oversee the
Company's risk management framework, the Company has
established several management-level governance committees
to support Wells Fargo leaders in carrying out their risk
management responsibilities. Each risk-focused governance
committee has a defined set of authorities and responsibilities
specific to one or more risk types. The risk governance
committee structure is designed so that significant risk issues
are considered and, if necessary, decided upon at the
appropriate level of the Company and by the appropriate
leaders.
The Enterprise Risk Management Committee, chaired by
the Wells Fargo Chief Risk Officer, oversees the management
of all risk types across the Company, and additionally provides
primary oversight for reputation risk and strategic risk. The
Enterprise Risk Management Committee reports to the Board's
Risk Committee, and serves as the focal point for risk
governance and oversight at the management level. The
Enterprise Risk Management Committee is responsible for:
monitoring and evaluating the Company’s risk profile relative
to its risk appetite across risk types, businesses, and activities;
providing active oversight of risk mitigation and the adequacy
of risk management resources, skills, and capabilities across
the enterprise; reporting periodically to senior management
and the Board on the most significant current and emerging
risks, risk management issues, initiatives, and concerns; and
addressing key risk issues which are escalated to it by its
members or its reporting committees. The Enterprise Risk
Management Committee annually reviews the Company’s
Strategic Plan, with a primary view toward ensuring alignment
with the Company’s risk appetite.
Our CEO and Operating Committee develop our enterprise
statement of risk appetite in the context of our risk
management framework and culture described above. As part
of Wells Fargo’s 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. 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.
A number of management-level governance committees
that are responsible for issues specific to an individual risk type
report into the Enterprise Risk Management Committee. These
governance committees include the:
•
•
•
•
•
•
•
•
•
•
•
•
Counterparty Credit Risk Committee
Credit Risk Management Committee
Enterprise Technology Governance Committee
Fiduciary & Investment Risk Oversight Committee
Financial Crimes Risk Committee
International Oversight Committee
Legal Entity Governance Committee
Liquidity Risk Management Oversight Committee
Operational Risk Management Committee, and
Regulatory Compliance Risk Management Committee
Market Risk Committee
Model Risk Committee
Wells Fargo & Company
61
At the management level, the Operational Risk
Management Committee has primary responsibility for
overseeing operational risk management across the Company
and informs and advises the Chief Operational Risk Officer on
matters that affect the Company's operational risk profile.
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 other
financial institutions continue to be the target of various
evolving and adaptive cyber attacks, including malware and
denial-of-service, as part of an effort to disrupt the operations
of financial institutions, potentially test their cybersecurity
capabilities, or obtain confidential, proprietary or other
information. Wells Fargo has not experienced any material
losses relating to these or other cyber attacks. Addressing
cybersecurity risks is a priority for Wells Fargo, and we
continue to develop and enhance our controls, processes and
systems in order to protect our networks, computers, software
and data from attack, damage or unauthorized access. We are
also proactively involved in industry cybersecurity efforts and
working with other parties, including our third-party service
providers and governmental agencies, to continue to enhance
defenses and improve resiliency to cybersecurity threats. 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.
Risk Management (continued)
Operational Risk Management
Operational risk is the risk of loss resulting from inadequate or
failed internal controls and processes, people and systems, or
resulting from external events. These losses may be caused by
events such as fraud, breaches of customer privacy, business
disruptions, inappropriate employee behavior, vendors that do
not perform their responsibilities and regulatory fines and
penalties.
To address these risks, Wells Fargo maintains an
operational risk management framework that includes the
following objectives:
•
Provide a structured approach for identifying, measuring,
managing, reporting, and monitoring current and
emerging operational risks across all areas of Wells Fargo;
Understand operational risk across the Company by
establishing and maintaining an effective operational risk
management program;
Adequately control operational risk-related losses;
Establish an appropriate level of capital for such losses in
accordance with regulatory guidance; and
Support the Board as it carries out its oversight duties and
responsibilities relating to management’s establishment of
an effective operational risk management program.
•
•
•
•
Wells Fargo’s operational risk management program seeks
to accomplish these objectives by managing operational risk
across the Company in a comprehensive, interconnected
manner, in line with the enterprise statement of risk appetite
and relevant regulatory requirements.
The A&E Committee of the Board has primary
responsibility for oversight of all aspects of operational risk. In
this capacity it reviews and approves the operational risk
management framework and significant supporting
operational risk policies and programs, including the
Company’s financial crimes, business continuity, information
security, privacy, technology and third party risk management
policies and programs. To further enhance Board-level
oversight and avoid duplication, the A&E Committee meets
periodically with the Risk Committee to discuss, among other
things, information security risk (including cyber) and
technology risk. In addition, the A&E Committee periodically
reviews updates from management on the state of operational
risk and the general condition of operational risk management
in the Company.
62
Wells Fargo & Company
Credit Risk Management
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). Credit risk exists with
many of our assets and exposures such as debt security holdings,
certain derivatives, and loans. The following discussion focuses
on our loan portfolios, which represent the largest component of
assets on our balance sheet for which we have credit risk. Table
17 presents our total loans outstanding by portfolio segment and
class of financing receivable.
Table 17: Total Loans Outstanding by Portfolio Segment and
Class of Financing Receivable
(in millions)
Commercial:
Dec 31,
2015
Dec 31,
2014
Commercial and industrial
$ 299,892
Real estate mortgage
Real estate construction
Lease financing
122,160
22,164
12,367
271,795
111,996
18,728
12,307
Total commercial
456,583
414,826
Consumer:
Real estate 1-4 family first mortgage
273,869
265,386
Real estate 1-4 family junior lien
mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans
53,004
34,039
59,966
39,098
59,717
31,119
55,740
35,763
459,976
447,725
$ 916,559
862,551
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:
•
•
•
•
•
•
•
Loan concentrations and related credit quality
Counterparty credit risk
Economic and market conditions
Legislative or regulatory mandates
Changes in interest rates
Merger and acquisition activities
Reputation risk
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 Quality Overview Credit quality remained solid in
2015 due in part to an improving housing market, as well as our
proactive credit risk management activities. We continued to
benefit from improvements in the performance of our residential
real estate portfolio, offset by an increase in our commercial
allowance to reflect continued deterioration in the oil and gas
portfolio. In particular:
•
Although commercial nonaccrual loans increased to
$2.4 billion at December 31, 2015, compared with
$2.2 billion at December 31, 2014, consumer nonaccrual
loans declined to $9.0 billion at December 31, 2015,
compared with $10.6 billion at December 31, 2014. The
increase in commercial nonaccrual loans was primarily
driven by continued deterioration in the oil and gas
portfolio, and the decline in consumer nonaccrual loans was
primarily driven by credit improvement in real estate 1-4
family first mortgage loans. Nonaccrual loans represented
1.24% of total loans at December 31, 2015, compared with
1.49% at December 31, 2014.
Net charge-offs as a percentage of average total loans
improved to 0.33% in 2015, compared with 0.35% in 2014.
Net charge-offs as a percentage of our average commercial
and consumer portfolios were 0.09% and 0.55% in 2015,
respectively, compared with 0.01% and 0.65%, respectively,
in 2014.
Loans that are not government insured/guaranteed and
90 days or more past due and still accruing were
$114 million and $867 million in our commercial and
consumer portfolios, respectively, at December 31, 2015,
compared with $47 million and $873 million at
December 31, 2014.
Our provision for credit losses was $2.4 billion during 2015,
compared with $1.4 billion for the same period a year ago.
The allowance for credit losses decreased to $12.5 billion, or
1.37% of total loans, at December 31, 2015, from
$13.2 billion or 1.53%, at December 31, 2014.
•
•
•
•
Additional information on our loan portfolios and our credit
quality trends follows.
Non-Strategic and Liquidating Loan Portfolios We
continually evaluate and, when appropriate, modify our credit
policies to address appropriate levels of risk. We may designate
certain portfolios and loan products as non-strategic or
liquidating after which we cease their continued origination and
actively work to limit losses and reduce our exposures.
Table 18 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, through the first half of 2014, our
education finance government guaranteed loan portfolio. We
transferred the government guaranteed student loan portfolio to
loans held for sale at the end of second quarter 2014, and
substantially all of the portfolio was sold as of December 31,
2014. The total balance of our non-strategic and liquidating loan
portfolios has decreased 73% since the merger with Wachovia at
December 31, 2008, and decreased 15% from the end of 2014.
Additional information regarding the liquidating PCI and
Pick-a-Pay loan portfolios is provided in the discussion of loan
portfolios that follows.
Wells Fargo & Company
63
Risk Management – Credit Risk Management (continued)
Table 18: Non-Strategic and Liquidating Loan Portfolios
(in millions)
Commercial:
Legacy Wachovia commercial and industrial and commercial real estate PCI loans (1)
$
Total commercial
Consumer:
Pick-a-Pay mortgage (1)(2)
Legacy Wells Fargo Financial debt consolidation (3)
Liquidating home equity
Legacy Wachovia other PCI loans (1)
Legacy Wells Fargo Financial indirect auto (3)
Education Finance – government insured
Total consumer
Total non-strategic and liquidating loan portfolios
(1) Net of purchase accounting adjustments related to PCI loans.
(2)
(3) When we refer to “legacy Wells Fargo”, we mean Wells Fargo excluding Wachovia Corporation (Wachovia).
Includes PCI loans of $19.0 billion, $21.5 billion and $37.6 billion at December 31, 2015, 2014 and 2008, respectively.
Outstanding balance
Dec 31,
Dec 31,
Dec 31,
2015
2014
2008
468
468
39,065
9,957
2,234
221
10
—
1,125
1,125
45,002
11,417
2,910
300
34
—
18,704
18,704
95,315
25,299
10,309
2,478
18,221
20,465
51,487
59,663
172,087
$ 51,955
60,788
190,791
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
$20.0 billion at December 31, 2015, down from $23.3 billion and
$58.8 billion at December 31, 2014 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, 2015, was $16.3 billion.
A nonaccretable difference is established for PCI loans to
absorb losses expected on the contractual amounts of those
loans in excess of the fair value recorded at the date of
acquisition. Amounts absorbed by the nonaccretable difference
do not affect the income statement or the allowance for credit
losses. Since December 31, 2008, we have released $11.7 billion
in nonaccretable difference, including $9.7 billion ($1.2 billion
in 2015) transferred from the nonaccretable difference to the
accretable yield and $2.0 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 $10.0 billion reduction from December 31, 2008,
through December 31, 2015, in our initial projected losses of
$41.0 billion on all PCI loans. At December 31, 2015, $1.9 billion
of nonaccretable difference remained to absorb losses on PCI
loans.
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.
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 for each
of the following portfolios.
COMMERCIAL AND INDUSTRIAL LOANS AND LEASE
FINANCING For purposes of portfolio risk management, we
aggregate commercial and industrial loans and lease financing
according to market segmentation and standard industry
codes. 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,
doubtful and loss categories.
The commercial and industrial loans and lease financing
portfolio totaled $312.3 billion, or 34% of total loans, at
December 31, 2015. The net charge-off rate for this portfolio was
0.16% in 2015 compared with 0.10% in 2014. At December 31,
2015, 0.44% of this portfolio was nonaccruing, compared with
0.20% at December 31, 2014. In addition, $19.1 billion of this
portfolio was rated as criticized in accordance with regulatory
guidance at December 31, 2015, compared with $16.7 billion at
December 31, 2014. The increase in nonaccrual and criticized
loans in this portfolio was predominantly in the oil and gas
portfolio.
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.
64
Wells Fargo & Company
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.
Table 19 provides a breakout of commercial and industrial
loans and lease financing by industry, and includes $49.3 billion
of foreign loans at December 31, 2015. Foreign loans totaled
$14.9 billion within the investors category, $18.1 billion within
the financial institutions category and $1.7 billion within the oil
and gas category.
The investors category includes loans to special purpose
vehicles (SPVs) formed by sponsoring entities to invest in
financial assets backed predominantly by commercial and
residential real estate or corporate cash flow, and are repaid
from the asset cash flows or the sale of assets by the SPV. We
limit loan amounts to a percentage of the value of the underlying
assets, as determined by us, based primarily on analysis of
underlying credit risk and other factors such as asset duration
and ongoing performance.
We provide financial institutions with a variety of
relationship focused products and services, including loans
supporting short-term trade finance and working capital needs.
The $18.1 billion of foreign loans in the financial institutions
category were predominantly originated by our Global Financial
Institutions (GFI) business.
Slightly more than half of our oil and gas loans were to
businesses in the exploration and production (E&P) sector. Most
of these E&P loans are secured by oil and/or gas reserves and
have underlying borrowing base arrangements which include
regular (typically semi-annual) “redeterminations” that consider
refinements to borrowing structure and prices used to determine
borrowing limits. All other oil and gas loans were to midstream
and services and equipment companies. Driven by a drop in
energy prices and the results of our spring and fall
redeterminations, our oil and gas nonaccrual loans increased to
$844 million at December 31, 2015, compared with $76 million
at December 31, 2014.
Table 19: Commercial and Industrial Loans and Lease
Financing by Industry (1)
(in millions)
Investors
Financial institutions
Oil and gas
Real estate lessor
Healthcare
Cyclical retailers
Food and beverage
Industrial equipment
Technology
Business services
Transportation
Public administration
Other
Total
December 31, 2015
Nonaccrual
loans
Total
portfolio (2)
% of total
loans
$
23
38
844
2
41
20
10
18
27
28
40
7
52,261
39,544
17,367
15,315
15,189
15,135
13,923
13,478
9,922
8,581
8,506
8,340
6%
4
2
2
2
2
1
1
1
1
1
1
291
94,698 (3)
$
1,389
312,259
10
34%
(1)
(2)
Industry categories are based on the North American Industry Classification
System and the amounts reported include foreign loans. See Note 6 (Loans
and Allowance for Credit Losses) to Financial Statements in this Report for a
breakout of commercial foreign loans.
Includes $78 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.
(3)
No other single industry had total loans in excess of $6.4 billion.
Wells Fargo & Company
65
Risk Management – Credit Risk Management (continued)
COMMERCIAL REAL ESTATE (CRE) We generally subject CRE
loans 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,
doubtful and loss categories. The CRE portfolio, which included
$8.8 billion of foreign CRE loans, totaled $144.3 billion, or 16%
of total loans, at December 31, 2015, and consisted of
$122.1 billion of mortgage loans and $22.2 billion of
construction loans.
Table 20 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, Texas,
New York and Florida, which combined represented 48% of the
Table 20: CRE Loans by State and Property Type
total CRE portfolio. By property type, the largest concentrations
are office buildings at 28% and apartments at 15% of the
portfolio. CRE nonaccrual loans totaled 0.7% of the CRE
outstanding balance at December 31, 2015, compared with 1.3%
at December 31, 2014. At December 31, 2015, we had $6.8 billion
of criticized CRE mortgage loans, down from $7.9 billion at
December 31, 2014, and $549 million of criticized CRE
construction loans, down from $949 million at December 31,
2014.
At December 31, 2015, the recorded investment in PCI CRE
loans totaled $634 million, down from $12.3 billion when
acquired at December 31, 2008, reflecting principal payments,
loan resolutions and write-downs.
December 31, 2015
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
Texas
New York
Florida
North Carolina
Arizona
Washington
Georgia
Virginia
Colorado
Other
Total
By property:
Office buildings
Apartments
Industrial/warehouse
Retail (excluding shopping center)
Shopping center
Hotel/motel
Real estate - other
Institutional
Land (excluding 1-4 family)
Agriculture
Other
Total
$
241
34,792
62
33
98
61
54
30
62
13
22
293
969
252
30
156
139
50
17
9,001
8,354
7,992
3,737
3,922
3,451
3,705
2,813
3,011
41,382
122,160
37,621
14,034
13,815
13,449
10,159
9,218
110
10,126
35
1
54
125
969
3,037
375
2,624
7,702
122,160
$
$
$
12
—
1
1
7
1
—
12
—
—
32
66
—
—
—
—
—
—
—
—
11
—
55
66
4,035
1,885
1,817
2,056
859
575
816
439
981
527
8,174
22,164
3,104
7,559
1,262
718
1,270
1,210
232
720
2,529
30
3,530
% of
total
loans
4%
1
1
1
1
*
*
*
*
*
5
253
62
34
99
68
55
30
74
13
22
38,827
10,886
10,171
10,048
4,596
4,497
4,267
4,144
3,794
3,538
325
49,556 (2)
1,035
144,324
16%
252
30
156
139
50
17
110
35
12
54
40,725
21,593
15,077
14,167
11,429
10,428
10,358
3,757
2,904
2,654
180
11,232
4%
2
2
2
1
1
1
*
*
*
1
22,164
1,035
144,324
16%
*
(1)
(2)
Less than 1%.
Includes a total of $634 million PCI loans, consisting of $542 million of real estate mortgage and $92 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.
Includes 40 states; no state had loans in excess of $3.5 billion.
66
Wells Fargo & Company
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,
2015, foreign loans totaled $58.6 billion, representing
approximately 6% of our total consolidated loans outstanding,
compared with $50.6 billion, or approximately 6% of total
consolidated loans outstanding, at December 31, 2014. Foreign
loans were approximately 3% of our consolidated total assets at
December 31, 2015 and at December 31, 2014.
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, 2015, was the United
Kingdom, which totaled $27.4 billion, or approximately 2% of
our total assets, and included $4.9 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 21 provides information regarding our top 20
exposures by country (excluding the U.S.) and our Eurozone
exposure, on an ultimate risk basis. Our exposure to Puerto Rico
(considered part of U.S. exposure) is primarily through
automobile lending and was not material to our consolidated
country risk exposure.
Wells Fargo & Company
67
Risk Management – Credit Risk Management (continued)
Table 21: Select Country Exposures
Lending (1)
Securities (2)
Derivatives and other (3)
December 31, 2015
Total exposure
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign (4)
Total
(in millions)
Top 20 country exposures:
United Kingdom
Canada
Ireland
Germany
Cayman Islands
Bermuda
India
China
Brazil
Netherlands
Australia
France
Switzerland
Mexico
Turkey
South Korea
Jersey, C.I.
Chile
Luxembourg
Colombia
$
4,939
2
22
1,279
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17,716
13,437
3,190
1,340
3,177
2,840
2,105
1,907
2,143
1,535
938
558
1,755
1,482
1,479
1,367
1,046
1,270
807
1,004
Total top 20 country exposures
$
6,242
61,096
Eurozone exposure:
Eurozone countries included in Top 20 above (5) $
1,301
7,430
Austria
Spain
Belgium
Italy
Other Eurozone countries (6)
—
—
—
—
21
618
324
245
105
26
Total Eurozone exposure
$
1,322
8,748
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,246
1,007
210
474
—
77
123
181
(2)
358
922
1,039
48
43
—
—
278
20
202
(2)
—
—
—
—
—
—
—
70
—
—
—
—
—
—
—
—
—
4
—
—
1,507
4,939
571
88
330
231
101
2
1
5
39
38
293
10
2
1
—
5
32
42
4
2
22
1,279
—
—
—
70
—
—
—
—
—
—
—
—
—
4
—
—
22,469
15,015
27,408
15,017
3,488
2,144
3,408
3,018
2,230
2,089
2,146
1,932
1,898
1,890
1,813
1,527
1,480
1,367
1,329
1,322
1,051
1,006
3,510
3,423
3,408
3,018
2,230
2,159
2,146
1,932
1,898
1,890
1,813
1,527
1,480
1,367
1,329
1,326
1,051
1,006
8,224
74
3,302
6,316
72,622
78,938
2,283
3
46
23
66
4
2,425
—
—
—
—
—
—
—
792
1,301
10,505
11,806
1
8
1
—
10
812
—
—
—
—
21
622
378
269
171
40
622
378
269
171
61
1,322
11,985
13,307
(1)
(2)
(3)
(4)
(5)
(6)
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 $37 million in PCI loans, predominantly to
customers in the Netherlands and Germany, and $1.2 billion in defeased leases secured primarily by U.S. Treasury and government agency securities, or government
guaranteed.
Represents exposure on debt and equity securities of foreign issuers. Long and short positions are netted and net short positions are reflected as negative exposure.
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, 2015, the gross notional amount of our CDS sold that reference assets in the Top 20 or Eurozone countries was $2.3 billion, which was offset by the notional
amount of CDS purchased of $2.3 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.
For countries presented in the table, total non-sovereign exposure comprises $36.3 billion exposure to financial institutions and $37.8 billion to non-financial corporations
at December 31, 2015.
Consists of exposure to Ireland, Germany, Netherlands, France and Luxembourg included in Top 20.
Includes non-sovereign exposure to Portugal in the amount of $28 million and less than $1 million to Greece. We had no sovereign debt exposure to these countries at
December 31, 2015.
68
Wells Fargo & Company
REAL ESTATE 1-4 FAMILY FIRST AND JUNIOR LIEN
MORTGAGE LOANS Our real estate 1-4 family first and junior
lien mortgage loans primarily include loans we have made to
customers and retained as part of our asset/liability
management strategy. These loans, as presented in Table 22,
include the Pick-a-Pay portfolio acquired from Wachovia, which
is discussed later in this Report. These loans also include other
purchased loans and loans included on our balance sheet as a
result of consolidation of variable interest entities (VIEs).
Table 22: Real Estate 1-4 Family First and Junior Lien Mortgage Loans
(in millions)
Real estate 1-4 family first mortgage
Core portfolio
Non-strategic and liquidating loan portfolios:
Pick-a-Pay mortgage
PCI and liquidating first mortgage
Total non-strategic and liquidating loan portfolios
Total real estate 1-4 family first mortgage loans
Real estate 1-4 family junior lien mortgage
Core portfolio
Non-strategic and liquidating loan portfolios
Total real estate 1-4 family junior lien mortgage loans
December 31, 2015
December 31, 2014
Balance
% of
portfolio
Balance
% of
portfolio
$ 224,750
69%
$ 208,852
64%
39,065
10,054
49,119
273,869
50,652
2,352
53,004
12
3
15
84
15
1
16
45,002
11,532
56,534
265,386
56,631
3,086
59,717
14
4
18
82
17
1
18
Total real estate 1-4 family mortgage loans
$ 326,873
100%
$ 325,103
100%
The real estate 1-4 family mortgage loan portfolio includes
some loans with adjustable-rate features and some with an
interest-only feature as part of the loan terms. Interest-only
loans were approximately 9% and 12% of total loans at
December 31, 2015 and 2014, respectively. We believe we have
manageable adjustable-rate mortgage (ARM) reset risk across
our owned mortgage loan portfolios. We do not offer option
ARM products, nor do we offer variable-rate mortgage products
with fixed payment amounts, commonly referred to within the
financial services industry as negative amortizing mortgage
loans. The option ARMs we do have are included in the Pick-a-
Pay portfolio which was acquired from Wachovia and are part of
our liquidating loan portfolios. Since our acquisition of the Pick-
a-Pay loan portfolio at the end of 2008, the option payment
portion of the portfolio has reduced from 86% to 38% at
December 31, 2015, as a result of our modification activities and
customers exercising their option to convert to fixed payments.
For more information, see the “Pick-a-Pay Portfolio” section in
this Report.
We continue to modify real estate 1-4 family mortgage loans
to assist homeowners and other borrowers experiencing
financial difficulties. 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 is modified either
through a permanent modification or a trial period, 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.
Part of our credit monitoring includes tracking delinquency,
FICO scores and loan/combined loan to 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 2015 on the
non-PCI mortgage portfolio. Loans 30 days or more delinquent
at December 31, 2015, totaled $8.3 billion, or 3%, of total non-
PCI mortgages, compared with $10.2 billion, or 3%, at
December 31, 2014. Loans with FICO scores lower than
640 totaled $21.1 billion at December 31, 2015, or 7% of total
non-PCI mortgages, compared with $25.8 billion, or 9%, at
December 31, 2014. Mortgages with a LTV/CLTV greater than
100% totaled $15.1 billion at December 31, 2015, or 5% of total
non-PCI mortgages, compared with $20.3 billion, or 7%, at
December 31, 2014. Information regarding credit quality
indicators, including PCI credit quality indicators, can be found
in Note 6 (Loans and Allowance for Credit Losses) to Financial
Statements in this Report.
Real estate 1-4 family first and junior lien mortgage loans by
state are presented in Table 23. Our real estate 1-4 family
mortgage loans to borrowers in California represented
approximately 13% of total loans at December 31, 2015, located
mostly within the larger metropolitan areas, with no single
California metropolitan area consisting of more than 5% 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. 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
Wells Fargo & Company
69
Risk Management – Credit Risk Management (continued)
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.
Additional information about AVMs and our policy for their use
can be found in Note 6 (Loans and Allowance for Credit Losses)
to Financial Statements in this Report.
Table 23: Real Estate 1-4 Family First and Junior Lien
Mortgage Loans by State
December 31, 2015
Total real
estate
1-4 % of
total
loans
Real
estate
1-4
family
junior
lien
Real
estate
1-4 family
first
family
mortgage mortgage mortgage
$ 88,367
14,554
102,921
11%
20,962
14,068
11,825
7,209
8,153
5,755
5,977
6,747
2,416
4,823
4,462
2,991
827
2,748
2,397
1,245
23,378
18,891
16,287
10,200
8,980
8,503
8,374
7,992
63,263
16,472
79,735
22,353
—
22,353
3
2
2
1
1
1
1
1
9
2
254,679
52,935
307,614
34
19,190
69
19,259
2
(in millions)
Real estate 1-4 family
loans (excluding PCI):
California
New York
Florida
New Jersey
Virginia
Texas
Pennsylvania
North Carolina
Washington
Other (1)
Government insured/
guaranteed loans (2)
Real estate 1-4 family
loans (excluding PCI)
Real estate 1-4 family
PCI loans (3)
Total
$ 273,869
53,004
326,873
36%
(1)
(2)
(3)
Consists of 41 states; no state had loans in excess of $7.2 billion.
Represents loans whose repayments are predominantly insured by the Federal
Housing Administration (FHA) or guaranteed by the Department of Veterans
Affairs (VA).
Includes $13.4 billion in real estate 1-4 family mortgage PCI loans in
California.
70
Wells Fargo & Company
First Lien Mortgage Portfolio Our total real estate 1-4
family first lien mortgage portfolio increased $8.5 billion in
2015. Growth in this portfolio has been largely offset by runoff in
our real estate 1-4 family first lien mortgage non-strategic and
liquidating portfolios. Excluding this runoff, our core real estate
1-4 family first lien mortgage portfolio increased $15.9 billion in
2015, as we retained $53.1 billion in non-conforming
originations, primarily consisting of loans that exceed
conventional conforming loan amount limits established by
federal government-sponsored entities (GSEs).
The credit performance associated with our real estate 1-4
family first lien mortgage portfolio continued to improve in
2015, as measured through net charge-offs and nonaccrual
loans. Net charge-offs as a percentage of average real estate 1-4
family first lien mortgage loans improved to 0.10% in 2015,
Table 24: First Lien Mortgage Portfolios Performance (1)
compared with 0.19% in 2014. Nonaccrual loans were
$7.3 billion at December 31, 2015, compared with $8.6 billion at
December 31, 2014. Improvement in the credit performance was
driven by an improving housing environment and declining
balances in non-strategic and liquidating loans, which have been
replaced with higher quality assets originated after 2008
generally utilizing tighter underwriting standards. Real estate
1-4 family first lien mortgage loans originated after 2008 have
resulted in minimal losses to date and were approximately 67%
of our total real estate 1-4 family first lien mortgage portfolio as
of December 31, 2015. Table 24 shows the credit attributes of the
core, non-strategic and liquidating first lien mortgage portfolios
and lists the top five states by outstanding balance for the core
portfolio.
(in millions)
Core portfolio:
California
New York
Florida
New Jersey
Texas
Other
Total
Government insured/guaranteed loans
Total core portfolio including government insured/
guaranteed loans
Non-strategic and liquidating portfolios
Outstanding balance
% of loans two payments
or more past due
Loss (recovery) rate
December 31,
December 31,
Year ended December 31,
2015
2014
2015
2014
2015
2014
$
77,270
19,858
11,331
10,283
7,020
67,038
16,102
10,991
9,203
6,646
76,635
72,604
202,397
182,584
22,353
26,268
0.56%
1.55
2.78
3.35
1.21
1.86
1.44
224,750
208,852
29,929
34,822
1.44
14.42
0.83
1.97
3.78
3.95
1.48
2.34
1.89
1.89
15.55
4.08
(0.01)
0.04
0.05
0.18
(0.01)
0.12
0.06
0.06
0.46
0.12
0.02
0.09
0.12
0.30
0.01
0.18
0.11
0.11
0.84
0.24
Total first lien mortgages
$ 254,679
243,674
3.11%
(1) Excludes PCI loans because their losses were generally reflected in PCI accounting adjustments at the date of acquisition.
Wells Fargo & Company
71
Risk Management – Credit Risk Management (continued)
Pick-a-Pay Portfolio The Pick-a-Pay portfolio was one of the
consumer residential first mortgage portfolios we acquired from
Wachovia and a majority of the portfolio was identified as PCI
loans.
The Pick-a-Pay portfolio includes loans that offer payment
options (Pick-a-Pay option payment loans), and also includes
loans that were originated without the option payment feature,
loans that no longer offer the option feature as a result of our
modification efforts since the acquisition, and loans where the
customer voluntarily converted to a fixed-rate product. The Pick-
a-Pay portfolio is included in the consumer real estate 1-4 family
first mortgage class of loans throughout this Report. Table 25
Table 25: Pick-a-Pay Portfolio – Comparison to Acquisition Date
provides balances by types of loans as of December 31, 2015, 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 $23.8 billion at
December 31, 2015, compared with $61.0 billion at acquisition.
Primarily due to modification efforts, the adjusted unpaid
principal balance of option payment PCI loans has declined to
15% of the total Pick-a-Pay portfolio at December 31, 2015,
compared with 51% at acquisition.
December 31, 2015
December 31, 2008
(in millions)
Option payment loans
Non-option payment adjustable-rate and fixed-rate loans
Full-term loan modifications
Total adjusted unpaid principal balance
Total carrying value
Adjusted
unpaid
principal
balance (1) % of total
Adjusted
unpaid
principal
balance (1)
$
16,828
39%
$
99,937
5,706
21,193
43,727
39,065
$
$
13
48
15,763
—
100%
$ 115,700
100%
$
95,315
% of total
86%
14
—
(1) Adjusted unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial
stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.
Pick-a-Pay loans may have fixed or adjustable rates with
payment options that include a minimum payment, an interest-
only payment or fully amortizing payment (both 15 and 30 year
options). Total interest deferred due to negative amortization on
Pick-a-Pay loans was $431 million at December 31, 2015, and
$606 million at December 31, 2014. Approximately 97% of the
Pick-a-Pay customers making a minimum payment in
December 2015 did not defer interest, compared with 95% in
December 2014.
Deferral of interest on a Pick-a-Pay loan may continue as
long as the loan balance remains below a pre-defined principal
cap, which is based on the percentage that the current loan
balance represents to the original loan balance. A significant
portion of the Pick-a-Pay portfolio has a cap of 125% of the
original loan balance. Most of the Pick-a-Pay loans on which
there is a deferred interest balance re-amortize (the monthly
payment amount is reset or “recast”) on the earlier of the date
when the loan balance reaches its principal cap, or generally the
10-year anniversary of the loan. After a recast, the customers’
new payment terms are reset to the amount necessary to repay
the balance over the remainder of the original loan term.
Generally, Pick-a-Pay option payment loans have an annual
7.5% maximum payment increase reset unless a recast event
occurs. If a recast occurs it may cause the payment reset to
exceed 7.5% and result in a significant payment increase, which
can affect some borrowers' ability to repay the outstanding
balance. The amount of Pick-a-Pay option payment loans we
would expect to recast and exceed the 7.5% payment increase
through 2020 is $1.8 billion ($1.2 billion for 2017) assuming a
flat rate environment. Recast risk associated with our Pick-a-Pay
PCI portfolio is covered through our nonaccretable difference.
As a result of our modification efforts, Pick-a-Pay option
payment loans have been reduced to $16.8 billion at
December 31, 2015, from $99.9 billion at acquisition.
72
Wells Fargo & Company
Table 26 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
Table 26: Pick-a-Pay Portfolio (1)
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.
(in millions)
California
Florida
New Jersey
New York
Texas
Other states
December 31, 2015
PCI loans
All other loans
Adjusted
unpaid
Current
Ratio of
carrying
value to
principal
LTV
Carrying
current
Carrying
Ratio of
carrying
value to
current
balance (2)
ratio (3)
value (4)
value (5)
value (4)
value (5)
$
16,552
73% $ 13,405
58% $
9,694
53%
1,875
780
526
204
3,834
82
81
77
57
79
75
1,307
610
465
185
3,066
$ 19,038
55
60
62
51
62
59
2,009
1,314
638
781
5,591
$ 20,027
66
69
67
44
65
59
Total Pick-a-Pay loans
$
23,771
(1)
(2)
(3)
(4)
(5)
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 2015.
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.
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.
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.
The ratio of carrying value to current value is calculated as the carrying value divided by the collateral value.
To maximize return and allow flexibility for customers to
avoid foreclosure, we have in place several loss mitigation
strategies for our Pick-a-Pay loan portfolio. We contact
customers who are experiencing financial difficulty and may in
certain cases modify the terms of a loan based on a customer’s
documented income and other circumstances.
We also have taken steps to work with customers to
refinance or restructure their Pick-a-Pay loans into other loan
products. For customers at risk, we offer combinations of term
extensions of up to 40 years (from 30 years), interest rate
reductions, forbearance of principal, and, in certain cases we
may offer principal forgiveness to customers with substantial
property value declines based on affordability needs.
In 2015, we completed more than 3,600 proprietary and
Home Affordability Modification Program (HAMP) Pick-a-Pay
loan modifications. We have completed nearly 133,000
modifications since the Wachovia acquisition, resulting in over
$6.1 billion of principal forgiveness to our Pick-a-Pay customers.
There remains $10.6 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 $7.1 billion from the
nonaccretable difference to the accretable yield since acquisition.
Our cash flows expected to be collected have been favorably
affected by lower expected defaults and losses as a result of
observed and forecasted economic strengthening, particularly in
housing prices, and our loan modification efforts. These factors
are expected to reduce the frequency and severity of defaults and
keep these loans performing for a longer period, thus increasing
future principal and interest cash flows. The resulting increase in
the accretable yield will be realized over the remaining life of the
portfolio, which is estimated to have a weighted-average
remaining life of approximately 12.0 years at December 31, 2015,
up from 11.7 years at December 31, 2014, due to changes in
composition of cash flows due to improving credit performance.
The accretable yield percentage at December 31, 2015 was 6.21%,
up from 6.15% at the end of 2014 due to favorable changes in the
expected timing and composition of cash flows resulting from
improving credit and prepayment expectations. 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 prepayments, liquidations, modifications and
short sales, can also affect the accretable yield rate and the
estimated weighted-average life of the portfolio.
The predominant portion of our PCI loans is included in the
Pick-a-Pay portfolio. For further information on the judgment
involved in estimating expected cash flows for PCI loans, see the
“Critical Accounting Policies – Purchased Credit-Impaired
Loans” section and Note 1 (Summary of Significant Accounting
Policies) to Financial Statements in this Report.
Wells Fargo & Company
73
Risk Management – Credit Risk Management (continued)
Junior Lien Mortgage Portfolio The junior lien mortgage
portfolio consists of residential mortgage lines and loans that are
subordinate in rights to an existing lien on the same property. It
is not unusual for these lines and loans to have draw periods,
interest only payments, balloon payments, adjustable rates and
similar features. The majority of our junior lien loan products
are amortizing payment loans with fixed interest rates and
repayment periods between five to 30 years.
We continuously monitor the credit performance of our
junior lien mortgage portfolio for trends and factors that
influence the frequency and severity of loss. We have observed
that the severity of loss for junior lien mortgages is high and
generally not affected by whether we or a third party own or
service the related first lien mortgage, but the frequency of
delinquency is typically lower when we own or service the first
lien mortgage. In general, we have limited information available
on the delinquency status of the third party owned or serviced
senior lien where we also hold a junior lien. To capture this
inherent loss content, we use the experience of our junior lien
mortgages behind delinquent first liens that are owned or
serviced by us adjusted for any observed differences in
delinquency and loss rates associated with junior lien mortgages
behind third party first lien mortgages. We incorporate this
inherent loss content into our allowance for loan losses. Our
allowance process for junior liens considers the relative
difference in loss experience for junior liens behind first lien
Table 27: Junior Lien Mortgage Portfolios Performance (1)
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, considers the inherent loss
where the borrower is delinquent on the corresponding first lien
mortgage loans.
Table 27 shows the credit attributes of the core, non-
strategic and liquidating junior lien mortgage portfolios and lists
the top five states by outstanding balance for the core portfolio.
Loans to California borrowers represent the largest state
concentration in each of these portfolios. The decrease in
outstanding balances since December 31, 2014, predominantly
reflects loan paydowns. As of December 31, 2015, 17% of the
outstanding balance of the junior lien mortgage portfolio was
associated with loans that had a combined loan to value (CLTV)
ratio in excess of 100%. Of those junior liens with a CLTV ratio
in excess of 100%, 2.77% were two payments or more past due.
CLTV means the ratio of the total loan balance of first mortgages
and junior lien mortgages (including unused line amounts for
credit line products) to property collateral value. The unsecured
portion (the outstanding amount that was in excess of the most
recent property collateral value) of the outstanding balances of
these loans totaled 7% of the junior lien mortgage portfolio at
December 31, 2015.
(in millions)
Core portfolio
California
Florida
New Jersey
Virginia
Pennsylvania
Other
Total
Non-strategic and liquidating portfolios
Outstanding balance
% of loans two payments
or more past due
Loss rate
December 31,
December 31,
Year ended December 31,
2015
2014
2015
2014
2015
2014
$
13,776
15,535
1.94%
4,718
4,367
2,889
2,721
22,181
50,652
2,283
5,283
4,705
3,160
2,942
25,006
56,631
2,985
59,616
2.41
3.03
2.02
2.33
2.08
2.16
4.56
2.27%
2.07
2.96
3.43
2.18
2.72
2.20
2.36
4.77
2.49
0.16
0.82
1.06
0.73
0.88
0.70
0.60
2.01
0.67
0.48
1.40
1.42
0.84
1.11
0.95
0.90
2.74
1.00
Total junior lien mortgages
$
52,935
(1) Excludes PCI loans because their losses were generally reflected in PCI accounting adjustments at the date of acquisition.
74
Wells Fargo & Company
Our junior lien, as well as first lien, lines of credit products
generally have a draw period of 10 years (with some up to 15 or
20 years) with variable interest rate and payment options during
the draw period of (1) interest only or (2) 1.5% of outstanding
principal balance plus accrued interest. During the draw period,
the borrower has the option of converting all or a portion of the
line from a variable interest rate to a fixed rate with terms
including interest-only payments for a fixed period between
three to seven years or a fully amortizing payment with a fixed
period between five to 30 years. At the end of the draw period, a
line of credit generally converts to an amortizing payment
schedule with repayment terms of up to 30 years based on the
balance at time of conversion. Certain lines and loans have been
structured with a balloon payment, which requires full
repayment of the outstanding balance at the end of the term
period. The conversion of lines or loans to fully amortizing or
balloon payoff may result in a significant payment increase,
which can affect some borrowers’ ability to repay the
outstanding balance.
On a monthly basis, we monitor the payment characteristics
of borrowers in our junior lien portfolio. In December 2015,
approximately 47% of these borrowers paid only the minimum
amount due and approximately 48% paid more than the
minimum amount due. The rest were either delinquent or paid
less than the minimum amount due. For the borrowers with an
interest only payment feature, approximately 36% paid only the
minimum amount due and approximately 60% paid more than
the minimum amount due.
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 28 reflects the outstanding balance of our portfolio of
junior lien mortgages, including lines and loans, and senior lien
lines segregated into scheduled end of draw or end of term
periods and products that are currently amortizing, or in balloon
repayment status. It excludes real estate 1-4 family first lien line
reverse mortgages, which total $2.1 billion, because they are
predominantly insured by the FHA, and it excludes PCI loans,
which total $96 million, because their losses were generally
reflected in our nonaccretable difference established at the date
of acquisition.
Table 28: Junior Lien Mortgage Line and Loan and Senior Lien Mortgage Line Portfolios Payment Schedule
Outstanding balance
Scheduled end of draw/term
2021 and
(in millions)
Junior lien lines and loans
First lien lines
Total (2)(3)
% of portfolios
December 31, 2015
2016
2017
2018
2019
2020
thereafter (1)
Amortizing
$
$
52,935
16,258
69,193
4,683
678
5,361
5,345
780
6,125
2,992
914
3,906
1,194
403
1,597
1,071
371
1,442
25,371
11,279
36,650
12,279
1,833
14,112
100%
8%
9%
6%
2%
2%
53%
20%
(1)
(2)
(3)
Substantially all lines and loans are scheduled to convert to amortizing loans by the end of 2026, with annual scheduled amounts through that date ranging from
$2.8 billion to $8.9 billion and averaging $6.1 billion per year.
Junior and first lien lines are predominantly interest-only during their draw period. The unfunded credit commitments for junior and first lien lines totaled $67.7 billion at
December 31, 2015.
Includes scheduled end-of-term balloon payments for lines and loans totaling $237 million, $366 million, $423 million, $394 million, $429 million and $1.2 billion for 2016
2017, 2018, 2019, 2020, and 2021 and thereafter, respectively. Amortizing lines and loans include $191 million of end-of-term balloon payments, which are past due. At
December 31, 2015, $506 million, or 5% of outstanding lines of credit that are amortizing, are 30 or more days past due compared to $937 million or 2% for lines in their
draw period.
CREDIT CARDS Our credit card portfolio totaled $34.0 billion
at December 31, 2015, which represented 4% of our total
outstanding loans. The net charge-off rate for our credit card
portfolio was 3.00% for 2015, compared with 3.14% for 2014.
AUTOMOBILE Our automobile portfolio, predominantly
composed of indirect loans, totaled $60.0 billion at
December 31, 2015. The net charge-off rate for our automobile
portfolio was 0.72% for 2015, compared with 0.70% for 2014.
OTHER REVOLVING CREDIT AND INSTALLMENT Other
revolving credit and installment loans totaled $39.1 billion at
December 31, 2015, and primarily included student and security-
based loans. Student loans totaled $12.2 billion at December 31,
2015, compared with $11.9 billion at December 31, 2014. The net
charge-off rate for other revolving credit and installment loans
was 1.36% for 2015, compared with 1.35% for 2014.
Wells Fargo & Company
75
Risk Management – Credit Risk Management (continued)
NONPERFORMING ASSETS (NONACCRUAL LOANS AND
FORECLOSED ASSETS) Table 29 summarizes nonperforming
assets (NPAs) for each of the last five years. We generally place
loans on nonaccrual status when:
•
the full and timely collection of interest or principal
becomes uncertain (generally based on an assessment of the
borrower’s financial condition and the adequacy of
collateral, if any);
they are 90 days (120 days with respect to real estate 1-4
family first and junior lien mortgages) past due for interest
or principal, unless both well-secured and in the process of
collection;
part of the principal balance has been charged off;
•
•
•
•
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
consumer real estate and auto 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
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
Total nonperforming assets
As a percentage of total loans
2015
2014
2013
2012
2011
December 31,
$
1,363
969
66
26
538
1,490
187
24
775
2,254
416
30
2,424
2,239
3,475
7,293
1,495
121
49
8,958
11,382
1.24%
$
446
979
1,425
8,583
1,848
137
41
10,609
12,848
1.49
982
1,627
2,609
9,799
2,188
173
33
12,193
15,668
1.91
2,093
1,844
3,937
1,467
3,323
1,003
29
5,822
11,456
2,923
245
40
14,664
20,486
2.57
1,509
2,514
4,023
2,167
4,085
1,890
55
8,197
10,932
1,976
159
40
13,107
21,304
2.77
1,319
3,342
4,661
$
12,807
15,457
19,605
24,509
25,965
1.40%
1.79
2.38
3.07
3.37
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Includes LHFS of $0 million, $1 million, $1 million, $16 million and $25 million at December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
Includes MHFS of $177 million, $177 million, $227 million, $336 million and $301 million at December 31, 2015, 2014, 2013, 2012, and 2011, respectively.
December 31, 2012, includes the impact of the implementation of guidance issued by bank regulatory agencies in 2012.
Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.
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.
See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans.
During fourth quarter 2014, we adopted Accounting Standards Update (ASU) 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure,
effective as of January 1, 2014. This ASU requires that certain government guaranteed residential real estate mortgage loans that meet specific criteria be recognized as
other receivables upon foreclosure; previously, these assets were included in foreclosed assets. Government guaranteed residential real estate mortgage loans that
completed foreclosure during 2014 and met the criteria specified by ASU 2014-14 are excluded from this table and included in Accounts Receivable in Other Assets. For
more information on the changes in foreclosures for government guaranteed residential real estate mortgage loans, see Note 1 (Summary of Specific Accounting Policies)
and Note 7 (Premises, Equipment, Lease Commitments and Other Assets).
76
Wells Fargo & Company
Table 30 provides a summary of nonperforming assets
during 2015.
Table 30: Nonperforming Assets by Quarter During 2015
(in millions)
Nonaccrual loans:
Commercial:
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
% of
total
% of
total
% of
total
Balance
loans
Balance
loans
Balance
loans
Balance
% of
total
loans
Commercial and industrial
$ 1,363
0.45% $ 1,031
0.35% $ 1,079
0.38% $
663
0.24%
Real estate mortgage
Real estate construction
Lease financing
Total commercial
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
0.79
0.30
0.21
0.53
2.66
2.82
0.20
0.13
1.95
1.24
969
66
26
2,424
7,293
1,495
121
49
8,958
11,382
446
979
1,425
0.93
0.70
0.24
0.52
2.74
2.95
0.21
0.11
2.02
1.28
1,125
151
29
2,336
7,425
1,612
123
41
9,201
11,537
502
1,265
1,767
1.04
0.77
0.23
0.58
3.00
3.04
0.22
0.11
2.20
1.40
1,250
165
28
2,522
8,045
1,710
126
40
9,921
12,443
588
1,370
1,958
1.18
0.91
0.19
0.53
3.15
3.11
0.24
0.12
2.31
1.45
1,324
182
23
2,192
8,345
1,798
133
42
10,318
12,510
772
1,557
2,329
Total nonperforming assets
$ 12,807
1.40% $ 13,304
1.47% $ 14,401
1.62% $ 14,839
1.72%
Change in NPAs from prior quarter
$
(497)
(1,097)
(438)
(618)
Wells Fargo & Company
77
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
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Year ended Dec 31,
2015
2015
2015
2015
2015
2014
Quarter ended
$
2,336
793
(44)
(72)
(243)
(346)
(705)
2,522
382
2,192
840
2,239
496
2,239
2,511
(26)
(32)
(135)
(375)
(568)
(20)
(11)
(117)
(362)
(510)
(67)
(24)
(107)
(345)
(543)
(157)
(139)
(602)
(1,428)
(2,326)
2,424
2,336
2,522
2,192
2,424
9,201
1,226
(646)
(89)
(204)
(530)
9,921
1,019
10,318
1,098
10,609
10,609
1,341
4,684
(676)
(99)
(228)
(736)
(668)
(108)
(229)
(490)
(686)
(111)
(265)
(570)
(2,676)
(407)
(926)
(2,326)
(1,469)
(1,739)
(1,495)
(1,632)
(6,335)
8,958
9,201
9,921
10,318
8,958
3,475
1,552
(280)
(174)
(501)
(1,833)
(2,788)
2,239
12,193
6,306
(3,706)
(540)
(1,315)
(2,329)
(7,890)
10,609
12,848
Total nonaccrual loans
$
11,382
11,537
12,443
12,510
11,382
(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, foreclosed, or are no longer
classified as nonaccrual as a result of continued performance
and an improvement in the borrower’s financial condition and
loan repayment capabilities. Also, reductions can come from
borrower repayments even if the loan remains on nonaccrual.
While nonaccrual loans are not free of loss content, we
believe exposure to loss is significantly mitigated by the
following factors at December 31, 2015:
•
98% of total commercial nonaccrual loans and over 99% of
total consumer nonaccrual loans are secured. Of the
consumer nonaccrual loans, 98% are secured by real estate
and 75% have a combined LTV (CLTV) ratio of 80% or less.
losses of $483 million and $3.1 billion have already been
recognized on 28% 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 guidance issued by bank
regulatory agencies), we transfer it to nonaccrual status.
When the loan reaches 180 days past due, or is discharged
in bankruptcy, it is our policy to write these loans down to
net realizable value (fair value of collateral less estimated
costs to sell), except for modifications in their trial period
that are not written down as long as trial payments are
made on time. Thereafter, we reevaluate each loan regularly
and record additional write-downs if needed.
79% of commercial nonaccrual loans were current on
interest, but were on nonaccrual status because the full or
•
•
78
•
•
timely collection of interest or principal had become
uncertain.
the risk of loss of all nonaccrual loans has been considered
and we believe is adequately covered by the allowance for
loan losses.
$1.9 billion of consumer loans discharged in bankruptcy and
classified as nonaccrual were 60 days or less past due, of
which $1.7 billion were current.
We continue to work with our customers experiencing
financial difficulty to determine if they can qualify for a loan
modification so that they can stay in their homes. Under both
our proprietary modification programs and the MHA programs,
customers may be required to provide updated documentation,
and some programs require completion of payment during trial
periods to demonstrate sustained performance before the loan
can be removed from nonaccrual status. In addition, for loans in
foreclosure in certain states, including New York and New
Jersey, the foreclosure timeline has significantly increased due
to backlogs in an already complex process. Therefore, some
loans may remain on nonaccrual status for a long period.
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 $700 million of
interest would have been recorded as income on these loans,
compared with $569 million actually recorded as interest income
in 2015, versus $741 million and $598 million, respectively, in
2014.
Table 32 provides a summary of foreclosed assets and an
analysis of changes in foreclosed assets.
Wells Fargo & Company
Table 32: Foreclosed Assets
(in millions)
Summary by loan segment
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Year ended Dec 31,
2015
2015
2015
2015
2015
2014
Quarter ended
Government insured/guaranteed
$
446
PCI loans:
Commercial
Consumer
Total PCI loans
All other loans:
Commercial
Consumer
Total all other loans
152
103
255
384
340
724
502
297
126
423
437
405
842
588
305
160
465
458
447
905
Total foreclosed assets
$
1,425
1,767
1,958
772
446
329
197
526
548
483
1,031
2,329
152
103
255
384
340
724
1,425
982
352
212
564
565
498
1,063
2,609
Analysis of changes in foreclosed assets
Balance, beginning of period
$
1,767
1,958
Net change in government insured/guaranteed (1)
Additions to foreclosed assets (2)
Reductions:
Sales
Write-downs and net gains (losses) on sales
Total reductions
Balance, end of period
(56)
327
(719)
106
(613)
(86)
325
(468)
38
(430)
2,329
(184)
300
(531)
44
(487)
2,609
2,609
3,937
(210)
356
(536)
(1,111)
1,308
1,595
(451)
(2,169)
(1,866)
25
213
54
(426)
(1,956)
(1,812)
$
1,425
1,767
1,958
2,329
1,425
2,609
(1)
(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 $46 million, $38 million, $24 million, and $49 million for the quarters ended
December 31, September 30, June 30, and March 31, 2015 and $157 million and $191 million for the years ended December 31, 2015 and 2014, respectively.
Predominantly include loans moved into foreclosure from nonaccrual status, PCI loans transitioned directly to foreclosed assets and repossessed automobiles.
Foreclosed assets at December 31, 2015, included
$861 million of foreclosed residential real estate that had
collateralized commercial and consumer loans, of which 52% is
predominantly FHA insured or VA guaranteed and expected to
have minimal or no loss content. The remaining foreclosed
assets balance of $564 million has been written down to
estimated net realizable value. The decrease in foreclosed assets
at December 31, 2015, compared with December 31, 2014,
reflected improving credit trends as well as the continued
decline in government insured/guaranteed foreclosed assets
attributed to the adoption of ASU 2014-14, which requires that
government guaranteed residential real estate mortgage loans
that meet specific criteria be recognized as other receivables
upon foreclosure (previously, these were included in foreclosed
assets). Of the $1.4 billion in foreclosed assets at December 31,
2015, 41% have been in the foreclosed assets portfolio one year
or less.
Wells Fargo & Company
79
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
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)
Total TDRs
TDRs on nonaccrual status
TDRs on accrual status (1)
Total TDRs
2015
2014
2013
2012
2011
December 31,
1,123
1,456
125
1
2,705
724
1,880
314
2
2,920
1,034
2,248
475
8
3,765
1,700
2,625
801
20
5,146
2,046
2,262
1,008
33
5,349
16,812
2,306
18,226
2,437
18,925
2,468
17,804
2,390
13,799
1,986
299
105
73
402
19,997
22,702
6,506
16,196
$
22,702
338
127
49
452
21,629
24,549
7,104
17,445
24,549
431
189
33
650
22,696
26,461
8,172
18,289
26,461
531
314
24
705
21,768
26,914
10,149
16,765
26,914
593
260
19
651
17,308
22,657
6,811
15,846
22,657
$
$
$
(1)
TDR loans include $1.8 billion, $2.1 billion, $2.5 billion, $1.9 billion, and $318 million at December 31, 2015, 2014, 2013, 2012, and 2011, respectively, of government
insured/guaranteed loans that are predominantly insured by the FHA or guaranteed by the VA and are accruing.
Table 34: TDRs Balance by Quarter During 2015
(in millions)
Commercial TDRs
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
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,
Sep 30,
2015
2015
Jun 30,
2015
Mar 31,
2015
1,123
1,456
125
1
2,705
999
1,623
207
1
2,830
808
1,740
236
2
2,786
779
1,838
247
2
2,866
16,812
2,306
17,193
2,336
17,692
2,381
18,003
2,424
299
105
73
402
19,997
22,702
6,506
16,196
$
22,702
307
109
63
421
20,429
23,259
6,709
16,550
23,259
315
112
58
450
21,008
23,794
6,889
16,905
23,794
326
124
54
432
21,363
24,229
6,982
17,247
24,229
$
$
$
Table 33 and Table 34 provide information regarding the
recorded investment of loans modified in TDRs. The allowance
for loan losses for TDRs was $2.7 billion and $3.6 billion at
December 31, 2015 and 2014, 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.
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
80
Wells Fargo & Company
has been modified, if the borrower has demonstrated
performance under the previous terms and the underwriting
process shows the capacity to continue to perform under the
restructured terms, the loan will generally remain in accruing
status. Otherwise, the loan will be placed in nonaccrual status
until the borrower demonstrates a sustained period of
performance, generally six consecutive months of payments, or
equivalent, inclusive of consecutive payments made prior to
modification. Loans will also be placed on nonaccrual, and a
corresponding charge-off is recorded to the loan balance, when
we believe that principal and interest contractually due under
the modified agreement will not be collectible.
Table 35: Analysis of Changes in TDRs
Table 35 provides an analysis of the changes in TDRs. Loans
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 (1)
Outflows
Charge-offs
Foreclosure
Payments, sales and other (2)
Balance, end of period
Consumer TDRs
Balance, beginning of period
Inflows (1)
Outflows
Charge-offs
Foreclosure
Payments, sales and other (2)
Net change in trial modifications (3)
Balance, end of period
Total TDRs
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Year ended Dec. 31,
2015
2015
2015
2015
2015
2014
Quarter ended
$
2,830
474
(109)
(64)
(426)
2,786
573
(86)
(30)
(413)
2,866
372
(20)
(5)
(427)
2,920
310
2,920
1,729
(26)
(11)
(241)
(110)
3,765
1,158
(155)
(50)
(327)
(1,593)
(1,798)
2,705
2,830
2,786
2,866
2,705
2,920
20,429
672
(73)
(226)
(786)
(19)
19,997
$
22,702
21,008
753
(79)
(226)
(998)
(29)
20,429
23,259
21,363
747
(71)
(242)
(807)
18
21,008
23,794
21,629
755
21,629
2,927
(88)
(245)
(668)
(20)
21,363
24,229
(311)
(939)
(3,259)
(50)
19,997
22,702
22,696
4,010
(515)
(1,163)
(3,201)
(198)
21,629
24,549
(1)
(2)
Inflows include loans that both modify and resolve within the period as well as advances on loans that modified in a prior period.
Other outflows include normal amortization/accretion of loan basis adjustments and loans transferred to held-for-sale. It also includes $6 million of loans refinanced or
restructured at market terms and qualifying as new loans and removed from TDR classification for the quarter ended December 31, 2015, while no loans were removed
from TDR classification for the quarters ended September 30, June 30, and March 31, 2015. During 2014, $1 million of loans refinanced or structured as new loans and
were removed from TDR classification.
(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 substantially all of the mortgages that enter a trial payment period program are successful in completing the program
requirements.
Wells Fargo & Company
81
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, 2015, were up
$61 million, or 7%, from December 31, 2014, primarily due to
increases in our credit card and dealer floorplan lending
Table 36: Loans 90 Days or More Past Due and Still Accruing
businesses, partially offset by improvement in consumer real
estate lending.
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 $13.4 billion at December 31, 2015,
down from $16.9 billion at December 31, 2014, due to improving
credit trends.
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.
(in millions)
Total (excluding PCI (1)):
2015
2014
2013
2012
2011
$ 14,380
17,810
23,219
23,245
22,569
December 31,
Less: FHA insured/guaranteed by the VA (2)(3)
13,373
16,827
21,274
20,745
19,240
$
$
Less: Student loans guaranteed under the FFELP (4)
Total, not government insured/guaranteed
By segment and class, not government insured/guaranteed:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
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
Total, not government insured/guaranteed
$
26
981
97
13
4
114
224
65
397
79
102
867
981
63
920
900
1,045
1,065
1,435
1,281
2,048
31
16
—
47
260
83
364
73
93
873
920
11
35
97
143
354
86
321
55
86
902
1,045
48
228
27
303
564
133
310
40
85
159
256
89
504
781
279
346
51
87
1,132
1,435
1,544
2,048
(1)
(2)
(3)
(4)
PCI loans totaled $2.9 billion, $3.7 billion, $4.5 billion, $6.0 billion and $8.7 billion at December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
Includes mortgages held for sale 90 days or more past due and still accruing.
Represents loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the FFELP. In fourth quarter 2014,
substantially all government guaranteed loans were sold.
82
Wells Fargo & Company
NET CHARGE-OFFS
Table 37: Net Charge-offs
Year ended
Quarter ended
December 31,
December 31,
September 30,
June 30,
March 31,
Net loan
% of
Net loan
% of
Net loan
% of
Net loan
% of
Net loan
charge-
offs
avg.
loans
charge-
avg.
charge-
avg.
charge-
avg.
charge-
offs
loans (1)
offs
loans (1)
offs
loans (1)
offs
loans (1)
% of
avg.
($ in millions)
2015
Commercial:
Commercial and industrial
$
Real estate mortgage
Real estate construction
Lease financing
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
2014
Commercial:
482
(68)
(33)
6
387
0.17% $
215
0.29% $
122
0.17% $
(0.06)
(0.16)
0.05
0.09
(19)
(10)
1
187
(0.06)
(0.18)
0.01
0.16
(23)
(8)
3
94
(0.08)
(0.15)
0.11
0.08
262
0.10
376
941
417
509
2,505
0.67
3.00
0.72
1.36
0.55
$ 2,892
0.33% $
50
70
243
135
146
644
831
0.07
0.52
2.93
0.90
1.49
0.56
0.36% $
Commercial and industrial
$
Real estate mortgage
Real estate construction
Lease financing
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
258
(94)
(127)
7
44
509
626
864
380
522
2,901
0.10 % $
(0.08)
(0.72)
0.06
0.01
82
(25)
(26)
1
32
0.12 % $
(0.09)
(0.56)
0.05
0.03
0.19
1.00
3.14
0.70
1.35
0.65
88
0.13
134
221
132
128
703
735
0.88
2.97
0.94
1.45
0.63
0.34 % $
$
2,945
0.35 % $
81
(15)
(6)
2
62
67
94
243
68
116
588
650
60
(10)
(20)
1
31
137
160
211
46
132
686
717
0.12% $
(0.05)
(0.11)
0.06
0.06
64
(11)
(9)
—
44
0.10%
(0.04)
(0.19)
—
0.04
0.10
0.66
3.21
0.48
1.26
0.53
0.30% $
0.10 % $
(0.04)
(0.47)
0.05
0.03
0.21
1.02
3.20
0.35
1.22
0.62
0.35 % $
83
0.13
123
239
101
118
664
708
49
(22)
(23)
1
5
170
192
231
90
137
820
825
0.85
3.19
0.73
1.32
0.60
0.33%
0.08 %
(0.08)
(0.54)
0.03
0.01
0.27
1.19
3.57
0.70
1.29
0.75
0.41 %
62
89
216
113
129
609
703
67
(37)
(58)
4
(24)
114
140
201
112
125
692
668
0.09
0.64
2.71
0.76
1.35
0.53
0.31% $
0.11 % $
(0.13)
(1.27)
0.10
0.02
0.17
0.90
2.87
0.81
1.46
0.62
0.32 % $
(1) Quarterly net charge-offs (recoveries) as a percentage of average respective loans are annualized.
Table 37 presents net charge-offs for the four quarters and full
year of 2015 and 2014. Net charge-offs in 2015 were $2.9 billion
(0.33% of average total loans outstanding) compared with
$2.9 billion (0.35%) in 2014. The increase in commercial and
industrial net charge-offs in 2015 reflected continued
deterioration within the oil and gas portfolio. Our commercial
real estate portfolios were in a net recovery position every
quarter in 2015 and 2014. We continued to have strong credit
improvement in our residential real estate secured portfolios,
benefiting from improvement in the housing market, with losses
down $497 million, or 44%, from 2014.
Wells Fargo & Company
83
Risk Management – Credit Risk Management (continued)
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 characteristics. The process
involves subjective and complex judgments. In addition, we
review a variety of credit metrics and trends. These credit
metrics and trends, however, do not solely determine the
amount of the allowance as we use several analytical tools. Our
Table 38: Allocation of the Allowance for Credit Losses (ACL)
estimation approach for the commercial portfolio reflects the
estimated probability of default in accordance with the
borrower's financial strength, and the severity of loss in the
event of default, considering the quality of any underlying
collateral. Probability of default and severity at the time of
default are statistically derived through historical observations of
defaults and losses after default within each credit risk rating.
Our estimation approach for the consumer portfolio uses
forecasted losses that represent our best estimate of inherent
loss based on historical experience, quantitative and other
mathematical techniques over the loss emergence period. For
additional information on our allowance for credit losses, see the
“Critical Accounting Policies – Allowance for Credit Losses”
section 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.
Dec 31, 2015
Dec 31, 2014
Dec 31, 2013
Dec 31, 2012
Dec 31, 2011
Loans
as %
of total
Loans
as %
of total
Loans
as %
of total
Loans
as %
of total
Loans
as %
of total
ACL
loans
ACL
loans
ACL
loans
ACL
loans
ACL
loans
(in millions)
Commercial:
Commercial and industrial
$ 4,231
33% $ 3,506
32% $ 3,040
29% $ 2,789
28% $ 2,810
27%
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
1,264
1,210
167
6,872
13
3
1
50
1,576
1,097
198
13
2
1
2,157
14
2,284
13
2,570
14
775
131
2
1
552
89
2
2
893
85
2
2
6,377
48
6,103
46
5,714
45
6,358
45
Real estate 1-4 family first mortgage
1,895
30
2,878
31
4,087
32
6,100
31
6,934
30
Real estate 1-4 family junior lien
mortgage
Credit card
Automobile
Other revolving credit and
installment
1,223
1,412
529
581
6
4
6
4
1,566
1,271
516
561
7
4
6
4
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
Total consumer
5,640
50
6,792
52
8,868
54
11,763
55
13,310
55
Total
$ 12,512
100% $ 13,169
100% $ 14,971
100% $ 17,477
100% $ 19,668
100%
Dec 31, 2015
Dec 31, 2014
Dec 31, 2013
Dec 31, 2012
Dec 31, 2011
$
$
Components:
Allowance for loan losses
Allowance for unfunded credit
commitments
Allowance for credit losses
Allowance for loan losses as a
percentage of total loans
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
11,545
967
12,512
1.26%
399
1.37
110
12,319
850
13,169
1.43
418
1.53
103
14,502
469
14,971
1.76
322
1.82
96
17,060
417
17,477
2.13
189
2.19
85
19,372
296
19,668
2.52
171
2.56
92
84
Wells Fargo & Company
In addition to the allowance for credit losses, there was
We believe the allowance for credit losses of $12.5 billion at
December 31, 2015, was appropriate to cover credit losses
inherent in the loan portfolio, including unfunded credit
commitments, at that date. Approximately $1.2 billion of the
allowance at December 31, 2015 was allocated to our oil and gas
portfolio, however the entire allowance is available to absorb
credit losses inherent in the total loan portfolio. 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. Future allowance levels
may increase or decrease based on a variety of factors, including
loan growth, portfolio performance and general economic
conditions. 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.
$1.9 billion at December 31, 2015, and $2.9 billion at
December 31, 2014, 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. Additionally, loans
purchased at fair value generally reflect a lifetime credit loss
adjustment and therefore do not initially require additions to the
allowance as is typically associated with loan growth. 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 our nonaccrual loans
were real estate 1-4 family first and junior lien mortgage loans at
December 31, 2015.
The allowance for credit losses declined in 2015, which
reflected continued credit improvement, particularly in our
residential real estate portfolios and primarily associated with
continued improvement in the housing market, partially offset
by an increase in our commercial allowance to reflect
deterioration in the oil and gas portfolio. The total provision for
credit losses was $2.4 billion in 2015, $1.4 billion in 2014 and
$2.3 billion in 2013. The 2015 provision for credit losses was
$450 million less than net charge-offs, due to strong underlying
credit, and improvement in the housing market. The 2014
provision was $1.6 billion less than net charge-offs, and the 2013
provision was $2.2 billion less than net charge-offs. For each of
2014 and 2013, the provision was influenced by continually
improving credit performance.
Wells Fargo & Company
85
Risk Management – Credit Risk Management (continued)
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. The majority of repurchase demands are on loans
that default in the first 24 to 36 months following origination of
the mortgage loan.
In connection with our sales and securitization of residential
mortgage loans to various parties, we have established a
mortgage repurchase liability, initially at fair value, related to
various representations and warranties that reflect
management’s estimate of losses for loans for which we could
have a repurchase obligation, whether or not we currently
service those loans, based on a combination of factors. Our
mortgage repurchase liability estimation process also
incorporates a forecast of repurchase demands associated with
mortgage insurance rescission activity.
Because we retain the servicing for most of the mortgage
loans we sell or securitize, we believe the quality of our
residential mortgage loan servicing portfolio provides helpful
information in evaluating our repurchase liability. Of the
$1.6 trillion in the residential mortgage loan servicing portfolio
at December 31, 2015, 95% was current and less than 2% was
subprime at origination. Our combined delinquency and
foreclosure rate on this portfolio was 5.18% at December 31,
2015, compared with 5.79% at December 31, 2014. Three percent
Table 39: Changes in Mortgage Repurchase Liability
of this portfolio is private label securitizations for which we
originated the loans and, therefore, have some repurchase risk.
The overall level of unresolved repurchase demands and
mortgage insurance rescissions outstanding at
December 31, 2015, was $62 million, representing 280 loans,
down from $183 million, or 839 loans, a year ago, as we
observed a decline in new demands and continued to work
through the outstanding 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.
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 the 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 summarizes the changes in our mortgage
repurchase liability. We incurred net losses on repurchased
loans and investor reimbursements totaling $78 million in 2015,
compared with $144 million in 2014.
(in millions)
Balance, beginning of period
Provision for repurchase losses:
Loan sales
Change in estimate (1)
Total additions (reductions)
Losses (2)
Balance, end of period
Quarter ended
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Year ended Dec. 31,
2015
2015
2015
$
538
557
586
9
(128)
(119)
(41)
11
(17)
(6)
(13)
13
(31)
(18)
(11)
$
378
538
557
2015
615
10
(26)
(16)
(13)
586
2015
615
43
(202)
(159)
(78)
378
2014
899
44
(184)
(140)
(144)
615
2013
2,206
143
285
428
(1,735)
899
(1)
(2)
Results from changes in investor demand and mortgage insurer practices, credit deterioration and changes in the financial stability of correspondent lenders.
Year ended December 31, 2013, reflects $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. Year ended December 31, 2013, reflects $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.
86
Wells Fargo & Company
Our liability for mortgage repurchases, included in “Accrued
expenses and other liabilities” in our consolidated balance sheet,
represents our best estimate of the probable loss that we expect
to incur for various representations and warranties in the
contractual provisions of our sales of mortgage loans. The
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. The liability was $378 million at December 31, 2015,
and $615 million at December 31, 2014. In 2015, we released
$159 million, which increased net gains on mortgage loan
origination/sales activities, compared with a release of
$140 million in 2014. The release in 2015 was primarily due to
resolving certain exposures and a re-estimation of our liability
based on recently observed trends.
Because of the uncertainty in the various estimates
underlying the mortgage repurchase liability, there is a range of
losses in excess of the recorded mortgage repurchase liability
that are reasonably possible. The estimate of the range of
possible loss for representations and warranties does not
represent a probable loss, and is based on currently available
information, significant judgment, and a number of assumptions
that are subject to change. The high end of this range of
reasonably possible losses exceeded our recorded liability by
$293 million at December 31, 2015, and was determined based
upon modifying the assumptions (particularly to assume
significant changes in investor repurchase demand practices)
used in our best estimate of probable loss to reflect what we
believe to be the high end of reasonably possible adverse
assumptions. Our estimate of reasonably possible losses
decreased in 2015 as court rulings during the year provided a
better understanding of our exposure to repurchase risk. For
additional information on our repurchase liability, see Note 9
(Mortgage Banking Activities) to Financial Statements in this
Report.
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.
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 on the mortgage
loans, (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
related servicing agreement, 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 observe 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 for 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 willful 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.
Consent Orders and Settlement Agreements for
Mortgage Servicing and Foreclosure Practices
In connection with our servicing activities we have entered into
various settlements with federal and state regulators to resolve
certain alleged servicing issues and practices. In general, these
settlements required us to provide customers with loan
modification relief, refinancing relief, and foreclosure prevention
and assistance, as well as imposed certain monetary penalties on
us.
In particular, on February 28, 2013, we entered into
amendments to an April 2011 Consent Order with both the
Office of the Comptroller of the Currency (OCC) and the FRB,
which effectively ceased the Independent Foreclosure Review
program created by such Consent Order and replaced it with an
accelerated remediation commitment to provide foreclosure
prevention actions on $1.2 billion of residential mortgage loans,
subject to a process to be administered by the OCC and the FRB.
Wells Fargo & Company
87
Risk Management – Credit Risk Management (continued)
During 2014, we reported sufficient foreclosure prevention
actions to satisfy the $1.2 billion financial commitment.
In June 2015, we entered into an additional amendment to
the April 2011 Consent Order with the OCC to address 15 of the
98 actionable items contained in the April 2011 Consent Order
that were still considered open. This amendment requires that
we remediate certain activities associated with our mortgage
loan servicing practices and allows for the OCC to take additional
supervisory action, including possible civil money penalties, if
we do not comply with the terms of this amended Consent
Order. In addition, this amendment prohibits us from acquiring
new mortgage servicing rights or entering into new mortgage
servicing contracts, other than mortgage servicing associated
with originating mortgage loans or purchasing loans from
correspondent clients in our normal course of business.
Additionally, this amendment prohibits any new off-shoring of
new mortgage servicing activities and requires OCC approval to
outsource or sub-service any new mortgage servicing activities.
Asset/Liability Management
Asset/liability management involves evaluating, monitoring and
managing interest rate risk, market risk, liquidity and funding.
Primary oversight of interest rate risk and market risk 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. Primary oversight of liquidity and funding
resides with the Risk Committee of the Board. At the
management level we utilize a Corporate Asset/Liability
Management Committee (Corporate ALCO), which consists of
senior financial, risk, and business executives, to oversee these
risks and report on them periodically to the Board’s Finance
Committee and Risk Committee as appropriate. Each of our
principal lines of business has its own asset/liability
management committee and process linked to the Corporate
ALCO process. As discussed in more detail for trading activities
below, we employ separate management level oversight specific
to market risk. Market risk, in its broadest sense, refers to the
possibility that losses will result from the impact of adverse
changes in market rates and prices on our trading and non-
trading portfolios and financial instruments.
INTEREST RATE RISK Interest rate risk, which potentially can
have a significant earnings impact, is an integral part of being a
financial intermediary. We are subject to interest rate risk
because:
•
assets and liabilities may mature or reprice at different
times (for example, if assets reprice faster than liabilities
and interest rates are generally falling, earnings will initially
decline);
assets and liabilities may reprice at the same time but by
different amounts (for example, when the general level of
interest rates is falling, we may reduce rates paid on
checking and savings deposit accounts by an amount that is
less than the general decline in market interest rates);
short-term and long-term market interest rates may change
by different amounts (for example, the shape of the yield
curve may affect new loan yields and funding costs
differently);
the remaining maturity of various assets or liabilities may
shorten or lengthen as interest rates change (for example, if
long-term mortgage interest rates decline sharply, MBS held
in the investment securities portfolio may prepay
significantly earlier than anticipated, which could reduce
portfolio income); or
•
•
•
88
•
interest rates may also have a direct or indirect effect on
loan demand, collateral values, credit losses, mortgage
origination volume, the fair value of MSRs and other
financial instruments, the value of the pension liability and
other items affecting earnings.
We assess interest rate risk by comparing outcomes under
various earnings simulations using many interest rate scenarios
that differ in the direction of interest rate changes, the degree of
change over time, the speed of change and the projected shape of
the yield curve. These simulations require assumptions
regarding how changes in interest rates and related market
conditions could influence drivers of earnings and balance sheet
composition such as loan origination demand, prepayment
speeds, deposit balances and mix, as well as pricing strategies.
Our risk measures include both net interest income
sensitivity and interest rate sensitive noninterest income and
expense impacts. We refer to the combination of these exposures
as interest rate sensitive earnings. In general, the Company is
positioned to benefit from higher interest rates. Currently, our
profile is such that net interest income will benefit from higher
interest rates as our assets reprice faster and to a greater degree
than our liabilities, and, in response to lower market rates, our
assets will reprice downward and to a greater degree than our
liabilities. Our interest rate sensitive noninterest income and
expense is largely driven by mortgage activity, and tends to move
in the opposite direction of our net interest income. So, in
response to higher interest rates, mortgage activity, primarily
refinancing activity, generally declines. And in response to lower
rates, mortgage activity generally increases. Mortgage results in
our simulations 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
interest rates versus our most likely scenario. Although the
performance in these rate scenarios contain initial benefit from
increased mortgage banking activity, the result is lower earnings
relative to the most likely scenario over time given pressure on
net interest income. The higher rate scenarios (scenario 3 and
scenario 4) measure the impact of varying degrees of rising
short-term and long-term interest rates over the course of the
forecast horizon relative to the most likely scenario, both
resulting in positive earnings sensitivity.
As of December 31, 2015, 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 40, indicating cumulative
net income after tax earnings sensitivity relative to the most
likely earnings plan over the 24 month horizon (a positive range
indicates a beneficial earnings sensitivity measurement relative
to the most likely earnings plan and a negative range indicates a
detrimental earnings sensitivity relative to the most likely
earnings plan).
Wells Fargo & Company
Table 40: Earnings Sensitivity Over 24 Month Horizon
Relative to Most Likely Earnings Plan
Most
Lower rates
Higher rates
likely
Scenario 1
Scenario 2 Scenario 3 Scenario 4
Ending rates:
Federal funds
2.12 %
0.25
1.86
2.35
5.25
10-year
treasury (1)
Earnings relative
to most likely
3.49
1.80
2.99
3.99
6.30
N/A
(3)-(4) %
(1)-(2)
0-5
0-5
(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,
2015, and 2014, are presented in Note 16 (Derivatives) to
Financial Statements in this Report. We use derivatives for
asset/liability management in two main ways:
•
to convert the cash flows from selected asset and/or liability
instruments/portfolios, including investments, commercial
loans and long-term debt, from fixed-rate payments to
floating-rate payments, or vice versa; and
to economically hedge our mortgage origination pipeline,
funded mortgage loans and MSRs using interest rate swaps,
swaptions, futures, forwards and options.
•
MORTGAGE BANKING INTEREST RATE AND MARKET RISK
We originate, fund and service mortgage loans, which subjects
us to various risks, including credit, liquidity and interest rate
risks. Based on market conditions and other factors, we reduce
credit and liquidity risks by selling or securitizing a majority of
the long-term fixed-rate mortgage and ARM loans 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 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.
With the decrease in average mortgage interest rates in
2015, our mortgage banking revenue increased as the level of
mortgage loan refinance activity increased compared with 2014.
The increase in mortgage loan origination income (primarily
driven by the increase in mortgage loan volume) more than
offset the decrease in net servicing income. Despite the
continued slow recovery in the housing sector, and the continued
lack of liquidity in the nonconforming secondary markets, our
mortgage banking revenue was strong in 2015, reflecting the
complementary origination and servicing strengths of the
business. The secondary market for agency-conforming
mortgages functioned well during 2015.
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
2015 and 2014, 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.
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
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 the entire potential decline in the value of our MSRs
Wells Fargo & Company
89
Risk Management - Asset/Liability Management (continued)
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 2015, our economic hedging strategy generally used
forward mortgage purchase contracts that were effective at
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:
•
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 our net gains on loan originations
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
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, 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 $13.7 billion and $14.0 billion at December 31, 2015
and 2014, respectively. The weighted-average note rate on our
portfolio of loans serviced for others was 4.37% and 4.45% at
December 31, 2015 and 2014, respectively. The carrying value of
our total MSRs represented 0.77% and 0.75% of mortgage loans
serviced for others at December 31, 2015 and 2014, 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.
90
Wells Fargo & Company
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 The Finance
Committee of our Board of Directors reviews the acceptable
market risk appetite for our trading activities. We engage in
trading activities primarily to accommodate the investment and
risk management activities of our customers (which involves
transactions that are recorded as trading assets and liabilities on
our balance sheet), to execute economic hedging to manage
certain balance sheet risks and, to a very limited degree, for
proprietary trading for our own account. These activities
primarily occur within our Wholesale Banking businesses and to
a lesser extent other divisions of the Company. All of our trading
assets and liabilities, including securities, foreign exchange
transactions, commodity transactions, and derivatives are
carried at fair value. Income earned related to these trading
activities include net interest income and changes in fair value
related to trading assets and liabilities. Net interest income
earned on trading assets and liabilities is reflected in the interest
income and interest expense components of our income
statement. Changes in fair value of trading assets and liabilities
are reflected in net gains on trading activities, a component of
noninterest income in our income statement.
Table 41 presents total revenue from trading activities.
Table 41: Net gains (losses) from Trading Activities
(in millions)
Interest income (1)
Less: Interest expense (2)
Net interest income
Noninterest income:
Net gains (losses) from
trading activities (3):
Customer
accommodation
Economic hedges
and other (4)
Proprietary trading
Total net gains
from trading
activities
Total trading-related net
interest and noninterest
income
Year ended December 31,
2015
1,971
357
1,614
806
(192)
—
2014
1,685
382
1,303
924
233
4
2013
1,376
307
1,069
1,278
332
13
614
1,161
1,623
2,228
2,464
2,692
(1)
(2)
(3)
(4)
Represents interest and dividend income earned on trading securities.
Represents interest and dividend expense incurred on trading securities we
have sold but have not yet purchased.
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.
Excludes economic hedging of mortgage banking and asset/liability
management activities, for which hedge results (realized and unrealized) are
reported with the respective hedged activities.
Customer accommodation Customer accommodation activities
are conducted to help customers manage their investment and
risk management needs. We engage in market-making activities
or act as an intermediary to purchase or sell financial
instruments in anticipation of or in response to customer needs.
This category also includes positions we use to manage our
exposure to customer transactions.
For the majority of our customer accommodation trading,
we serve as intermediary between buyer and seller. For example,
we may purchase or sell a derivative to a customer who wants to
manage interest rate risk exposure. We typically enter into
offsetting derivative or security positions with a separate
counterparty or exchange to manage our exposure to the
derivative with our customer. We earn income on this activity
based on the transaction price difference between the customer
and offsetting derivative or security positions, which is reflected
in the fair value changes of the positions recorded in net gains on
trading activities.
Customer accommodation trading also includes net gains
related to market-making activities in which we take positions to
facilitate customer order flow. For example, we may own
securities recorded as trading assets (long positions) or sold
securities we have not yet purchased, recorded as trading
liabilities (short positions), typically on a short-term basis, to
facilitate support of buying and selling demand from our
customers. As a market maker in these securities, we earn
income due to: (1) the difference between the price paid or
received for the purchase and sale of the security (bid-ask
spread), (2) the net interest income, and (3) the change in fair
value of the long or short positions during the short-term period
held on our balance sheet. Additionally, we may enter into
separate derivative or security positions to manage our exposure
related to our long or short security positions. Income earned on
this type of market-making activity is reflected in the fair value
changes of these positions recorded in net gains on trading
activities.
Wells Fargo & Company
91
Risk Management - Asset/Liability Management (continued)
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
Table 42: Distribution of Daily Trading-Related Revenues
provisions known as the “Volcker Rule.” Accordingly, we
reduced and have exited certain business activities as a result of
the 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-Related Revenue Table 42 provides information
on the distribution of daily trading-related revenues for the
Company’s trading portfolio. This trading-related revenue is
defined as the change in value of the trading assets and trading
liabilities, trading-related net interest income, and trading-
related intra-day gains and losses. Net trading-related revenue
does not include activity related to long-term positions held for
economic hedging purposes, period-end adjustments, and other
activity not representative of daily price changes driven by
market factors.
Market risk is the risk of possible economic loss from adverse
changes in market risk factors such as interest rates, credit
spreads, foreign exchange rates, equity prices, commodity prices,
mortgage rates and mortgage liquidity. Market risk is intrinsic to
the Company’s sales and trading, market making, investing, and
risk management activities.
The Company uses Value-at-Risk (VaR) metrics
complemented with sensitivity analysis and stress testing in
measuring and monitoring market risk. These market risk
measures are monitored at both the business unit level and at
aggregated levels on a daily basis. Our corporate market risk
management function aggregates and monitors all exposures to
ensure risk measures are within our established risk appetite.
Changes to the market risk profile are analyzed and reported on
a daily basis. The Company monitors various market risk
exposure measures from a variety of perspectives, including line
of business, product, risk type, and legal entity.
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Wells Fargo & Company
VaR is a statistical risk measure used to estimate the potential
loss from adverse moves in the financial markets. The VaR
measures assume that historical changes in market values
(historical simulation analysis) are representative of the
potential future outcomes and measure the expected loss over a
given time interval (for example, 1 day or 10 days) at a given
confidence level. Our historical simulation analysis approach
uses historical observations of daily changes in each of the
market risk factors from each trading day in the previous
12 months. The risk drivers of each market risk exposure are
updated on a daily basis. We measure and report VaR for 1-day
and 10-day holding periods at a 99% confidence level. This
means we would expect to incur single day losses greater than
predicted by VaR estimates for the measured positions one time
in every 100 trading days. We treat data from all historical
periods as equally relevant and consider using data for the
previous 12 months as appropriate for determining VaR. We
believe using a 12-month look back period helps ensure the
Company’s VaR is responsive to current market conditions.
The VaR models measure exposure to the following
categories:
•
credit risk – exposures from corporate credit spreads, asset-
backed security spreads, and mortgage prepayments.
interest rate risk – exposures from changes in the level,
slope, and curvature of interest rate curves and the volatility
of interest rates.
equity risk – exposures to changes in equity prices and
volatilities of single name, index, and basket exposures.
commodity risk – exposures to changes in commodity prices
and volatilities.
foreign exchange risk – exposures to changes in foreign
exchange rates and volatilities.
•
•
•
•
VaR is a primary market risk management measure for
assets and liabilities classified as trading positions and is used as
a supplemental analysis tool to monitor exposures classified as
available for sale (AFS) and other exposures that we carry at fair
value.
VaR measurement between different financial institutions
Trading VaR is the measure used to provide insight into the
is not readily comparable due to modeling and assumption
differences from company to company. VaR measures are more
useful when interpreted as an indication of trends rather than an
absolute measure to be compared across financial institutions.
VaR models are subject to limitations which include, but are
not limited to, the use of historical changes in market factors
that may not accurately reflect future changes in market factors,
and the inability to predict market liquidity in extreme market
conditions. All limitations such as model inputs, model
assumptions, and calculation methodology risk are monitored by
the Corporate Market Risk Group and the Corporate Model Risk
Group.
market risk exhibited by the Company’s trading positions. The
Company calculates Trading VaR for risk management purposes
to establish line of business and Company-wide risk limits.
Trading VaR is calculated based on all trading positions
classified as trading assets or trading liabilities on our balance
sheet.
Table 43 shows the results of the Company’s Trading
General VaR by risk category. As presented in the table, average
Trading General VaR was $19 million for the quarter ended
December 31, 2015, compared with $21 million for the quarter
ended September 30, 2015. The decrease was primarily driven
by risk reducing changes in portfolio composition which offset
the market volatility experienced during the quarter.
Table 43: Trading 1-Day 99% General VaR by Risk Category
(in millions)
Company Trading General VaR Risk Categories
Credit
Interest rate
Equity
Commodity
Foreign exchange
Diversification benefit (1)
Company Trading General VaR
December 31, 2015
Quarter ended
September 30, 2015
Period
end
Average
Low
High
Period
end
Average
Low
High
$
14
8
13
1
2
(20)
18
18
9
14
1
1
(24)
19
14
5
12
1
1
25
13
16
1
2
20
18
16
1
1
(38)
18
20
14
14
1
1
(29)
21
16
6
12
1
—
24
22
16
2
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.
Sensitivity Analysis Given the inherent limitations of the VaR
models, the Company uses other measures, including sensitivity
analysis, to measure and monitor risk. Sensitivity analysis is the
measure of exposure to a single risk factor, such as a 0.01%
increase in interest rates or a 1% increase in equity prices. We
conduct and monitor sensitivity on interest rates, credit spreads,
volatility, equity, commodity, and foreign exchange exposure.
Sensitivity analysis complements VaR as it provides an
indication of risk relative to each factor irrespective of historical
market moves.
Stress Testing While VaR captures the risk of loss due to adverse
changes in markets using recent historical market data, stress
testing captures the Company’s exposure to extreme but low
probability market movements. Stress scenarios estimate the
risk of losses based on management’s assumptions of abnormal
but severe market movements such as severe credit spread
widening or a large decline in equity prices. These scenarios
assume that the market moves happen instantaneously and no
repositioning or hedging activity takes place to mitigate losses as
events unfold (a conservative approach since experience
demonstrates otherwise).
Wells Fargo & Company
93
Risk Management - Asset/Liability Management (continued)
An inventory of scenarios is maintained representing both
historical and hypothetical stress events that affect a broad range
of market risk factors with varying degrees of correlation and
differing time horizons. Hypothetical scenarios assess the impact
of large movements in financial variables on portfolio values.
Typical examples include a 1% (100 basis point) increase across
the yield curve or a 10% decline in equity market indexes.
Historical scenarios utilize an event-driven approach: the stress
scenarios are based on plausible but rare events, and the analysis
addresses how these events might affect the risk factors relevant
to a portfolio.
The Company’s stress testing framework is also used in
calculating results in support of the Federal Reserve Board’s
Comprehensive Capital Analysis and Review (CCAR) and
internal stress tests. Stress scenarios are regularly reviewed and
updated to address potential market events or concerns. For
more detail on the CCAR process, see the “Capital Management”
section in this Report.
Regulatory Market Risk Capital is based on U.S. regulatory
agency risk-based capital regulations that are based on the Basel
Committee Capital Accord of the Basel Committee on Banking
Supervision. The Company must calculate regulatory capital
based on the Basel III market risk capital rule, which requires
banking organizations with significant trading activities to adjust
their capital requirements to better account for the market risks
of those activities based on comprehensive and risk sensitive
methods and models. The market risk capital rule is intended to
cover the risk of loss in value of covered positions due to changes
in market conditions.
Composition of Material Portfolio of Covered 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. Positions excluded from market risk regulatory capital
treatment are subject to the credit risk capital rules applicable to
the “non-covered” trading positions.
The material portfolio of the Company’s “covered” positions
is predominantly concentrated in the trading assets and trading
Table 44: Regulatory 10-Day 99% General VaR by Risk Category
liabilities managed within Wholesale Banking where the
substantial portion of market risk capital resides. Wholesale
Banking engages in the fixed income, traded credit, foreign
exchange, equities, and commodities markets businesses. Other
business segments also hold small trading positions covered
under the market risk capital rule.
Regulatory Market Risk Capital Components The capital
required for market risk on the Company’s “covered” positions is
determined by internally developed models or standardized
specific risk charges. The market risk regulatory capital models
are subject to internal model risk management and validation.
The models are continuously monitored and enhanced in
response to changes in market conditions, improvements in
system capabilities, and changes in the Company’s market risk
exposure. The Company is required to obtain and has received
prior written approval from its regulators before using its
internally developed models to calculate the market risk capital
charge.
Basel III prescribes various VaR measures in the
determination of regulatory capital and risk-weighted assets
(RWAs). The Company uses the same VaR models for both
market risk management purposes as well as regulatory capital
calculations. For regulatory purposes, we use the following
metrics to determine the Company’s market risk capital
requirements:
General VaR measures the risk of broad market movements such
as changes in the level of credit spreads, interest rates, equity
prices, commodity prices, and foreign exchange rates. General
VaR uses historical simulation analysis based on 99% confidence
level and a 10-day time horizon.
Table 44 shows the General VaR measure by major risk
categories for Wholesale Banking. Average 10-day Company
Regulatory General VaR was $40 million for the quarter ended
December 31, 2015, compared with $35 million for the quarter
ended September 30, 2015. The increase was primarily driven by
changes in portfolio composition.
(in millions)
Wholesale Regulatory General VaR Risk Categories
Credit
Interest rate
Equity
Commodity
Foreign exchange
Diversification benefit (1)
Wholesale Regulatory General VaR
Company Regulatory General VaR
December 31, 2015
Quarter ended
September 30, 2015
Period
Period
end Average
Low High
end Average
Low
High
$
$
29
25
9
2
2
38
29
7
3
2
(22)
(41)
45
47
38
40
26
21
4
1
1
26
28
54
40
11
5
5
54
56
45
38
7
1
2
46
45
6
3
4
(64)
(72)
29
31
32
35
30
27
3
1
1
21
23
61
77
13
5
6
56
58
(1)
The period-end VaR was less than the sum of the VaR components described above, which is due to portfolio diversification. The diversification benefit 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.
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Wells Fargo & Company
Specific Risk measures the risk of loss that could result from
factors other than broad market movements, or name-specific
market risk. Specific Risk uses Monte Carlo simulation analysis
based on a 99% confidence level and a 10-day time horizon.
Total VaR (as presented in Table 45) is composed of General
VaR and Specific Risk and uses the previous 12 months of
historical market data in accordance with regulatory
requirements.
Total Stressed VaR (as presented in Table 45) uses a historical
period of significant financial stress over a continuous 12 month
period using historically available market data and is composed
of Stressed General VaR and Stressed Specific Risk. Total
Stressed VaR uses the same methodology and models as Total
VaR.
Incremental Risk Charge (as presented in Table 45) captures
losses due to both issuer default and migration risk at the 99.9%
confidence level over the one-year capital horizon under the
assumption of constant level of risk or a constant position
assumption. The model covers all non-securitized credit-
sensitive products.
Table 45: Market Risk Regulatory Capital Modeled Components
(in millions)
Total VaR
Total Stressed VaR
Incremental Risk Charge
The Company calculates Incremental Risk by generating a
portfolio loss distribution using Monte Carlo simulation, which
assumes numerous scenarios, where an assumption is made that
the portfolio’s composition remains constant for a one-year time
horizon. Individual issuer credit grade migration and issuer
default risk is modeled through generation of the issuer’s credit
rating transition based upon statistical modeling. Correlation
between credit grade migration and default is captured by a
multifactor proprietary model which takes into account industry
classifications as well as regional effects. Additionally, the
impact of market and issuer specific concentrations is reflected
in the modeling framework by assignment of a higher charge for
portfolios that have increasing concentrations in particular
issuers or sectors. Lastly, the model captures product basis risk;
that is, it reflects the material disparity between a position and
its hedge.
Table 45 provides information on Total VaR, Total Stressed
VaR and the Incremental Risk Charge results for the quarter
ended December 31, 2015. For the Incremental Risk Charge, the
required capital for market risk at quarter end equals the
average for the quarter.
Quarter ended December 31, 2015
December 31, 2015
Average
63
258
309
Low
51
185
270
High
75
316
393
Quarter
end
Risk-
based
capital (1)
Risk-
weighted
assets (1)
67
285
305
188
773
309
2,350
9,661
3,864
(1) Results represent the risk-based capital and RWAs based on the VaR and Incremental Risk Charge models.
Securitized Products Charge Basel III requires a separate
market risk capital charge for positions classified as a
securitization or re-securitization. The primary criteria for
classification as a securitization are whether there is a transfer of
risk and whether the credit risk associated with the underlying
exposures has been separated into at least two tranches
reflecting different levels of seniority. Covered trading
securitizations positions include consumer and commercial
asset-backed securities (ABS), commercial mortgage-backed
securities (CMBS), residential mortgage-backed securities
(RMBS), and collateralized loan and other debt obligations
(CLO/CDO) positions. The securitization capital requirements
are the greater of the capital requirements of the net long or
short exposure, and are capped at the maximum loss that could
be incurred on any given transaction.
Table 46 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, 2015 and 2014.
Table 46: Covered Securitization Positions by Exposure Type
(Net Market Value)
(in millions)
ABS
CMBS
RMBS CLO/CDO
December 31, 2015
Securitization exposure:
Securities
Derivatives
Total
$ 962
402
571
15
977
6
2
408
573
December 31, 2014
Securitization Exposure:
Securities
Derivatives
Total
$
752
(1)
$
751
709
5
714
689
23
712
667
(21)
646
553
(31)
522
Wells Fargo & Company
95
Risk Management - Asset/Liability Management (continued)
SECURITIZATION DUE DILIGENCE AND RISK MONITORING The
market risk capital rule requires that the Company conduct due
diligence on the risk of each position within three days of the
purchase of a securitization position. The Company's due
diligence seeks to provide an understanding of the features that
would materially affect the performance of a securitization or re-
securitization. The due diligence analysis is re-performed on a
quarterly basis for each securitization and re-securitization
position. The Company uses an automated solution to track the
due diligence associated with securitization activity. The
Company aims to manage the risks associated with securitization
and re-securitization positions through the use of offsetting
positions and portfolio diversification.
Standardized Specific Risk Charge For debt and equity 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
Table 47: Market Risk Regulatory Capital and RWAs
(in millions)
Total VaR
Total Stressed VaR
Incremental Risk Charge
Securitized Products Charge
Standardized Specific Risk Charge
De minimis Charges (positions not included in models)
Total
RWA Rollforward Table 48 depicts the changes in market risk
regulatory capital and RWAs under Basel III for the full year and
fourth quarter of 2015.
Table 48: Analysis of Changes in Market Risk Regulatory
Capital and RWAs
(in millions)
Risk-
based
capital
Risk-
weighted
assets
Balance, December 31, 2014
$
3,969
49,613
Total VaR
Total Stressed VaR
Incremental Risk Charge
Securitized Products Charge
Standardized Specific Risk Charge
De minimis Charges
42
528
(696)
(8,698)
(36)
(151)
(129)
(46)
(453)
(1,882)
(1,612)
(586)
Balance, December 31, 2015
$
2,953
36,910
Balance, September 30, 2015
$
3,275
40,934
Total VaR
Total Stressed VaR
Incremental Risk Charge
Securitized Products Charge
Standardized Specific Risk Charge
De minimis Charges
5
(73)
(69)
(79)
(99)
(7)
58
(910)
(857)
(984)
(1,243)
(88)
Balance, December 31, 2015
$
2,953
36,910
(OECD) country risk classifications (CRC) and the remaining
contractual maturity of the position. These risk add-ons for debt
positions range from 0.25% to 12%. The add-on for corporate
debt is based on creditworthiness and the remaining contractual
maturity of the position. All other types of debt positions are
subject to an 8% add-on. The standard specific risk add-on for
equity positions is generally 8%.
Comprehensive Risk Charge/Correlation Trading The market
risk capital rule requires capital for correlation trading positions.
The Company's remaining correlation trading exposure covered
under the market risk capital rule matured in fourth quarter
2014.
Table 47 summarizes the market risk-based capital
requirements charge and market RWAs in accordance with the
Basel III market risk capital rule as of December 31, 2015 and
2014. The market RWAs are calculated as the sum of the
components in the table below.
December 31, 2015
December 31, 2014
Risk-
based
capital
Risk-
weighted
assets
$
188
773
309
616
2,350
9,661
3,864
7,695
Risk-
based
capital
146
1,469
345
766
Risk-
weighted
assets
1,822
18,359
4,317
9,577
1,048
13,097
1,177
14,709
19
243
66
829
$
2,953
36,910
3,969
49,613
All changes to market risk regulatory capital and RWAs for the
full year and fourth quarter of 2015 were associated with
changes in positions due to normal trading activity in addition to
market volatility over the last year.
VaR Backtesting The market risk capital rule requires
backtesting as one form of validation of the VaR model.
Backtesting is a comparison of the daily VaR estimate with the
actual clean profit and loss (clean P&L) as defined by the market
risk capital rule. Clean P&L is the change in the value of the
Company’s covered trading positions that would have occurred
had previous end-of-day covered trading positions remained
unchanged (therefore, excluding fees, commissions, net interest
income, and intraday trading gains and losses). The backtesting
analysis compares the daily Total VaR for each of the trading
days in the preceding 12 months with the net clean P&L. Clean
P&L does not include credit adjustments and other activity not
representative of daily price changes driven by market risk
factors. The clean P&L measure of revenue is used to evaluate
the performance of the Total VaR and is not comparable to our
actual daily trading net revenues, as reported elsewhere in this
Report.
Any observed clean P&L loss in excess of the Total VaR is
considered a market risk regulatory capital backtesting
exception. The actual number of exceptions (that is, the number
of business days for which the clean P&L losses exceed the
corresponding 1-day, 99% Total VaR measure) over the
preceding 12 months is used to determine the capital multiplier
for the market risk capital calculation. The number of actual
backtesting exceptions is dependent on current market
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Wells Fargo & Company
performance relative to historic market volatility in addition to
model performance and assumptions. This capital multiplier
increases from a minimum of three to a maximum of four,
depending on the number of exceptions. No backtesting
exceptions occurred over the preceding 12 months. Backtesting
is also performed at more granular levels within the Company.
Table 49: Daily Total 1-Day 99% VaR Measure (Rolling 12 Months)
Table 49 shows daily Total VaR (1-day, 99%) used for
market risk regulatory capital backtesting for the 12 months
ended December 31, 2015. The Company’s average Total VaR for
fourth quarter 2015 was $22 million with a low of $18 million
and a high of $25 million.
Market Risk Governance The Finance Committee of our Board
has primary oversight over market risk-taking activities of the
Company and reviews the acceptable market risk appetite. The
Corporate Risk Group’s Market Risk Committee, which reports
to the Finance Committee of the Board, is responsible for
governance and oversight of market risk-taking activities across
the Company as well as the establishment of market risk appetite
and associated limits. The Corporate Market Risk Group, which
is part of the Corporate Risk Group, administers and monitors
compliance with the requirements established by the Market
Risk Committee. The Corporate Market Risk Group has
oversight responsibilities in identifying, measuring and
monitoring the Company’s market risk. The group is responsible
for developing corporate market risk policy, creating
quantitative market risk models, establishing independent risk
limits, calculating and analyzing market risk capital, and
reporting aggregated and line-of-business market risk
information. Limits are regularly reviewed to ensure they remain
relevant and within the market risk appetite for the Company.
An automated limits-monitoring system enables a daily
comprehensive review of multiple limits mandated across
businesses. Limits are set with inner boundaries that will be
periodically breached to promote an ongoing dialogue of risk
exposure within the Company. Each line of business that exposes
the Company to market risk has direct responsibility for
managing market risk in accordance with defined risk tolerances
and approved market risk mandates and hedging strategies. We
measure and monitor market risk for both management and
regulatory capital purposes.
Model Risk Management The market risk capital models are
governed by our Corporate Model Risk Committee policies and
procedures, which include model validation. The purpose of
model validation includes ensuring models are appropriate for
their 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 (CMoR) provides
oversight of model validation and assessment processes.
Corporate oversight responsibilities include evaluating the
adequacy of business unit model risk management programs,
maintaining company-wide model validation policies and
standards, and reporting the results of these activities to
management. In addition to the corporate-level review, all
internal valuation models are subject to ongoing review by
business-unit-level management.
Wells Fargo & Company
97
Risk Management - Asset/Liability Management (continued)
Table 50: Nonmarketable and Marketable Equity Investments
(in millions)
Nonmarketable equity investments:
Cost method:
Federal bank stock
Private equity
Auction rate securities (1)
Total cost method
Equity method:
LIHTC (2)
Private equity
Tax-advantaged renewable energy
New market tax credit and other
Total equity method
Fair value (3)
Dec 31,
Dec 31,
2015
2014
$ 4,814
1,626
595
4,733
2,300
—
7,035
7,033
8,314
3,300
1,625
408
7,278
3,043
1,710
379
13,647
12,410
3,065
2,512
Total nonmarketable equity
investments (4)
$ 23,747
21,955
Marketable equity securities:
Cost
Net unrealized gains
$ 1,058
579
Total marketable equity securities (5) $ 1,637
1,906
1,770
3,676
(1)
(2)
(3)
(4)
(5)
Reflects auction rate perpetual preferred equity securities that were
reclassified during 2015 with a cost basis of $689 million (fair value of
$640 million) from available-for-sale securities because they do not trade on a
qualified exchange.
Represents low income housing tax credit investments.
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.
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.
Included in available-for-sale securities. See Note 5 (Investment Securities) to
Financial Statements in this Report for additional information.
MARKET RISK – EQUITY INVESTMENTS We are directly and
indirectly affected by changes in the equity markets. We make
and manage direct equity investments in start-up businesses,
emerging growth companies, management buy-outs,
acquisitions and corporate recapitalizations. We also invest in
non-affiliated funds that make similar private equity
investments. These private equity investments are made within
capital allocations approved by management and the Board. The
Board’s policy is to review business developments, key risks and
historical returns for the private equity investment portfolio at
least annually. Management reviews these investments at least
quarterly and assesses them for possible OTTI. For
nonmarketable investments, the analysis is based on facts and
circumstances of each individual investment and the
expectations for that investment’s cash flows and capital needs,
the viability of its business model and our exit strategy.
Nonmarketable investments include private equity investments
accounted for under the cost method, equity method and fair
value option.
In conjunction with the March 2008 initial public offering
(IPO) of Visa, Inc. (Visa), we received approximately
20.7 million shares of Visa Class B common stock, which was
apportioned to member banks of Visa at the time of the IPO. To
manage our exposure to Visa and realize the value of the
appreciated Visa shares, we incrementally sold these shares
through a series of sales over the past few years, thereby
eliminating this position as of September 30, 2015. As part of
these sales, we agreed to compensate the buyer for any
additional contributions to a litigation settlement fund for the
litigation matters associated with the Class B shares we sold. Our
exposure to this retained litigation risk has been reflected on our
balance sheet.
As part of our business to support our customers, we trade
public equities, listed/OTC equity derivatives and convertible
bonds. We have parameters that govern these activities. We also
have marketable equity securities in the available-for-sale
securities portfolio, including securities relating to our venture
capital activities. We manage these investments within capital
risk limits approved by management and the Board and
monitored by Corporate ALCO and the Corporate Market Risk
Committee. Gains and losses on these securities are recognized
in net income when realized and periodically include OTTI
charges.
Changes in equity market prices may also indirectly affect
our net income by (1) the value of third party assets under
management and, hence, fee income, (2) borrowers whose
ability to repay principal and/or interest may be affected by the
stock market, or (3) brokerage activity, related commission
income and other business activities. Each business line
monitors and manages these indirect risks.
Table 50 provides information regarding our nonmarketable
and marketable equity investments as of December 31, 2015 and
2014.
98
Wells Fargo & Company
LIQUIDITY AND FUNDING The objective of effective liquidity
management is to ensure that we can meet customer loan
requests, customer deposit maturities/withdrawals and other
cash commitments efficiently under both normal operating
conditions and under periods of Wells Fargo-specific and/or
market stress. To achieve this objective, the Board of Directors
establishes liquidity guidelines that require sufficient asset-
based liquidity to cover potential funding requirements and to
avoid over-dependence on volatile, less reliable funding markets.
These guidelines are monitored on a monthly basis by the
Corporate ALCO and on a quarterly basis by the Board of
Directors. These guidelines are established and monitored for
both the consolidated company and for the Parent on a stand-
alone basis to ensure that the Parent is a source of strength for
its regulated, deposit-taking banking subsidiaries.
Liquidity Standards On September 3, 2014, the FRB, OCC
and FDIC issued a final rule that implements a quantitative
liquidity requirement consistent with the liquidity coverage ratio
(LCR) established by the Basel Committee on Banking
Supervision (BCBS). The rule requires banking institutions, such
as Wells Fargo, to hold high-quality liquid assets, such as central
bank reserves and government and corporate debt that can be
converted easily and quickly into cash, in an amount equal to or
greater than its projected net cash outflows during a 30-day
stress period. The final LCR rule began its phase-in period on
January 1, 2015, and requires full compliance with a minimum
100% LCR by January 1, 2017. The FRB also finalized rules
imposing enhanced liquidity management standards on large
bank holding companies (BHC) such as Wells Fargo. In addition,
Table 51: Primary Sources of Liquidity
the FRB recently proposed a rule that would require large bank
holding companies, such as Wells Fargo, to publicly disclose on a
quarterly basis certain quantitative and qualitative information
regarding their LCR calculations. We continue to analyze these
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.
Liquidity Sources We maintain liquidity in the form of cash,
cash equivalents and unencumbered high-quality, liquid
securities. These assets make up our primary sources of liquidity
which are presented in Table 51. Our cash is primarily on deposit
with the Federal Reserve. Securities included as part of our
primary sources of liquidity are comprised of U.S. Treasury and
federal agency debt, and mortgage-backed securities issued by
federal agencies within our investment securities portfolio. We
believe these securities provide quick sources of liquidity
through sales or by pledging to obtain financing, regardless of
market conditions. Some of these securities are within the held-
to-maturity portion of our investment securities portfolio and as
such are not intended for sale but may be pledged to obtain
financing. Some of the legal entities within our consolidated
group of companies are subject to various regulatory, tax, legal
and other restrictions that can limit the transferability of their
funds. We believe we maintain adequate liquidity for these
entities in consideration of such funds transfer restrictions.
December 31, 2015
December 31, 2014
(in millions)
Total Encumbered Unencumbered
Total
Encumbered Unencumbered
Interest-earning deposits
$ 220,409
—
220,409
219,220
Securities of U.S. Treasury and federal agencies (1)
81,417
Mortgage-backed securities of federal agencies (2)
132,967
Total
$ 434,793
6,462
74,778
81,240
74,955
67,352
58,189
115,730
353,553
402,302
—
856
80,324
81,180
219,220
66,496
35,406
321,122
(1)
(2)
Included in encumbered securities at December 31, 2014, were securities with a fair value of $152 million which were purchased in December 2014, but settled in
January 2015.
Included in encumbered securities at December 31, 2014, were securities with a fair value of $5 million which were purchased in December 2014, but settled in
January 2015.
In addition to our primary sources of liquidity shown in
Table 51, liquidity is also available through the sale or financing
of other securities including trading and/or available-for-sale
securities, as well as through the sale, securitization or financing
of loans, to the extent such securities and loans are not
encumbered. In addition, other securities in our held-to-
maturity portfolio, to the extent not encumbered, may be
pledged to obtain financing.
Deposits have historically provided a sizeable source of
relatively low-cost funds. At December 31, 2015, deposits were
133% of total loans compared with 135% at December 31, 2014.
Additional funding is provided by long-term debt and short-term
borrowings.
Table 52 shows selected information for short-term
borrowings, which generally mature in less than 30 days.
Wells Fargo & Company
99
Risk Management - Asset/Liability Management (continued)
Table 52: Short-Term Borrowings
(in millions)
Balance, period end
Dec 31,
2015
Sep 30,
2015
Jun 30,
2015
Mar 31,
2015
Dec 31,
2014
Quarter ended
Federal funds purchased and securities sold under agreements to repurchase
$ 82,948
74,652
71,439
64,400
Commercial paper
Other short-term borrowings
Total
Average daily balance for period
334
14,246
$ 97,528
393
13,024
88,069
621
10,903
82,963
3,552
9,745
77,697
51,052
2,456
10,010
63,518
Federal funds purchased and securities sold under agreements to repurchase
$ 88,949
79,445
72,429
58,881
51,509
Commercial paper
Other short-term borrowings
Total
Maximum month-end balance for period
414
13,552
$ 102,915
484
10,428
90,357
2,433
9,637
3,040
9,791
3,511
9,656
84,499
71,712
64,676
Federal funds purchased and securities sold under agreements to repurchase (1)
$ 89,800
80,961
Commercial paper (2)
Other short-term borrowings (3)
461
510
14,246
13,024
71,811
2,713
10,903
66,943
3,552
10,068
51,052
3,740
10,010
(1)
(2)
(3)
Highest month-end balance in each of the last five quarters was in October, August, May and February 2015 and December 2014.
Highest month-end balance in each of the last five quarters was in November, July, April and March 2015 and November 2014.
Highest month-end balance in each of the last five quarters was in December, September, June and February 2015 and December 2014.
We access domestic and international capital markets for
Table 53: Medium-Term Note (MTN) Programs
long-term funding (generally greater than one year) through
issuances of registered debt securities, private placements and
asset-backed secured funding.
Parent Under SEC rules, our Parent is classified as a “well-
known seasoned issuer,” which allows it to file a registration
statement that does not have a limit on issuance capacity. In
May 2014, the Parent filed a registration statement with the SEC
for the issuance of senior and subordinated notes, preferred
stock and other securities. The Parent’s ability to issue debt and
other securities under this registration statement is limited by
the debt issuance authority granted by the Board. The Parent is
currently authorized by the Board to issue $60 billion in
outstanding short-term debt and $170 billion in outstanding
long-term debt. At December 31, 2015, the Parent had available
$39.4 billion in short-term debt issuance authority and
$46.0 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. In 2015, the Parent
issued $26.4 billion of senior notes, of which $17.0 billion were
registered with the SEC. In addition, in 2015, the Parent issued
$5.3 billion of subordinated notes, all of which were registered
with the SEC.
The Parent’s proceeds from securities issued were used for
general corporate purposes, and, unless otherwise specified in
the applicable prospectus or prospectus supplement, we expect
the proceeds from securities issued in the future will be used for
the same purposes. Depending on market conditions, we may
purchase our outstanding debt securities from time to time in
privately negotiated or open market transactions, by tender
offer, or otherwise.
Table 53 provides information regarding the Parent’s
medium-term note (MTN) programs, which are covered by the
long-term debt issuance authority granted by the Board. The
Parent may issue senior and subordinated debt securities under
Series N & O, and the European and Australian programmes.
Under Series K, the Parent may issue senior debt securities
linked to one or more indices or bearing interest at a fixed or
floating rate.
(in billions)
MTN program:
Date
established
Series N & O (1)(2)
Series K (1)(3)
May 2014
April 2010
European (4)(5)
December 2009
European (4)(6)
August 2013
Australian (4)(7)
June 2005 AUD
December 31, 2015
Debt
issuance
authority
Available
for
issuance
$
—
25.0
25.0
10.0
10.0
—
20.7
3.9
7.9
7.8
(1)
(2)
(3)
(4)
(5)
(6)
(7)
SEC registered.
The Parent can issue an indeterminate amount of debt securities, subject to
the debt issuance authority granted by the Board.
As amended in April 2012 and March 2015.
Not registered with the SEC. May not be offered in the United States without
applicable exemptions from registration.
As amended in April 2012, April 2013, April 2014 and March 2015. 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.
As amended in May 2014 and April 2015, 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.
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, 2015, Wells Fargo Bank, N.A. had available
$99.98 billion in short-term debt issuance authority and
$66.3 billion in long-term debt issuance authority. In April 2015,
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. At
December 31, 2015, Wells Fargo Bank, N.A. had remaining
issuance capacity under the bank note program of $50.0 billion
in short-term senior notes and $50.0 billion in long-term senior
or subordinated notes. In January 2016, Wells Fargo Bank, N.A.
issued $3.5 billion of unregistered senior notes under the bank
note program. In addition, during 2015, Wells Fargo Bank, N.A.
executed advances of $10.5 billion with the Federal Home Loan
100
Wells Fargo & Company
developing a resolution regime that reduces the likelihood of
government support. S&P concluded that it was appropriate to
remove from its ratings the uplift created by the likelihood of
government support and, as a result, the ratings of all eight bank
holding companies, including the Parent, were lowered by one
notch. S&P also concluded that nondeferrable subordinated debt
issued by a bank should be treated as hybrid capital. As a result,
the nondeferrable subordinated debt of Wells Fargo Bank, N.A.,
and several other banks, was lowered one notch. Both the Parent
and Wells Fargo Bank, N.A. remain among the top-rated
financial firms in the U.S.
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,
2015, 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, 2015, 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*
Aa1
AA-
AA+
AA**
P-1
A-1+
F1+
R-1**
Bank of Des Moines, and as of December 31, 2015, Wells Fargo
Bank, N.A. had outstanding advances of $37.1 billion across the
Federal Home Loan Bank System. In January 2016, Wells Fargo
Bank, N.A. executed an additional $12.5 billion in Federal Home
Loan Bank advances.
Credit Ratings 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.
On October 5, 2015, Fitch Ratings, Inc. affirmed all the
ratings of Wells Fargo and its rated subsidiaries. On
December 2, 2015, Standard and Poor’s Ratings Services (S&P)
completed their assessment of whether to continue
incorporating the likelihood of extraordinary government
support into the ratings of eight bank holding companies,
including the Parent, in light of regulatory progress toward
Table 54: Credit Ratings as of December 31, 2015
Moody's
S&P
Fitch Ratings, Inc.
DBRS
* middle **high
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.
Wells Fargo & Company
101
Capital Management
We have an active program for managing capital through a
comprehensive process for assessing the Company’s overall
capital adequacy. Our objective is to maintain capital at an
amount commensurate with our risk profile and risk tolerance
objectives, and to meet both regulatory and market expectations.
We primarily fund our capital needs through the retention of
earnings net of dividends as well as the issuance of preferred
stock and long and short-term debt. Retained earnings increased
$13.8 billion from December 31, 2014, predominantly from
Wells Fargo net income of $22.9 billion, less common and
preferred stock dividends of $9.1 billion. During 2015, we issued
85.2 million shares of common stock. In January 2015, we
issued 2 million Depositary Shares, each representing 1/25th
interest in a share of the Company’s newly issued 5.875% Fixed-
to-Floating Rate Non-Cumulative Perpetual Class A Preferred
Stock, Series U, for an aggregate public offering price of
$2.0 billion. In September 2015, we issued 40 million Depositary
Shares, each representing 1/1,000th interest in a share of the
Company’s newly issued Non-Cumulative Perpetual Class A
Preferred Stock, Series V, for an aggregate public offering price
of $1.0 billion. In addition, in January 2016, we issued
40 million Depositary Shares, each representing a 1/1,000th
interest in a share of the Company's newly issued Non-
Cumulative Perpetual Class A Preferred Stock, Series W, for an
aggregate public offering price of $1.0 billion. During 2015, we
repurchased 163.4 million shares of common stock in open
market transactions, private transactions and from employee
benefit plans, at a cost of $8.9 billion. We also entered into a
$500 million forward repurchase contract with an unrelated
third party in December 2015 that settled in January 2016 for
9.2 million shares. In addition, we entered into a $750 million
forward repurchase contract with an unrelated third party in
January 2016 that settled in first quarter 2016 for 15.9 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.
See Note 26 (Regulatory and Agency Capital Requirements) to
Financial Statements in this Report for additional information.
RISK-BASED CAPITAL AND RISK-WEIGHTED ASSETS The
Company is subject to final and interim final rules issued by
federal banking regulators to implement Basel III capital
requirements for U.S. banking organizations. These rules are
based on international guidelines for determining regulatory
capital issued by the Basel Committee on Banking Supervision
(BCBS). The federal banking regulators’ capital rules, among
other things, require on a fully phased-in basis:
•
•
•
•
a minimum Common Equity Tier 1 (CET1) ratio of 4.5%;
a minimum tier 1 capital ratio of 6.0%;
a minimum total capital ratio of 8.0%;
a capital conservation buffer of 2.5% to be added to the
minimum capital ratios, and a capital surcharge between
1.0-4.5% for global systemically important banks (G-SIBs)
that will be calculated annually (based on year-end 2014
data, the FRB estimated that our G-SIB surcharge would
be 2.0%) and also added to the minimum capital ratios
(for a minimum CET1 ratio of 9.0%, a minimum tier 1
capital ratio of 10.5%, and a minimum total capital ratio of
12.5%);
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;
a minimum tier 1 leverage ratio of 4.0%; and
a minimum supplementary leverage ratio (SLR) of 5.0%
(comprised of a 3.0% minimum requirement and a
supplementary leverage buffer of 2.0%) for large and
internationally active bank holding companies (BHCs).
•
•
•
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 the end of 2021. The Basel
III capital rules contain two frameworks for calculating capital
requirements, a Standardized Approach, which replaced Basel
I, and an Advanced Approach applicable to certain
institutions.
In March 2015, the FRB and OCC directed the Company
and its subsidiary national banks to exit the parallel run phase
and begin using the Basel III Advanced Approaches capital
framework, in addition to the Standardized Approach, to
determine our risk-based capital requirements starting in
second quarter 2015. Accordingly, in the assessment of our
capital adequacy, we must report the lower of our CET1, tier 1
and total capital ratios calculated under the Standardized
Approach and under the Advanced Approach.
Because the Company has been designated as a G-SIB, we
will also be subject to the FRB’s rule implementing the
additional capital surcharge on G-SIBs. Under the rule, we must
annually calculate our surcharge under two methods and use the
higher of the two surcharges. The first method (method one) will
consider our size, interconnectedness, cross-jurisdictional
activity, substitutability, and complexity, consistent with a
methodology developed by the BCBS and the Financial Stability
Board (FSB). The second (method two) will use similar inputs,
but will replace substitutability with use of short-term wholesale
funding and will generally result in higher surcharges than the
BCBS methodology. The G-SIB surcharge will be phased in
beginning on January 1, 2016 and become fully effective on
January 1, 2019. Based on year-end 2014 data, the FRB
estimated that the Company’s G-SIB surcharge would be 2.0% of
the Company’s RWAs. However, because the G-SIB surcharge is
calculated annually based on data that can differ over time, the
amount of the surcharge is subject to change in future periods.
Assuming a 2.0% G-SIB surcharge, our fully phased-in
minimum required CET1 ratio at December 31, 2015 would have
been 9.0%. Under the Standardized Approach (fully phased-in),
our CET1 ratio of 10.77% exceeded the minimum of 9.0% by
177 basis points at December 31, 2015.
The tables that follow provide information about our risk-
based capital and related ratios as calculated under Basel III
capital guidelines. For banking industry regulatory reporting
purposes, we report our capital in accordance with Transition
Requirements but are managing our capital based on a fully
phased-in calculation. For information about our capital
requirements calculated in accordance with Transition
Requirements, see Note 26 (Regulatory and Agency Capital
102
Wells Fargo & Company
Requirements) to Financial Statements in this Report.
Table 55 summarizes our Basel III CET1, tier 1 capital, total
capital, risk-weighted assets and capital ratios on a fully phased-
in basis at December 31, 2015 and 2014. As of December 31,
2015, our CET1 ratio was lower using RWAs calculated under the
Standardized Approach.
Table 55: Capital Components and Ratios Under Basel III (Fully Phased-In) (1)
(in billions)
Common Equity Tier 1
Tier 1 Capital
Total Capital
Risk-Weighted Assets
Common Equity Tier 1 Capital Ratio
Tier 1 Capital Ratio
Total Capital Ratio
December 31, 2015
December 31, 2014
Advanced Approach
Standardized
Approach
General Approach
$
(A)
(B)
(C)
(D)
(A)/(D)
(B)/(D)
(C)/(D)
142.4
162.8
190.4
1,282.8
11.10%
12.69
14.84 *
142.4
162.8
200.8
1,321.7
10.77 *
12.32 *
15.19
137.1
154.7
192.9
1,242.5
11.04
12.45
15.53
*Denotes the lowest capital ratio as determined under the Basel III Advanced and Standardized Approaches.
(1)
Fully phased-in regulatory capital amounts, ratios and RWAs are considered non-GAAP financial measures that are used by management, bank regulatory agencies,
investors and analysts to assess and monitor the Company’s capital position. See Table 56 for information regarding the calculation and components of CET1, Tier 1 capital,
total capital and RWAs, as well as the corresponding reconciliation of our regulatory capital amounts to total equity.
Wells Fargo & Company
103
Capital Management (continued)
Table 56 provides information regarding the calculation and
composition of our risk-based capital under the Advanced and
Standardized Approaches at December 31, 2015 and under the
General Approach at December 31, 2014.
Table 56: Risk-Based Capital Calculation and Components Under Basel III
(in billions)
Total equity
Noncontrolling interests
Total Wells Fargo stockholders' equity
Adjustments:
Preferred stock
Cumulative other comprehensive income
Goodwill and other intangible assets (1)
Investment in certain subsidiaries and other
Common Equity Tier 1 (Fully Phased-In)
Effect of Transition Requirements
Common Equity Tier 1 (Transition Requirements)
Common Equity Tier 1 (Fully Phased-In)
Preferred stock
Other
Total Tier 1 capital (Fully Phased-In)
Effect of Transition Requirements
Total Tier 1 capital (Transition Requirements)
Total Tier 1 capital (Fully Phased-In)
Long-term debt and other instruments qualifying as Tier 2
Qualifying allowance for credit losses (2)
Other
Total Tier 2 capital (Fully Phased-In)
Effect of Transition Requirements
Total Tier 2 capital (Transition Requirements)
December 31, 2015
December 31, 2014
Advanced
Approach
Standardized
Approach
General Approach
$
193.9
(0.9)
193.0
(21.0)
—
(28.7)
(0.9)
142.4
1.8
144.2
142.4
21.0
(0.6)
162.8
1.8
164.6
25.8
2.1
(0.3)
27.6
3.0
30.6
$
$
$
$
$
(A)
(B)
162.8
162.8
193.9
(0.9)
193.0
(21.0)
—
(28.7)
(0.9)
142.4
1.8
144.2
142.4
21.0
(0.6)
162.8
1.8
164.6
25.8
12.5
(0.3)
38.0
3.0
41.0
200.8
4.8
205.6
1,284.8
36.9
N/A
1,321.7
1,266.2
36.9
N/A
185.3
(0.9)
184.4
(18.0)
(2.6)
(26.3)
(0.4)
137.1
—
137.1
137.1
18.0
(0.4)
154.7
—
154.7
154.7
25.0
13.2
—
38.2
—
38.2
192.9
—
192.9
1,192.9
49.6
N/A
1,242.5
1,192.9
49.6
N/A
1,242.5
Total qualifying capital (Fully Phased-In)
(A+B) $
190.4
Total Effect of Transition Requirements
Total qualifying capital (Transition Requirements)
Risk-Weighted Assets (RWAs) (3)(4):
Credit risk
Market risk
Operational risk
Total RWAs (Fully Phased-In)
Credit risk
Market risk
Operational risk
4.8
$
195.2
$
$
$
989.6
36.9
256.3
1,282.8
970.0
36.9
256.3
Total RWAs (Transition Requirements)
$
1,263.2
1,303.1
(1)
(2)
Goodwill and other intangible assets are net of any associated deferred tax liabilities.
Under the Advanced Approach the allowance for credit losses that exceeds expected credit losses is eligible for inclusion in Tier 2 Capital, to the extent the excess
(3)
allowance does not exceed 0.6% of Advanced credit RWAs, and under the Standardized Approach, the allowance for credit losses is includable in Tier 2 Capital up to 1.25%
of Standardized credit RWAs, with any excess allowance for credit losses being deducted from total RWAs.
RWAs calculated under the Advanced Approach utilize a risk-sensitive methodology, which relies upon the use of internal credit models based upon our experience with
internal rating grades. Advanced Approach also includes an operational risk component, which reflects the risk of operating loss resulting from inadequate or failed internal
processes or systems.
(4)
Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to
one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category
is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total
RWAs. The risk weights and categories were changed by Basel III for the Standardized Approach and will generally result in higher RWAs than result from the General
Approach risk weights and categories.
104
Wells Fargo & Company
Table 57 presents the changes in Common Equity Tier 1
under the Advanced Approach for the year ended December 31,
2015.
Table 57: Analysis of Changes in Common Equity Tier 1 Under Basel III
(in billions)
Common Equity Tier 1 (General Approach) at December 31, 2014
$
Effect of changes in rules
Common Equity Tier 1 (Advanced Approach – Fully Phased-In) at December 31, 2014
Net income
Common stock dividends
Common stock issued, repurchased, and stock compensation-related items
Goodwill and other intangible assets (net of any associated deferred tax liabilities)
Other
Change in Common Equity Tier 1
137.1
(0.4)
136.7
21.5
(7.6)
(5.0)
0.3
(3.5)
5.7
Common Equity Tier 1 (Advanced Approach – Fully Phased-In) at December 31, 2015
$
142.4
Table 58 presents net changes in the components of RWAs
under the Advanced and Standardized Approaches for the year
ended December 31, 2015.
Table 58: Analysis of Changes in Basel III RWAs
(in billions)
Basel III RWAs (General Approach) at December 31, 2014
$
Effect of changes in rules
Basel III RWAs (Fully Phased-In) at December 31, 2014
Net change in credit risk RWAs
Net change in market risk RWAs
Net change in operational risk RWAs
Total change in RWAs
Basel III RWAs (Fully Phased-In) at December 31, 2015
Effect of Transition Requirements
Basel III RWAs (Transition Requirements) at December 31, 2015
$
1,263.2
Advanced
Approach
Standardized
Approach
1,242.5
68.0
1,310.5
(24.4)
(12.7)
9.4
(27.7)
1,282.8
(19.6)
1,242.5
62.9
1,305.4
29.0
(12.7)
N/A
16.3
1,321.7
(18.6)
1,303.1
Wells Fargo & Company
105
Capital Management (continued)
SUPPLEMENTARY LEVERAGE RATIO In April 2014, federal
banking regulators finalized a rule that enhances the SLR
requirements for BHCs, like Wells Fargo, and their insured
depository institutions. The SLR consists of Tier 1 capital under
Basel III divided by the Company’s total leverage exposure. Total
leverage exposure consists of the total average on-balance sheet
assets, plus off-balance sheet exposures, such as undrawn
commitments and derivative exposures, less amounts permitted
to be deducted from Tier 1 capital. The rule, which becomes
effective on January 1, 2018, will require a covered BHC to
maintain a SLR of at least 5.0% (comprised of the 3.0%
minimum requirement and a supplementary leverage buffer of
2.0%) to avoid restrictions on capital distributions and
discretionary bonus payments. The rule will also require that all
of our insured depository institutions maintain a SLR of 6.0%
under applicable regulatory capital adequacy guidelines. In
September 2014, federal banking regulators finalized additional
changes to the SLR requirements to implement revisions to the
Basel III leverage framework finalized by the BCBS in January
2014. These additional changes, among other things, modify the
methodology for including off- balance sheet items, including
credit derivatives, repo-style transactions and lines of credit, in
the denominator of the SLR, and will become effective on
January 1, 2018. At December 31, 2015, our SLR for the
Company was 7.7% assuming full phase-in of the Basel III
Advanced Approach capital framework. Based on our review, our
current leverage levels would exceed the applicable requirements
for each of our insured depository institutions as well. The fully
phased-in SLR is considered a non-GAAP financial measure that
is used by management, bank regulatory agencies, investors and
analysts to assess and monitor the Company’s leverage exposure.
See Table 59 for information regarding the calculation and
components of the SLR.
Table 59: Basel III Fully Phased-In SLR
(in billions)
Tier 1 capital
Total average assets
Less: deductions from Tier 1 capital
Total adjusted average assets
Adjustments:
Derivative exposures
Repo-style transactions
Other off-balance sheet exposures
Total adjustments
$
December 31, 2015
162.8
1,787.3
29.6
1,757.7
63.2
3.3
292.3
358.8
Total leverage exposure
$
2,116.5
Supplementary leverage ratio
7.7%
OTHER REGULATORY CAPITAL MATTERS In October 2015,
the FRB proposed rules to address the amount of equity and
unsecured long-term debt a U.S. G-SIB must hold to improve its
resolvability and resiliency, often referred to as Total Loss
Absorbing Capacity (TLAC). Under the proposed rules, U.S. G-
SIBs would be required to have a minimum TLAC amount
(consisting of CET1 capital and additional tier 1 capital issued
directly by the top-tier or covered BHC plus eligible external
long-term debt) equal to the greater of (i) 18% of RWAs and (ii)
9.5% of total leverage exposure (the denominator of the SLR
calculation). Additionally, U.S. G-SIBs would be required to
maintain a TLAC buffer equal to 2.5% of RWAs plus the firm’s
applicable G-SIB capital surcharge calculated under method one
plus any applicable countercyclical buffer that would be added to
the 18% minimum in order to avoid restrictions on capital
distributions and discretionary bonus payments. The proposed
rules would also require U.S. G-SIBs to have a minimum amount
of eligible unsecured long-term debt equal to the greater of (i)
6.0% of RWAs plus the firm’s applicable G-SIB capital surcharge
calculated under method two and (ii) 4.5% of the total leverage
exposure. In addition, the proposed rules would impose certain
restrictions on the operations and liabilities of the top-tier or
covered BHC in order to further facilitate an orderly resolution,
including prohibitions on the issuance of short-term debt to
external investors and on entering into derivatives and certain
other types of financial contracts with external counterparties.
The proposed rules were open for comments until
February 1, 2016. If the proposed rules are finalized as proposed,
we may be required to issue additional long-term debt. We
continue to evaluate the impact this proposal will have on our
consolidated financial statements.
In addition, as discussed in the “Risk Management –
Asset/Liability Management – Liquidity and Funding –
Liquidity Standards” section in this Report, a final rule
regarding the U.S. implementation of the Basel III LCR was
issued by the FRB, OCC and FDIC in September 2014.
Capital Planning and Stress Testing
Our planned long-term capital structure is designed to meet
regulatory and market expectations. We believe that our long-
term targeted capital structure enables us to invest in and grow
our business, satisfy our customers' financial needs in varying
environments, access markets, and maintain flexibility to return
capital to our shareholders. Our long-term targeted capital
structure also considers capital levels sufficient to exceed Basel
III capital requirements including the G-SIB surcharge.
Accordingly, based on the final Basel III capital rules under the
lower of the Standardized or Advanced Approaches CET1 capital
ratios, we currently target a long-term CET1 capital ratio at or in
excess of 10%, which assumes a 2% G-SIB surcharge. Our capital
targets are subject to change based on various factors, including
changes to the regulatory capital framework and expectations for
large banks promulgated by bank regulatory agencies, planned
capital actions, changes in our risk profile and other factors.
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. The FRB assesses the overall
financial condition, risk profile, and capital adequacy of BHCs
while considering both quantitative and qualitative factors when
evaluating capital plans.
Our 2015 CCAR, which was submitted on January 2, 2015,
included a comprehensive capital plan supported by an
assessment of expected sources and uses 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
2014. As part of the 2015 CCAR, the FRB also generated a
supervisory stress test, which assumed a sharp decline in the
economy and significant decline in asset pricing using the
information provided by the Company to estimate performance.
The FRB reviewed the supervisory stress results both as required
under the Dodd-Frank Act using a common set of capital actions
for all large BHCs and by taking into account the Company’s
proposed capital actions. The FRB published its supervisory
stress test results as required under the Dodd-Frank Act on
March 5, 2015. On March 11, 2015, the FRB notified us that it did
not object to our capital plan included in the 2015 CCAR. The
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Wells Fargo & Company
FRB has moved the start date for future CCAR cycles, including
the 2016 CCAR, to the first quarter.
In addition to CCAR, federal banking regulators also require
stress tests to evaluate whether an institution has sufficient
capital to continue to operate during periods of adverse
economic and financial conditions. These stress testing
requirements set forth the timing and type of stress test activities
large BHCs and banks must undertake as well as rules governing
stress testing controls, oversight and disclosure requirements.
The rules also limit a large BHC’s ability to make capital
distributions to the extent its actual capital issuances were less
than amounts indicated in its capital plan. As required under the
FRB’s stress testing rule, we completed a mid-cycle stress test
based on data and scenarios developed by the Company. We
submitted the results of the mid-cycle stress test to the FRB and
disclosed a summary of the results in July 2015.
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 March 2014, the Board authorized the repurchase of
350 million shares of our common stock. At December 31, 2015,
we had remaining authority to repurchase approximately
77 million shares, subject to regulatory and legal conditions. In
January 2016, the Board authorized the repurchase of an
additional 350 million shares of our common stock. For more
information about share repurchases during fourth quarter
2015, see Part II, Item 5 in our 2015 Form 10-K.
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
original exercise price of $34.01 per share expiring on October
28, 2018. The terms of the warrants require the exercise price to
be adjusted under certain circumstances when the Company’s
quarterly common stock dividend exceeds $0.34 per share,
which began occurring in second quarter 2014. Accordingly, with
each quarterly common stock dividend above $0.34 per share,
we must calculate whether an adjustment to the exercise price is
required by the terms of the warrants, including whether certain
minimum thresholds have been met to trigger an adjustment,
and notify the holders of any such change. The Board authorized
the repurchase by the Company of up to $1 billion of the
warrants. At December 31, 2015, there were 34,816,632 warrants
outstanding, exercisable at $33.92 per share, 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.
Wells Fargo & Company
107
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 2015 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.
•
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 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
and OCC have also finalized rules implementing stress
testing requirements for large BHCs and national banks.
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 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
finalized guidelines establishing heightened governance and
risk management standards for large national banks such as
Wells Fargo Bank, N.A. The OCC guidelines require covered
banks to establish and adhere to a written risk governance
framework in order to manage and control their risk-taking
activities. The guidelines also formalize roles and
responsibilities for risk management practices within
covered banks and create certain risk oversight
responsibilities for their boards of directors.
• 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 origination, notification and other requirements that
generally became effective in January 2014. In November
2013, the CFPB also finalized rules integrating disclosures
required of lenders and settlement agents under the Truth
in Lending Act (TILA) and the Real Estate Settlement
Procedures Act (RESPA). These rules, which became
effective in October 2015, combine existing separate
disclosure forms under the TILA and RESPA into new
integrated forms and provide additional limitations on the
fees and charges that may be increased from the estimates
provided by lenders. In October 2015, the CFPB finalized
amendments to the rule implementing the Home Mortgage
Disclosure Act, resulting in a significant expansion of the
data points lenders will be required to collect beginning
January 1, 2018 and report to the CFPB beginning January
1, 2019. The CFPB also expanded the transactions covered
by the rule and increased the reporting frequency from
annual to quarterly for large volume lenders, such as
Wells Fargo, beginning January 1, 2020. With respect to
other financial products, in November 2014, the CFPB
issued a proposed rule to expand consumer protections for
prepaid products such as prepaid cards. The proposal would
make prepaid cards subject to similar consumer protections
as those provided by more traditional debit and credit cards
such as fraud protection and expanded access to account
information.
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 mortgage
lending and servicing, fair lending requirements, student
lending activities, and auto finance. 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.
Volcker Rule. The Volcker Rule, with limited exceptions,
prohibits banking entities from engaging in proprietary
trading or owning any interest in or sponsoring or having
certain relationships with a hedge fund, a private equity
fund or certain structured transactions that are deemed
covered funds. On December 10, 2013, federal banking
regulators, the SEC and CFTC (collectively, the Volcker
supervisory regulators) jointly released a final rule to
implement the Volcker Rule’s restrictions. Banking entities
were required to comply with many of the Volcker Rule’s
restrictions by July 21, 2015. However, the FRB has
extended the rule’s compliance date to give banking entities
until July 21, 2016, to conform their ownership interests in
and sponsorships of covered funds that were in place prior
to December 31, 2013, and the FRB has announced that it
intends to provide an additional one-year extension to this
date in the future. As a banking entity with more than
$50 billion in consolidated assets, we are also subject to
enhanced compliance program requirements. We expect to
have to make divestments in non-conforming funds prior to
•
108
Wells Fargo & Company
•
•
•
•
the extended compliance date for covered funds that were in
place prior to December 31, 2013, however we do not
anticipate a material impact to our financial results as
prohibited proprietary trading and covered fund investment
activities are not significant 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. In October 2015, federal
regulators also approved a final rule requiring certain
margin and capital requirements for swaps not centrally
cleared. All of these new rules, as well as others being
considered by regulators in other jurisdictions, may
negatively impact customer demand for over-the-counter
derivatives and may increase our costs for engaging in
swaps and other derivatives activities.
Changes to asset-backed securities (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. In October 2014, federal
regulatory agencies issued final rules to implement this
credit risk retention requirement, which included an
exemption for the GSE’s mortgage-backed securities. The
final rules also aligned the definition of QRMs, which are
exempt from the risk retention requirements, with the
Consumer Financial Protection Bureau’s definition of
“qualified mortgage.” In addition, the final rules 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. The final rules may impact our ability
to issue certain asset-backed securities or otherwise
participate in various securitization transactions.
Enhanced regulation of money market mutual funds. On
July 23, 2014, the SEC adopted a rule governing money
market mutual funds that, among other things, requires
significant structural changes to these funds, including
requiring non-governmental institutional money market
funds to maintain a variable net asset value and providing
for the imposition of liquidity fees and redemption gates for
all non-governmental money market funds during periods
in which they experience liquidity impairments of a certain
magnitude. Money market mutual funds must comply with
these requirements by October 14, 2016.
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. 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 March 2014, the Court of Appeals reversed the District
Court’s decision, but did direct the FRB to provide further
explanation regarding its treatment of the costs of
monitoring transactions. The plaintiffs did not file a petition
for rehearing with the Court of Appeals but filed a petition
for writ of certiorari with the U.S. Supreme Court. In
January 2015, the U.S. Supreme Court denied the petition
for writ of certiorari.
FDIC Deposit Insurance Assessments. Through a Deposit
Insurance Fund (DIF), the FDIC insures the deposits of our
banks up to prescribed limits for each depositor and funds
the DIF through assessments on member insured
depository institutions. In October 2015, the FDIC issued a
proposed rule that would impose on insured depository
institutions with $10 billion or more in assets, such as
Wells Fargo, a surcharge of 4.5 cents per $100 of their
assessment base, after making certain adjustments. The
proposed surcharge would be in addition to the base
assessments we pay and could significantly increase the
overall amount of our deposit insurance assessments. For
more information, see the “Regulation and Supervision –
Deposit Insurance Assessments” section in our 2015 Form
10-K.
•
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. In 2014,
federal banking regulators also finalized rules 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, 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
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. On
November 25, 2014, the FRB and FDIC announced that our 2014
resolution plan submission provided a basis for a resolution
strategy that could facilitate an orderly resolution under
Wells Fargo & Company
109
Regulatory Reform (continued)
bankruptcy; however, they identified specific shortcomings in
the 2014 resolution plan that would need to be addressed in the
2015 resolution plan. We submitted our 2015 resolution plan on
June 29, 2015, but have not yet received regulatory feedback on
the plan. 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 its third annual resolution plan on June 29, 2015.
We must also prepare and submit to the FRB on an annual
basis a recovery plan that identifies a range of options that we
may consider during times of idiosyncratic or systemic economic
stress to remedy any financial weaknesses and restore market
confidence without extraordinary government support. Recovery
options include the possible sale, transfer or disposal of assets,
securities, loan portfolios or businesses. In December 2015, the
OCC published a notice of proposed rulemaking on guidelines to
establish standards for recovery planning by large insured
national banks, such as Wells Fargo Bank, N.A. The guidelines
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. Five of these policies are
critical because they require management to make difficult,
subjective and complex judgments about matters that are
inherently uncertain and because it is likely that materially
different amounts would be reported under different conditions
or using different assumptions. These policies govern:
•
•
•
•
•
the allowance for credit losses;
PCI loans;
the valuation of residential MSRs;
the fair value of financial instruments; and
income taxes.
Management and the Board's Audit and Examination
committee have reviewed and approved these critical accounting
policies.
Allowance for Credit Losses
We maintain an allowance for credit losses, which consists of the
allowance for loan losses and the allowance for unfunded credit
commitments, which 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. For a description of our related accounting policies,
see Note 1 (Summary of Significant Accounting Policies) to
Financial Statements in this Report.
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,
would require a bank to develop and maintain a recovery plan
that sets forth the bank’s plan to remain a going concern when
the bank is experiencing considerable financial or operational
stress, but has not yet deteriorated to the point where liquidation
or resolution is imminent. If either the FRB or the OCC
determine that our recovery plan is deficient, they may impose
restrictions on our business or ultimately require us to divest
assets.
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 released a notice
and request for comment 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 not issued any final statements on the single point of
entry resolution strategy.
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. While our
methodology attributes portions of the allowance to specific
portfolio segments (commercial and consumer), the entire
allowance for credit losses is available to absorb credit losses
inherent in the total loan portfolio and unfunded credit
commitments.
•
•
•
Judgment is specifically applied in:
Credit risk ratings applied to individual commercial loans
and unfunded credit commitments. We estimate the
probability of default in accordance with the borrower’s
financial strength using a borrower quality rating and the
severity of loss in the event of default using a collateral
quality rating. Collectively, these ratings are referred to as
credit risk ratings and are assigned to our commercial loans.
Probability of default and severity at the time of default are
statistically derived through historical observations of
defaults and losses after default within each credit risk
rating. 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.
Economic assumptions applied to pools of consumer loans
(statistically modeled). Losses are estimated using
economic variables to represent our best estimate of
inherent loss. Our forecasted losses are modeled using a
range of economic scenarios.
Selection of a 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 expected loss, roll rate, net flow,
vintage maturation, behavior score, and time series or
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Wells Fargo & Company
statistical trend models, most with economic correlations.
Management must use judgment in establishing additional
input metrics for the modeling processes, considering
further stratification into reference data time series, sub-
product, origination channel, vintage, loss type, geographic
location and other predictive characteristics. The models
used to determine the allowance are validated by an internal
model validation group operating in accordance with
Company policies.
Assessment of limitations to credit loss estimation models.
We apply our judgment to adjust or supplement our
modeled estimates to reflect other risks that may be
identified from current conditions and developments in
selected portfolios.
Identification and measurement of impaired loans,
including loans modified in a TDR. Our experienced senior
credit officers may consider a loan impaired based on their
evaluation of current information and events, including
loans modified in a TDR. The measurement of impairment
is typically based on an analysis of the present value of
expected future cash flows. The development of these
expectations requires significant management review and
judgment.
An amount for imprecision or uncertainty which reflects
management’s overall estimate of the effect of quantitative
and qualitative factors on inherent credit losses. 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 emerging risk assessments.
•
•
•
SENSITIVITY TO CHANGES Table 60 demonstrates the impact
of the sensitivity of our estimates on our allowance for credit
losses.
Table 60: Allowance Sensitivity Summary
(in billions)
Assumption:
Favorable (1)
Adverse (2)
December 31, 2015
Estimated
increase/(decrease)
in allowance
$
(3.5)
8.3
(1)
(2)
Represents a one risk rating upgrade throughout our commercial portfolio
segment and a more optimistic economic outlook for modeled losses on our
consumer portfolio segment.
Represents 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 for PCI loans.
The sensitivity analyses provided in the previous table 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 – Allowance for Credit
Losses” section and Note 6 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report for further
discussion of our allowance for credit losses.
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. For a description
of our related accounting policies, see Note 1 (Summary of
Significant Accounting Policies) to Financial Statements in this
Report.
•
•
•
We apply judgment for PCI loans in:
identifying loans that meet the PCI criteria at acquisition
based on our evaluation of credit quality deterioration using
indicators such as past due and nonaccrual status,
commercial risk ratings, recent borrower credit scores and
recent loan-to-value percentages.
determining initial fair value at acquisition, which 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. Our estimation includes the timing and
amount of cash flows expected to be collected.
regularly evaluating our estimates of cash flows expected to
be collected, subsequent to acquisition. 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
changes in value of underlying collateral such as home price
and property value changes, changing loss severities,
modification activity, and prepayment speeds.
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 –
Purchased Credit Impaired Loans” section and Note 6 (Loans
and Allowance for Credit Losses – Purchased Credit Impaired
Loans") to Financial Statements in this Report for further
discussion of PCI loans.
Valuation of Residential Mortgage Servicing
Rights (MSRs)
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 carry our MSRs related to residential mortgage loans
at fair value. Periodic changes in our residential MSRs and
the economic hedges used to hedge our residential MSRs are
reflected in earnings.
We use a model to estimate the fair value of our
residential MSRs. The model is validated by an internal model
validation group operating in accordance with Company
policies. The model calculates the present value of estimated
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111
Critical Accounting Policies (continued)
•
future net servicing income and incorporates inputs and
assumptions that market participants use in estimating fair
value. Certain significant inputs and assumptions are not
observable in the market and require judgment to determine:
•
The mortgage loan prepayment speed used to estimate
future net servicing income. The prepayment speed is the
annual rate at which borrowers are forecasted to repay their
mortgage loan principal; this rate also includes estimated
borrower defaults. We use models to estimate prepayment
speeds and borrower defaults which are influenced by
changes in mortgage interest rates and borrower behavior.
The discount rate used to present value estimated future
net servicing income. The discount rate 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).
The expected cost to service loans used to estimate future
net servicing income. The cost to service loans includes
estimates for unreimbursed expenses, such as delinquency
and foreclosure costs, which considers the number of
defaulted loans as well as changes in servicing processes
associated with default and foreclosure management.
•
Both prepayment speed and discount rate assumptions can,
and generally will, change quarterly as market conditions and
mortgage 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. Additionally, while our current valuation reflects our
best estimate of servicing costs, future regulatory changes in
servicing standards, as well as changes in individual state
foreclosure legislation, may have an impact on our servicing cost
assumption and our MSR valuation in future periods.
For a description of our valuation and sensitivity of MSRs,
see 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.
Fair Value of Financial Instruments
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.
We use fair value measurements to record fair value
adjustments to certain financial instruments and to determine
fair value disclosures. For example, trading assets, securities
available for sale, derivatives and substantially all of our
residential MHFS are carried at fair value each period. Other
financial instruments, such as certain MHFS and substantially
all of our loans held for investment, are not carried at fair value
each period but may require nonrecurring fair value
adjustments due to application of lower-of-cost-or-market
accounting or write-downs of individual assets. We also disclose
our estimate of fair value for financial instruments not recorded
at fair value, such as loans held for investment or issuances of
long-term debt.
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. Additionally, we
use third party pricing services to obtain fair values, which are
used to either record the price of an instrument or to corroborate
internally developed prices. For additional information on our
use of pricing services, see Note 1 (Summary of Significant
Accounting Policies) and Note 17 (Fair Value of Assets and
Liabilities) to Financial Statements in this Report.
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.
Significant judgment is also required to determine whether
certain assets measured at fair value are classified as 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.
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
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Wells Fargo & Company
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.
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).
Table 61: Fair Value Level 3 Summary
($ in billions)
Assets carried
at fair value
As a percentage
of total assets
Liabilities carried
at fair value
As a percentage of
total liabilities
December 31, 2015
December 31, 2014
Total Level 3
(1)
balance
Total Level 3
(1)
balance
$ 384.2
27.7
378.1
32.3
21%
2
22
2
$ 29.6
1.5
34.9
2.3
2%
*
2
*
Less than 1%.
*
(1) Before derivative netting adjustments.
See Note 17 (Fair Values of Assets and Liabilities) to
Financial Statements in this Report for a complete discussion on
our fair value 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.
Wells Fargo & Company
113
Current Accounting Developments
Table 62 provides accounting pronouncements applicable to us
that have been issued by the FASB but are not yet effective.
Table 62: Current Accounting Developments – Issued Standards
Standard
Description
Accounting Standards Update (ASU or Update)
2016-01 – Financial Instruments – Overall
(Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial
Liabilities
The Update amends the presentation and
accounting for certain financial instruments,
including liabilities measured at fair value
under the fair value option and equity
investments. The guidance also updates fair
value presentation and disclosure requirements
for financial instruments measured at
amortized cost.
ASU 2015-16 – Business Combinations (Topic
805): Simplifying the Accounting for
Measurement-Period Adjustments
ASU 2015-07 – Fair Value Measurement (Topic
820): Disclosures for Investments in Certain
Entities that Calculate Net Asset Value per
Share (or Its Equivalent)
ASU 2015-03 – Interest – Imputation of
Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs
ASU 2015-02 – Consolidation (Topic 810):
Amendments to the Consolidation Analysis
ASU 2015-01 – Income Statement –
Extraordinary and Unusual Items (Subtopic
225-20): Simplifying Income Statement
Presentation by Eliminating the Concept of
Extraordinary Items
The Update eliminates the requirement for
companies to retrospectively adjust initial
amounts recognized in business combinations
when the accounting is incomplete at the
acquisition date. Under the new guidance,
companies should record adjustments in the
same reporting period in which the amounts
are determined.
The Update eliminates the disclosure
requirement to categorize investments within
the fair value hierarchy that are measured at
fair value using net asset value as a practical
expedient.
The Update changes the balance sheet
presentation for debt issuance costs. Under the
new guidance, debt issuance costs should be
reported as a deduction from debt liabilities
rather than as a deferred charge classified as
an asset.
The Update primarily amends the criteria
companies use to evaluate whether they
should consolidate certain variable interest
entities that have fee arrangements and the
criteria used to determine whether
partnerships and similar entities are variable
interest entities. The Update also excludes
certain money market funds from the
consolidation guidance.
The Update removes the concept of
extraordinary items from GAAP and eliminates
the requirement for extraordinary items to be
separately presented in the statement of
income.
Effective date and financial statement
impact
The Update is effective for us in first quarter
2018 with prospective application to changes in
guidance related to nonmarketable equity
investments. The remaining amendments
should be applied with a cumulative-effect
adjustment to the balance sheet as of the
beginning of the adoption period. Early
application is only permitted for changes
related to liabilities measured at fair value
under the fair value option. Early adoption is
prohibited for the remaining amendments. We
are evaluating the impact of the Update on our
consolidated financial statements.
The Update is effective for us in first quarter
2016 with prospective application. The Update
will not have a material impact on our
consolidated financial statements.
The guidance is effective for us in first quarter
2016 with retrospective application. The
Update will not affect our consolidated financial
statements as it impacts only the fair value
disclosure requirements for certain
investments.
The Update is effective for us in first quarter
2016 and will not have a material impact on
our consolidated financial statements since it is
limited to a reclassification on our balance
sheet.
These changes are effective for us in first
quarter 2016 and will be applied with a
cumulative-effect adjustment to opening
retained earnings. The Update will not have a
material impact on our consolidated financial
statements.
The Update is effective for us in first quarter
2016 with prospective application. The Update
will not have a material impact on our
consolidated financial statements.
ASU 2014-16 – Derivatives and Hedging (Topic
815): Determining Whether the Host Contract
in a Hybrid Financial Instrument Issued in the
Form of a Share is More Akin to Debt or to
Equity
The Update clarifies that the nature of host
contracts in hybrid financial instruments that
are issued in share form should be determined
based on the entire instrument, including the
embedded derivative.
The Update is effective for us in first quarter
2016 with modified retrospective application.
The Update will not have a material impact on
our consolidated financial statements.
ASU 2014-13 – Consolidation (Topic 810):
Measuring the Financial Assets and the
Financial Liabilities of a Consolidated
Collateralized Financing Entity
The Update provides a measurement
alternative to companies that consolidate
collateralized financing entities (CFEs), such as
collateralized debt obligation and collateralized
loan obligation structures. Under the new
guidance, companies can measure both the
financial assets and financial liabilities of a CFE
using the more observable fair value of the
financial assets or of the financial liabilities.
These changes are effective for us in first
quarter 2016 and can be applied by a modified
retrospective approach. The Update will not
have a material impact on our consolidated
financial statements.
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Wells Fargo & Company
Standard
Description
ASU 2014-12 – Compensation – Stock
Compensation (Topic 718): Accounting for
Share-Based Payments When the Terms of an
Award Provide That a Performance Target Could
Be Achieved after the Requisite Service Period
ASU 2014-09 – Revenue from Contracts With
Customers (Topic 606)
The Update provides accounting guidance for
employee share-based payment awards with
specific performance targets. The Update
clarifies that performance targets should be
treated as performance conditions if the
targets affect vesting and could be achieved
after the requisite service period.
The Update modifies the guidance companies
use to recognize revenue from contracts with
customers for transfers of goods or services
and transfers of nonfinancial assets, unless
those contracts are within the scope of other
standards. The guidance also requires new
qualitative and quantitative disclosures,
including information about contract balances
and performance obligations.
Effective date and financial statement
impact
The Update is effective for us in first quarter
2016 and can be applied prospectively. The
Update will not have a material impact on our
consolidated financial statements.
In August 2015, the FASB issued ASU 2015-14
(Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date),
which defers the effective date of ASU 2014-09
to first quarter 2018. The Update can be
applied retrospectively to prior periods
presented or as a cumulative-effect adjustment
in the period of adoption. Early adoption is
permitted in first quarter 2017. Our revenue is
balanced between net interest income on
financial assets and liabilities, which is
explicitly excluded from the scope of the new
guidance, and noninterest income. We continue
to evaluate the impact of the Update to our
noninterest income and on our presentation
and disclosures. We expect to adopt the
Update in first quarter 2018 with a cumulative-
effect adjustment to opening retained
earnings.
Table 63 provides proposed accounting pronouncements
that could materially affect our consolidated financial statements
when finalized by the FASB.
Table 63: Current Accounting Developments – Proposed Standards
Proposed Standard
Description
Expected Issuance
Financial Instruments – Credit Losses (Subtopic
825-15)
Leases (Topic 842)
The FASB expects to issue a final standard in
2016.
The FASB expects to issue a final standard in
2016.
The proposed Update would change the
accounting for credit losses on loans and debt
securities. For loans, the proposal would
require an expected credit loss model rather
than the current incurred loss model to
determine the allowance for credit losses. The
expected credit loss model would estimate
losses for the estimated life of the financial
asset. In addition, the proposed guidance
would modify the other-than-temporary
impairment model for available-for-sale debt
securities to require an allowance for credit
impairment instead of a direct write-down,
which would allow for reversal of credit
impairments in future periods.
The proposed Update would require lessees to
recognize leases on the balance sheet with
lease liabilities and corresponding right-of-use
assets based on the present value of lease
payments. Additionally, lessors would largely
continue current accounting with lease
financings and operating lease assets
depending on the nature of the leases. The
proposed Update would also eliminate
leveraged lease accounting, but would allow
existing leveraged leases to continue their
current accounting until maturity or
termination.
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
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115
Forward-Looking Statements (continued)
efficiency ratio; (iii) future credit quality and performance,
including our expectations regarding future loan losses and
allowance levels; (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
or targets and our estimated Common Equity Tier 1 ratio under
Basel III capital standards; (viii) the performance of our
mortgage business and any related exposures; (ix) the expected
outcome and impact of legal, regulatory and legislative
developments, as well as our expectations regarding compliance
therewith; (x) future common stock dividends, common share
repurchases and other uses of capital; (xi) our targeted range for
return on assets and return on equity; (xii) the outcome of
contingencies, such as legal proceedings; and (xiii) the
Company’s plans, objectives and strategies.
Forward-looking statements are not based on historical
facts but instead represent our current expectations and
assumptions regarding our business, the economy and other
future conditions. Because forward-looking statements relate to
the future, they are subject to inherent uncertainties, risks and
changes in circumstances that are difficult to predict. Our actual
results may differ materially from those contemplated by the
forward-looking statements. We caution you, therefore, against
relying on any of these forward-looking statements. They are
neither statements of historical fact nor guarantees or
assurances of future performance. While there is no assurance
that any list of risks and uncertainties or risk factors is complete,
important factors that could cause actual results to differ
materially from those in the forward-looking statements include
the following, without limitation:
•
current and future economic and market conditions,
including the effects of declines in housing prices, high
unemployment rates, U.S. fiscal debt, budget and tax
matters, geopolitical matters, and the overall slowdown in
global economic growth;
our capital and liquidity requirements (including under
regulatory capital standards, such as the Basel III capital
standards) and our ability to generate capital internally or
raise capital on favorable terms;
financial services reform and other current, pending or
future legislation or regulation that could have a negative
effect on our revenue and businesses, including the Dodd-
Frank Act and other legislation and regulation relating to
bank products and services;
the extent of our success in our loan modification efforts, as
well as the effects of regulatory requirements or guidance
regarding loan modifications;
the amount of mortgage loan repurchase demands that we
receive and our ability to satisfy any such demands without
having to repurchase loans related thereto or otherwise
indemnify or reimburse third parties, and the credit quality
of or losses on such repurchased mortgage loans;
negative effects relating to our mortgage servicing and
foreclosure practices, 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
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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;
significant turbulence or a 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.
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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.
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Wells Fargo & Company
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. Moreover, geopolitical
matters, including international political unrest or disturbances,
as well as continued concerns over energy prices and global
economic difficulties, may impact the stability of financial
markets and the global economy. A prolonged period of slow
growth in the global economy, particularly in the U.S., or any
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 and
CRE lenders 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, weak economic
conditions, as well as competition and/or increases in interest
rates, could soften demand for our loans 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
2015, approximately 26% 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 2015, but also experienced significant volatility and
there is no guarantee that high 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. If our funding costs rise faster than the yield we earn
Wells Fargo & Company
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Risk Factors (continued)
on our assets or if the yield we earn on our assets falls faster than
our funding costs, our net interest margin could contract.
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 is currently being experienced
as a result of economic conditions and FRB monetary policies, as
it may result in us holding 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. When the yield curve flattens, or even inverts, our net
interest margin could decrease if the cost of our short-term
funding increases relative to the yield we can earn on our long-
term 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. In particular, economic difficulties in the oil and
gas industry resulting from prolonged low oil prices may further
impact our energy sector investments and require us to
recognize OTTI in these investments 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 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
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Wells Fargo & Company
deposits to be a low cost and stable source of funding for the
loans we make and the operation of our business. 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-
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, concerns over geopolitical issues, commodity and
currency prices, as well as global economic conditions, may
cause 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. 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 on our credit ratings, see the “Risk
Management – Asset/Liability Management – Liquidity and
Funding – Credit Ratings” section and 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
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Risk Factors (continued)
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 2015 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
and extensive 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. In addition, greater
government oversight and scrutiny of financial services
companies has increased our operational and compliance costs
as we must continue to devote substantial resources to
enhancing our procedures and controls and meeting heightened
regulatory standards and expectations. Any failure to meet
regulatory standards or expectations could result in fees,
penalties, or restrictions on our ability to engage in certain
business activities.
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) permitted banks
to pay interest on business checking accounts beginning on July
1, 2011; (x) authorized the FRB under the Durbin Amendment to
adopt regulations that limit debit card interchange fees received
by debit card issuers; and (xi) includes several corporate
governance and executive compensation provisions and
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 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 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 and 2015, 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 have
become subject to more and 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
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earnings, although proprietary trading has not been significant
to our financial results. Final rules to implement the
requirements of the Volcker Rule were issued in December 2013.
Pursuant to an order of the FRB, banking entities were required
to comply with many of the Volcker Rule’s restrictions by July
21, 2015. However, the FRB has extended the rule’s compliance
date to give banking entities until July 21, 2016 to conform their
ownership interests in and sponsorships of covered funds that
were in place prior to December 31, 2013, and the FRB has
announced that it intends to provide an additional one-year
extension to this date in the future. Wells Fargo is also subject to
enhanced compliance program requirements.
In addition, the Dodd-Frank Act established a
comprehensive framework for regulating over-the-counter
derivatives and authorized the CFTC and SEC to regulate swaps
and security-based swaps, respectively. The CFTC and SEC have
adopted various rules to implement this framework, including
rules requiring extensive regulatory and public reporting of
swaps, certain swaps to be centrally cleared and traded on
exchanges or other multilateral platforms, and swap dealers to
comply with comprehensive internal and external business
conduct standards. Federal regulators also approved rules
requiring certain margin and capital requirements for swaps not
centrally cleared. All of these rules, as well as others being
considered by regulators in other jurisdictions, may negatively
impact customer demand for over-the-counter derivatives and
may increase our costs for engaging in swaps and other
derivatives activities.
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 finalized rules to implement
this credit risk retention requirement, which have only included
limited exemptions. The final rules may impact our ability to
issue certain ABS or otherwise participate in various
securitization transactions.
In order to address the perceived risks that money market
mutual funds may pose to the financial stability of the United
States, the SEC adopted rules in July 2014 that, among other
things, require significant structural changes to these funds,
including requiring non-governmental institutional money
market funds to maintain a variable net asset value and
providing for the imposition of liquidity fees and redemption
gates for all non-governmental money market funds during
periods in which they experience liquidity impairments of a
certain magnitude. Money market mutual funds must comply
with these requirements by October 14, 2016. Certain of our
money market mutual funds may see a decline in assets under
management in response to implementation of these structural
changes.
Through a Deposit Insurance Fund (DIF), the FDIC insures
the deposits of our banks up to prescribed limits for each
depositor and funds the DIF through assessments on member
insured depository institutions. In October 2015, the FDIC
issued a proposed rule that would impose on insured depository
institutions with $10 billion or more in assets, such as
Wells Fargo, a surcharge of 4.5 cents per $100 of their
assessment base, after making certain adjustments. The
proposed surcharge would be in addition to the base
assessments we pay and could significantly increase the overall
amount of our deposit insurance assessments.
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 is designed to facilitate our resolution
in the event of material distress or failure. There can be no
assurance that the FRB or FDIC will respond favorably to the
Company’s resolution plans. 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
and submit a resolution plan to the FDIC under separate
regulatory authority.
We must also prepare and submit to the FRB on an annual
basis a recovery plan that identifies a range of options that we
may consider during times of idiosyncratic or systemic economic
stress to remedy any financial weaknesses and restore market
confidence without extraordinary government support. In
December 2015, the OCC published a notice of proposed
rulemaking on guidelines to establish standards for recovery
planning by large insured national banks, such as Wells Fargo
Bank, N.A. The guidelines would require a bank to develop and
maintain a recovery plan that sets forth the bank’s plan to
remain a going concern when the bank is experiencing
considerable financial or operational stress, but has not yet
deteriorated to the point where liquidation or resolution is
imminent. If either the FRB or the OCC determine that our
recovery plan is deficient, they may impose restrictions on our
business or ultimately require us to divest assets.
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 released a notice
and request for comment 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 not issued any final statements on
the single point of entry resolution strategy.
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
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Risk Factors (continued)
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 2015 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 or other
products and services to our customers. The Company
and each of our insured depository institutions are subject to
various regulatory capital adequacy requirements administered
by federal banking regulators. In particular, the Company is
subject to final and interim final rules issued by federal banking
regulators to implement Basel III capital requirements for U.S.
banking organizations. These rules are based on international
guidelines for determining regulatory capital issued by the Basel
Committee on Banking Supervision (BCBS) and are designed to
address weaknesses identified in the banking sector as
contributing to the financial crisis of 2008, including excessive
leverage, inadequate and low quality capital and insufficient
liquidity buffers. The federal banking regulators’ capital rules,
among other things, require on a fully phased-in basis:
•
•
•
•
a minimum Common Equity Tier 1 (CET1) ratio of 4.5%;
a minimum tier 1 capital ratio of 6.0%;
a minimum total capital ratio of 8.0%;
a capital conservation buffer of 2.5% to be added to the
minimum capital ratios, and a capital surcharge between
1.0-4.5% for global systemically important banks (G-SIBs)
that will be calculated annually (based on year-end 2014
data, the FRB estimated that our G-SIB surcharge would be
2.0%) and also added to the minimum capital ratios (for a
minimum CET1 ratio of 9.0%, a minimum tier 1 capital ratio
of 10.5%, and a minimum total capital ratio of 12.5%);
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;
a minimum tier 1 leverage ratio of 4.0%; and
a minimum supplementary leverage ratio (SLR) of 5.0%
(comprised of a 3.0% minimum requirement and a
supplementary leverage buffer of 2.0%) for large and
internationally active bank holding companies (BHCs).
•
•
•
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 the end of 2021.
Because the Company has been designated as a G-SIB, we
will also be subject to the FRB’s rule implementing the
additional capital surcharge on G-SIBs. Under the rule, we must
annually calculate our surcharge under two prescribed methods
and use the higher of the two surcharges. The G-SIB surcharge
will be phased in beginning on January 1, 2016 and become fully
effective on January 1, 2019. Based on year-end 2014 data, the
FRB estimated that the Company’s G-SIB surcharge would be
2.0% of the Company’s RWAs. However, because the G-SIB
surcharge is calculated annually based on data that can differ
over time, the amount of the surcharge is subject to change in
future periods.
In April 2014, federal banking regulators finalized a rule
that enhances the SLR requirements for BHCs, like Wells Fargo,
and their insured depository institutions. The SLR consists of
tier 1 capital under Basel III divided by the Company’s total
leverage exposure. Total leverage exposure consists of the total
average on-balance sheet assets, plus off-balance sheet
exposures, such as undrawn commitments and derivative
exposures, less amounts permitted to be deducted from tier 1
capital. The rule, which becomes effective on January 1, 2018,
will require a covered BHC to maintain a SLR of at least 5.0%
(comprised of the 3.0% minimum requirement and a
supplementary leverage buffer of 2.0%) to avoid restrictions on
capital distributions and discretionary bonus payments. The rule
will also require that all of our insured depository institutions
maintain a SLR of 6.0% under applicable regulatory capital
adequacy guidelines.
In October 2015, the FRB proposed rules to address the
amount of equity and unsecured long-term debt a U.S. G-SIB
must hold to improve its resolvability and resiliency, often
referred to as Total Loss Absorbing Capacity (TLAC). Under the
proposed rules, U.S. G-SIBs would be required to have a
minimum TLAC amount (consisting of CET1 capital and
additional tier 1 capital issued directly by the top-tier or covered
BHC plus eligible external long-term debt) equal to the greater of
(i) 18% of RWAs and (ii) 9.5% of total leverage exposure (the
denominator of the SLR calculation). Additionally, U.S. G-SIBs
would be required to maintain a TLAC buffer equal to 2.5% of
RWAs plus the firm’s applicable G-SIB capital surcharge
calculated under method one of the G-SIB calculation plus any
applicable countercyclical buffer that would be added to the 18%
minimum in order to avoid restrictions on capital distributions
and discretionary bonus payments. The proposed rules would
also require U.S. G-SIBs to have a minimum amount of eligible
unsecured long-term debt equal to the greater of (i) 6.0% of
RWAs plus the firm’s applicable G-SIB capital surcharge
calculated under method two of the G-SIB calculation and (ii)
4.5% of the total leverage exposure. In addition, the proposed
rules would impose certain restrictions on the operations and
liabilities of the top-tier or covered BHC in order to further
facilitate an orderly resolution, including prohibitions on the
issuance of short-term debt to external investors and on entering
into derivatives and certain other types of financial contracts
with external counterparties. If the proposed rules are finalized
as proposed, we may be required to issue additional long-term
debt. We continue to evaluate the impact this proposal will have
on our consolidated financial statements.
In September 2014, federal banking regulators issued a final
rule that implements a quantitative liquidity requirement
consistent with the liquidity coverage ratio (LCR) established by
the BCBS. The rule requires banking institutions, such as
Wells Fargo, to hold high-quality liquid assets, such as central
bank reserves and government and corporate debt that can be
converted easily and quickly into cash, in an amount equal to or
greater than its projected net cash outflows during a 30-day
stress period. The final LCR rule began its phase-in period on
January 1, 2015, and requires full compliance with a minimum
100% LCR by January 1, 2017. The FRB also finalized rules
imposing enhanced liquidity management standards on large
BHCs such as Wells Fargo.
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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
requires large 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 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 and OCC have
also finalized rules implementing stress testing requirements for
large BHCs and national banks. 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 OCC, under separate
authority, has also established heightened governance and risk
management standards for large national banks, such as
Wells Fargo Bank, N.A.
The Basel standards and federal 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, product
offerings and/or investment plans, which may negatively affect
our financial results. Although not currently anticipated,
proposed 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. In addition, federal banking regulations may
increase our compliance costs as well as limit our ability to invest
in our business or provide loans or other products and services
to our customers. For more information, refer to the “Capital
Management” and “Regulatory Reform” sections in this Report
and the “Regulation and Supervision” section of our 2015
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. The FRB recently increased
the target range for the federal funds rate by 25 basis points. The
FRB has stated that in determining the timing and size of any
future adjustments to the target range for the federal funds rate,
the FRB will assess realized and expected economic conditions
relative to its objectives of maximum employment and two
percent inflation. The FRB has indicated that any future
increases in interest rates likely would be gradual and data
dependent. 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, significant loan
growth, or other factors. For example, if oil prices remain low for
a prolonged period of time, we may have to increase the
allowance, particularly to cover potential losses on loans to
customers in the energy sector. Additionally, the regulatory
environment or external factors, such as natural disasters, also
can influence recognition of credit losses in our loan portfolios
and impact our allowance for credit losses.
Reflecting the continued improved credit performance in
our loan portfolios, our provision for credit losses was
$450 million and $1.6 billion less than net charge-offs in 2015
and 2014, respectively, which had a positive effect on our
earnings. Future allowance levels may increase or decrease
based on a variety of factors, including loan growth, portfolio
performance and general economic conditions. While we believe
that our allowance for credit losses was appropriate at
December 31, 2015, 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 or if we experience
significant loan growth, 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
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Risk Factors (continued)
increase if our loans are concentrated to borrowers engaged in
the same or similar activities or to borrowers who individually or
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 one of the largest CRE lenders 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 foreign economic conditions, such as those
occurring in China and parts of 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,
2015, continued economic difficulties in these or other foreign
jurisdictions could indirectly have a material adverse effect on
our credit performance and results of operations and financial
condition to the extent they negatively affect the U.S. economy
and/or our borrowers who have foreign operations.
Additionally, economic conditions in the oil and gas
industry have increased our credit risk. Although our oil and gas
portfolio represented less than 2% of our total outstanding loans
at December 31, 2015, prolonged economic difficulties in this
sector could have an adverse effect on our credit performance to
the extent they negatively affect our customers who are
dependent on the oil and gas industry. In particular, if oil prices
remain low for a prolonged period of time, there could be
additional performance deterioration in our oil and gas portfolio
resulting in higher criticized assets, nonperforming loans,
allowance levels and ultimately credit losses. Deteriorated
performance can take the form of increased downgrades,
borrower defaults, potentially higher commitment drawdowns
prior to default, and downgraded borrowers being unable to fully
access the capital markets. Furthermore, our loan exposure in
communities where the employment base has a concentration in
the oil and gas sector may experience some credit challenges.
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, 2015, 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 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
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Wells Fargo & Company
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 the Federal Housing
Authority (FHA) to insure loans that meet their policy
requirements. These loans are then securitized into either GSE
or GNMA securities that are sold to investors. In order to meet
customer needs, we also originate loans that do not conform to
either GSE or FHA standards, which are referred to as
“nonconforming” loans. We generally retain these
nonconforming loans on our balance sheet. When we retain a
loan on our balance sheet 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. If we
were unable or unwilling to continue retaining nonconforming
loans on our balance sheet, whether due to regulatory, business
or other reasons, our ability to originate new mortgage loans
may be reduced, thereby reducing the fees we earn from
originating and servicing loans. Similarly, if the GSEs or the FHA
were to limit or reduce their purchases or insuring of loans, our
ability to fund, and thus originate new mortgage loans, could
also be reduced. We cannot assure that the GSEs or the FHA will
not materially limit their purchases or insuring of conforming
loans or change their criteria for what constitutes a conforming
loan (e.g., maximum loan amount or borrower eligibility). Each
of the GSEs is currently in conservatorship, with its primary
regulator, the Federal Housing Finance 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 impact 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.
may incur other losses as a result of real or alleged
violations of statutes or regulations applicable to the
origination of our residential mortgage loans. The
origination of residential mortgage loans is governed by a variety
of federal and state laws and regulations, including the Truth in
Lending Act of 1968 and various anti-fraud and consumer
protection statutes, which are complex and frequently changing.
We often sell residential mortgage loans that we originate 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 or the housing
market worsen or future investor repurchase demand and our
success at appealing repurchase requests differ from past
experience, we could have increased repurchase obligations and
increased loss severity on repurchases, requiring significant
additions to the repurchase liability.
Additionally, for residential mortgage loans that we
We may be required to repurchase mortgage loans or
reimburse investors and others as a result of breaches
in contractual representations and warranties, and we
originate, borrowers may allege that the origination of the loans
did not comply with applicable laws or regulations in one or
more respects and assert such violation as an affirmative defense
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Risk Factors (continued)
to payment or to the exercise by us of our remedies, including
foreclosure proceedings, or in an action seeking statutory and
other damages in connection with such violation. If we are not
successful in demonstrating that the loans in dispute were
originated in accordance with applicable statutes and
regulations, we could become subject to monetary damages and
other civil penalties, including the loss of certain contractual
payments or the inability to exercise certain remedies under the
loans.
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 willful 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 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, negatively affect our residential mortgage origination
or servicing business, or result in material fines, penalties,
equitable remedies, or other enforcement actions.
In particular, on February 28, 2013, we entered into
amendments to an April 2011 Consent Order with both the OCC
and the FRB, which effectively ceased the Independent
Foreclosure Review program created by such Consent Order and
replaced it with an accelerated remediation commitment to
provide foreclosure prevention actions on $1.2 billion of
residential mortgage loans, subject to a process to be
administered by the OCC and the FRB. During 2014, we reported
sufficient foreclosure prevention actions to satisfy the $1.2
billion financial commitment.
In June 2015, we entered into an additional amendment to
the April 2011 Consent Order with the OCC to address 15 of the
98 actionable items contained in the April 2011 Consent Order
that were still considered open. This amendment requires that
we remediate certain activities associated with our mortgage
loan servicing practices and allows for the OCC to take additional
supervisory action, including possible civil money penalties, if
we do not comply with the terms of this amended Consent
Order. In addition, this amendment prohibits us from acquiring
new mortgage servicing rights or entering into new mortgage
servicing contracts, other than mortgage servicing associated
with originating mortgage loans or purchasing loans from
correspondent clients in our normal course of business.
Additionally, this amendment prohibits any new off-shoring of
new mortgage servicing activities and requires OCC approval to
outsource or sub-service any new mortgage servicing activities.
As noted above, any increase in our servicing costs from changes
in our foreclosure and other servicing practices, including
resulting from consent orders, could negatively affect the fair
value of our MSRs.
For more information, refer to the “Risk Management –
Credit 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
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Wells Fargo & Company
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) was seized by its
regulator. Although only a limited amount of loans and
securities held in our portfolios had PMI insurance support, we
cannot be certain that any future financial difficulties or credit
downgrades involving one of our 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 “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 8,700
locations, 13,000 ATMs, the Internet, mobile banking 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
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 other financial institutions continue to be the
target of various evolving and adaptive cyber attacks, including
malware and denial-of-service, as part of an effort to disrupt the
operations of financial institutions, potentially test their
cybersecurity capabilities, or obtain confidential, proprietary or
other information. 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. We are also proactively involved in
industry cybersecurity efforts and working with other parties,
including our third-party service providers and governmental
agencies, to continue to enhance defenses and improve resiliency
to cybersecurity threats. 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
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Risk Factors (continued)
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
which could materially adversely affect our results of operations
or financial condition.
Our framework for managing risks may not be fully
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. In addition, we rely on data to
aggregate and assess our various risk exposures and any issues
with the quality or effectiveness of our data aggregation and
validation procedures could result in ineffective risk
management practices or inaccurate risk reporting. 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 and file
a separate report with the SEC if we or our worldwide affiliates
knowingly engage in certain activities involving Iran. 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 government sanctions and reputational
harm for engaging in a reportable activity may be significant.
Any violation of these or other applicable laws or regulatory
requirements, even if inadvertent or unintentional, could result
in fees, penalties, restrictions on our ability to engage in certain
business activities, reputational harm and other negative
consequences.
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. In addition, because we conduct most of our
businesses under the “Wells Fargo” brand, negative public
opinion about one business also could affect our other
businesses. 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 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.
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Wells Fargo & Company
RISKS RELATED TO OUR INDUSTRY’S COMPETITIVE
OPERATING ENVIRONMENT
RISKS RELATED TO OUR FINANCIAL STATEMENTS
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. Our success depends on our ability to develop and
maintain deep and enduring relationships with our customers
based on 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 or increased
competition in any one or all of these areas may negatively affect
our customer relationships, market share and results of
operations and/or cause us to increase our capital investment in
our businesses in order to remain competitive. In addition, our
ability to reposition or reprice our products and services from
time to time may be limited and could be influenced significantly
by the current economic, regulatory and political environment
for large financial institutions as well as by the actions of our
competitors. Furthermore, 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 customer
relationships 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 and other competitive threats from existing
and new competitors and may be forced to sell products at lower
prices, increase our investment in our business to modify or
adapt our existing products and services, and/or develop new
products and services to respond to our customers’ needs. To the
extent we are not successful in developing and introducing new
products and services or responding or adapting to the
competitive landscape or to changes in customer preferences, we
may lose customer relationships and our revenue growth and
results of operations may be materially adversely affected.
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.
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. For example, in
Proposed Accounting Standards Update, Financial Instruments-
Credit Losses (Subtopic 825-15), FASB has proposed replacing
the current “incurred loss” model for the allowance for credit
losses with an “expected loss” model referred to as the Current
Expected Credit Loss model, or CECL. If adopted, CECL could
materially affect how we determine our allowance and report our
financial results and condition.
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 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
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Risk Factors (continued)
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
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 or businesses 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 law prohibits
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 prior 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, 2015, we believe we already held more than 10%
of total U.S. deposits. As a result, our size may limit our bank
acquisition opportunities in the future.
Difficulty in integrating an acquired company or business
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 acquired business, 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 or business operates internationally or in a
geographic location where we do not already have significant
business operations and/or team members.
* * *
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 2016 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.
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Wells Fargo & Company
Controls and Procedures
Disclosure Controls and Procedures
The Company’s management evaluated the effectiveness, as of December 31, 2015, 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, 2015.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the
Company’s Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles
(GAAP) and includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations
of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements.
•
•
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during any quarter in
2015 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, 2015,
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control –
Integrated Framework (2013). Based on this assessment, management concluded that as of December 31, 2015, 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 on the
following page.
Wells Fargo & Company
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,
2015, based on criteria established in Internal Control – Integrated Framework (2013) 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 over
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 effectiveness
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 accounting
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 statements 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,
2015, based on criteria established in Internal Control – Integrated Framework (2013) 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, 2015 and 2014, 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, 2015, and
our report dated February 24, 2016, expressed an unqualified opinion on those consolidated financial statements.
San Francisco, California
February 24, 2016
132
Wells Fargo & Company
Financial Statements
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,
2015
2014
2013
$
1,971
8,937
785
19
1,685
8,438
767
78
1,376
8,116
1,290
13
36,575
35,652
35,571
990
932
723
49,277
47,552
47,089
963
64
2,592
357
3,976
45,301
2,442
42,859
5,168
14,468
3,720
4,324
6,501
1,694
614
952
2,230
621
464
1,096
59
2,488
382
4,025
43,527
1,395
42,132
5,050
14,280
3,431
4,349
6,381
1,655
1,161
593
2,380
526
1,014
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
40,756
40,820
40,980
15,883
10,352
4,446
2,063
2,886
1,246
973
12,125
49,974
33,641
10,365
23,276
382
$
22,894
1,424
$
21,470
$
4.18
4.12
1.475
5,136.5
5,209.8
15,375
15,152
9,970
4,597
1,973
2,925
1,370
928
11,899
49,037
33,915
10,307
23,608
551
23,057
1,236
21,821
4.17
4.10
1.350
5,237.2
5,324.4
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
1.150
5,287.3
5,371.2
(1)
(2)
Total other-than-temporary impairment (OTTI) losses were $136 million, $18 million and $39 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Of total OTTI, losses of $183 million, $49 million and $158 million were recognized in earnings, and reversal of losses of $(47) million, $(31) million and $(119) million
were recognized as non-credit-related OTTI in other comprehensive income for the years ended December 31, 2015, 2014 and 2013, respectively.
Includes OTTI losses of $376 million, $273 million and $186 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The accompanying notes are an integral part of these statements.
Wells Fargo & Company
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) losses 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
Wells Fargo other comprehensive income (loss), net of tax
Wells Fargo comprehensive income
Comprehensive income from noncontrolling interests
Total comprehensive income
The accompanying notes are an integral part of these statements.
Year ended December 31,
2015
2014
2013
$
22,894
23,057
21,878
(3,318)
(1,530)
5,426
(1,532)
(7,661)
(285)
1,549
(1,089)
(512)
114
(137)
(5)
(4,928)
1,774
(3,154)
67
(3,221)
952
(545)
(1,116)
74
(60)
6
3,205
(1,300)
1,905
(227)
2,132
(32)
(296)
1,533
276
(44)
(12)
(6,521)
2,524
(3,997)
267
(4,264)
19,673
25,189
17,614
449
324
613
$
20,122
25,513
18,227
134
Wells Fargo & Company
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 $80,567 and $56,359)
Mortgages held for sale (includes $13,539 and $15,565 carried at fair value) (1)
Loans held for sale (includes $0 and $1 carried at fair value) (1)
Loans (includes $5,316 and $5,788 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 $3,065 and $2,512 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
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
Additional paid-in capital
Retained earnings
Cumulative other comprehensive income
Treasury stock – 389,682,664 shares and 311,462,276 shares
Unearned ESOP shares
Total Wells Fargo stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
Dec 31,
2015
$
19,111
270,130
77,202
Dec 31,
2014
19,571
258,429
78,255
267,358
257,442
80,197
19,603
279
55,483
19,536
722
916,559
(11,545)
862,551
(12,319)
905,014
850,232
12,415
1,308
8,704
25,529
100,782
12,738
1,242
8,743
25,705
99,057
$
1,787,632
1,687,155
$
351,579
871,733
321,963
846,347
1,223,312
1,168,310
97,528
73,365
63,518
86,122
199,536
183,943
1,593,741
1,501,893
22,214
9,136
60,714
120,866
297
(18,867)
(1,362)
19,213
9,136
60,537
107,040
3,518
(13,690)
(1,360)
192,998
184,394
893
868
193,891
185,262
$
1,787,632
1,687,155
(1)
(2)
Parenthetical amounts represent assets and liabilities for which we have elected the fair value option.
Our consolidated assets at December 31, 2015 and 2014, 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, $157 million and $117 million; Trading assets, $1 million and $0 million; Investment securities, $425 million and $875 million;
Net loans, $4.8 billion and $4.5 billion; Other assets, $242 million and $316 million; and Total assets, $5.6 billion and $5.8 billion, respectively.
(3)
Our consolidated liabilities at December 31, 2015 and 2014, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Accrued
expenses and other liabilities, $57 million and $49 million; Long-term debt, $1.3 billion and $1.6 billion; and Total liabilities, $1.4 billion and $1.7 billion, respectively.
The accompanying notes are an integral part of these statements.
Wells Fargo & Company
135
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 income (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/exercised
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
Balance January 1, 2014
Net income
Other comprehensive income (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/exercised
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, 2014
Preferred stock
Common stock
Shares
Amount
Shares
Amount
10,558,865 $
12,883
5,266,314,176 $
9,136
10,558,865
12,883
5,266,314,176
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
10,881,195
16,267
5,257,162,705
9,136
75,340,898
(183,146,803)
1,217,000
1,217
(1,071,377)
(1,071)
20,992,398
112,000
2,800
257,623
2,946
(86,813,507)
—
11,138,818 $
19,213
5,170,349,198 $
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 settled in first
quarter 2014 for 11.1 million shares of common stock. For the year ended December 31, 2014, includes $750 million related to a private forward repurchase transaction
that settled in first quarter 2015 for 14.3 million shares of common stock. See Note 1 (Summary of Significant Accounting Policies) for additional information.
The accompanying notes are an integral part of these statements.
(continued on following pages)
136
Wells Fargo & Company
Additional
paid-in
capital
59,802
59,802
28
(2)
(300)
108
(88)
191
(45)
83
269
725
(475)
494
60,296
60,296
(7)
(273)
(250)
108
(94)
251
(9)
(25)
76
453
858
(847)
241
60,537
Cumulative
other
comprehensive
income
5,650
5,650
(4,264)
Retained
earnings
77,679
77,679
21,878
(10)
(4,264)
1,386
1,386
2,132
(6,169)
(1,017)
14,682
92,361
92,361
23,057
(7,143)
(1,235)
Treasury
stock
(6,610)
(6,610)
2,745
(5,056)
815
2
(1,494)
(8,104)
(8,104)
2,756
(9,164)
820
14,679
107,040
2,132
3,518
2
(5,586)
(13,690)
Noncontrolling
interests
1,357
1,357
346
267
(1,104)
(491)
866
866
551
(227)
(322)
Wells Fargo stockholders' equity
Unearned
ESOP
shares
(986)
(986)
Total
Wells Fargo
stockholders'
equity
157,554
157,554
(1,308)
1,094
(214)
(1,200)
(1,200)
(1,325)
1,165
21,878
(4,264)
28
2,733
(5,356)
—
1,006
—
—
3,145
(6,086)
(1,017)
269
725
(473)
12,588
170,142
170,142
23,057
2,132
(7)
2,483
(9,414)
—
1,071
—
(9)
2,775
(7,067)
(1,235)
453
858
(845)
Total
equity
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
171,008
23,608
1,905
(329)
2,483
(9,414)
—
1,071
—
(9)
2,775
(7,067)
(1,235)
453
858
(845)
(160)
(1,360)
14,252
184,394
2
868
14,254
185,262
Wells Fargo & Company
137
(continued from previous pages)
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity
(in millions, except shares)
Balance December 31, 2014
Balance January 1, 2015
Net income
Other comprehensive income (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
Common stock
Shares
Amount
Shares
Amount
11,138,818 $
19,213
5,170,349,198 $
9,136
11,138,818
19,213
5,170,349,198
9,136
826,598
826
69,876,577
(163,400,892)
Preferred stock converted to common shares
(825,499)
(825)
15,303,927
Common stock warrants repurchased/exercised
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, 2015
120,000
3,000
121,099
3,001
(78,220,388)
—
11,259,917 $
22,214
5,092,128,810 $
9,136
(1)
For the year ended December 31, 2015, includes $500 million related to a private forward repurchase transaction that settled in first quarter 2016 for 9.2 million shares of
common stock. See Note 1 (Summary of Significant Accounting Policies) for additional information.
The accompanying notes are an integral part of these statements.
138
Wells Fargo & Company
Wells Fargo stockholders' equity
Retained
earnings
107,040
107,040
22,894
Cumulative
other
comprehensive
income
3,518
3,518
(3,221)
Treasury
stock
(13,690)
(13,690)
Unearned
ESOP
shares
(1,360)
(1,360)
3,041
(8,947)
718
(900)
898
Total
Wells Fargo
stockholders'
equity
184,394
184,394
22,894
(3,221)
Noncontrolling
interests
868
868
382
67
2
(424)
Total
equity
185,262
185,262
23,276
(3,154)
(422)
2,644
(8,697)
—
825
—
(49)
2,972
(7,580)
(1,426)
453
844
(1,057)
8,629
193,891
2,644
(8,697)
—
825
—
(49)
2,972
(7,580)
(1,426)
453
844
(1,057)
8,604
(3,221)
(5,177)
(2)
11
297
(18,867)
(1,362)
192,998
25
893
Additional
paid-in
capital
60,537
60,537
2
(397)
250
74
(73)
107
(49)
(28)
62
453
844
(1,068)
177
60,714
(7,642)
(1,426)
13,826
120,866
Wells Fargo & Company
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, amortization and accretion
Other net 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
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:
Year ended December 31,
2015
2014
2013
$
23,276
23,608
22,224
2,442
62
3,288
(6,496)
1,958
(453)
(178,266)
133,194
7
(28)
47,244
(2,265)
(623)
160
(1,764)
(6,964)
14,772
1,395
1,820
2,515
(3,760)
1,912
(453)
(144,812)
117,097
207
(154)
11,186
2,354
(372)
119
(10,681)
15,548
17,529
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
Federal funds sold, securities purchased under resale agreements and other short-term investments
(11,866)
(41,778)
(78,184)
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 held 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
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
25,431
33,912
(79,778)
5,290
(25,424)
3,496
(2,352)
(57,016)
11,672
(13,759)
10,023
(12,441)
(3)
7,803
(135)
(2,088)
6,089
37,257
(44,807)
5,168
(47,012)
3,161
(3,087)
(65,162)
21,564
(6,424)
13,589
(13,570)
(174)
7,697
(150)
(741)
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
(107,235)
(128,380)
(153,492)
54,867
34,010
43,030
(27,333)
2,972
(1,426)
1,726
(8,697)
(7,400)
453
(232)
33
89,133
8,035
42,154
(15,829)
2,775
(1,235)
1,840
(9,414)
(6,908)
453
(552)
51
92,003
110,503
(460)
19,571
19,111
3,816
13,688
$
$
(348)
19,919
19,571
3,906
8,808
76,342
(3,390)
53,227
(25,423)
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
The accompanying notes are an integral part of these statements. See Note 1 (Summary of Significant Accounting Policies) for noncash activities.
140
Wells Fargo & Company
Notes to Financial Statements
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. We also hold a majority
interest in a real estate investment trust, which has publicly
traded preferred stock outstanding.
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,
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 (Loans and Allowance for Credit Losses)), valuations of
residential mortgage servicing rights (MSRs) (Note 8
(Securitizations and Variable Interest Entities) and Note 9
(Mortgage Banking Activities)) and financial instruments
(Note 17 (Fair Values of Assets and Liabilities)) and income taxes
(Note 21 (Income Taxes)). Actual results could differ from those
estimates.
•
Accounting Standards Adopted in 2015
In 2015, we adopted the following new accounting guidance:
•
Accounting Standards Update (ASU or Update) 2014-11,
Transfers and Servicing (Topic 860): Repurchase-to-
Maturity Transactions, Repurchase Financings, and
Disclosures;
ASU 2014-08, Presentation of Financial Statements (Topic
205) and Property, Plant, and Equipment (Topic 360):
Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity; and
ASU 2014-01, Investments – Equity Method and Joint
Ventures (Topic 323): Accounting for Investments in
Qualified Affordable Housing Projects.
•
ASU 2014-11 requires repurchase-to-maturity transactions to
be accounted for as secured borrowings versus sales. The
guidance also requires separate accounting for transfers of
financial assets that are executed contemporaneously with
repurchase agreements. The Update also includes new
disclosures for transfers accounted for as sales and for
repurchase agreements and similar arrangements, such as
classes of collateral pledged for gross obligations and the
remaining contractual maturity of repurchase agreements. We
adopted the accounting changes in first quarter 2015 with no
impact to our consolidated financial statements or disclosures.
We adopted the collateral and remaining contractual maturity
disclosures for repurchase and similar agreements in second
quarter 2015. For additional information, see Note 14
(Guarantees, Pledged Assets and Collateral).
ASU 2014-08 changes the definition and reporting
requirements for discontinued operations. Under the new
guidance, an entity’s disposal of a component or group of
components must be reported in discontinued operations if the
disposal is a strategic shift that has or will have a significant
effect on the entity’s operations and financial results. We
adopted these changes in first quarter 2015 with prospective
application. This Update did not have a material impact on our
consolidated financial statements.
ASU 2014-01 amends the accounting guidance for investments
in affordable housing projects that qualify for the low-income
housing tax credits. The Update requires incremental disclosures
for all entities that invest in qualified affordable housing
projects. Additionally companies may make an accounting
election to amortize the cost of their investments in proportion
to the tax benefits received if certain criteria are met and present
the amortization as a component of income tax expense. We
adopted the new disclosure requirements in first quarter 2015
(see Note 7 (Premises, Equipment, Lease Commitments and
Other Assets)) and will continue our previous accounting for
these investments rather than make the alternative election to
amortize the initial cost of the investments in proportion to the
tax benefits received.
Consolidation
Our consolidated financial statements include the accounts of
the Parent and our subsidiaries in which we have a controlling
interest.
We are also a variable interest holder in certain entities 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
variable interest entities (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. We are the primary beneficiary if we have a
controlling financial interest, which includes both the power to
direct the activities that most significantly impact the VIE and a
variable interest that potentially could 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 ongoing basis.
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, which
requires us to recognize our proportionate share of the
company’s earnings. If we do not have significant influence, we
recognize the equity investment at cost except for (1) marketable
Wells Fargo & Company
141
Note 1: Summary of Significant Accounting Policies (continued)
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.
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 predominantly securities, including corporate
debt, U.S. government agency obligations and other securities
that we acquire for short-term appreciation or other trading
purposes, certain loans held for market-making purposes to
support the buying and selling demands of our customers
and 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 changes in fair value recorded in
earnings. For securities and loans in trading assets, interest and
dividend income are recorded in interest income, and realized
and unrealized gains and losses are recorded in noninterest
income. For other trading assets, including derivatives, the
entire change in fair value is recorded in noninterest income.
Investments
Our investments include various debt and marketable equity
securities and nonmarketable equity investments. We classify
debt and marketable equity securities as available-for-sale or
held-to-maturity securities based on our intent to hold to
maturity. Our nonmarketable equity investments are reported in
other assets.
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 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.
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:
•
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.
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 expected future 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. 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
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Wells Fargo & Company
fair value of the security, and the investee's financial condition,
capital strength, and near-term prospects.
We recognize realized gains and losses on the sale of
investment 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 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 recorded 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 have elected the
fair value option for some of these investments with the
remainder of these investments accounted for under the cost or
equity method, which we review 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. We monitor the fair 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 have elected the fair value option for
substantially all residential MHFS (see Note 17 (Fair Values of
Assets and Liabilities)). The remaining residential MHFS are
held at the lower of cost or fair 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.
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 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 management evaluation processes, including
corporate asset/liability management. In determining the
“foreseeable future” for 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. If
subsequent changes, including 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. Upon such
management determination, we immediately transfer these
loans to the MHFS or LHFS 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.
We have certain private label and co-brand credit card loans
through a program agreement that involves our active
participation in the operating activity of the program with a third
party. We share in the economic results of the loans subject to
this agreement. We consider the program to be a collaborative
arrangement and therefore report our share of revenue and
losses on a net basis in interest income for loans, other
noninterest income and provision for credit losses as applicable.
Our net share of revenue from this activity represented less than
1% of our total revenues for 2015.
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
Wells Fargo & Company
143
Note 1: Summary of Significant Accounting Policies (continued)
income. Leveraged leases, which are a form of direct financing
leases, are recorded net of related non-recourse 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:
•
the full and timely collection of interest or principal
becomes uncertain (generally based on an assessment of the
borrower’s financial condition and the adequacy of
collateral, if any);
they are 90 days (120 days with respect to real estate 1-4
family first and junior lien mortgages) past due for interest
or principal, unless both well-secured and in the process of
collection;
part of the principal balance has been charged off;
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
consumer real estate and auto loans are discharged in
bankruptcy, regardless of their delinquency status.
•
•
•
•
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
suspend amortization of any net deferred fees. 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:
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.
•
•
•
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:
•
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.
•
•
•
•
•
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) 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
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Wells Fargo & Company
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.
PCI loans may be 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. Generally, commercial PCI loans are
accounted for as individual loans and consumer PCI loans are
included in pools.
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
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. Certain
government-guaranteed mortgage loans upon foreclosure are
included in accounts receivable, not foreclosed assets. These
receivables were loans predominantly insured by the FHA or
guaranteed by the VA and are measured based on the balance
expected to be recovered from the guarantor.
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. We develop and document our
allowance methodology at the portfolio segment level –
commercial loan portfolio and consumer loan portfolio. 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
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
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. Our estimation approach for the commercial
portfolio reflects the estimated probability of default in
accordance with the borrower’s financial strength and the
severity of loss in the event of default, considering the quality of
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Note 1: Summary of Significant Accounting Policies (continued)
any underlying collateral. Probability of default and severity at
the time of default are statistically derived through historical
observations of default and losses after default within each credit
risk rating. These 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 estimated probability of default and
severity at the time of default are applied to loan equivalent
exposures to estimate losses for unfunded credit commitments.
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. Accordingly, the loss
content associated with the effects of 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 emerging risk
assessments.
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 a Special Purpose Entity (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. The valuation and sensitivity
of MSRs is discussed further in Note 8 (Securitizations and
Variable Interest Entities), Note 9 (Mortgage Banking Activities)
and Note 17 (Fair Values of Assets and Liabilities).
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 allowance 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
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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. 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. 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.
If we perform a qualitative assessment of goodwill to test for
impairment and conclude it is more likely than not that a
reporting unit’s fair value is greater than its carrying amount,
quantitative tests are not required. However, if we determine it
is more likely than not that a reporting unit’s fair value is less
than its carrying amount, then we complete a quantitative
assessment to determine if there is goodwill impairment. We
apply various quantitative valuation methodologies, including
discounted cash flow and earnings multiple approaches, to
determine the estimated fair value, which is compared to the
carrying value of each reporting unit. 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
In connection with our sales and securitization of residential
mortgage loans to various parties, 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.
The liability for mortgage loan repurchase losses is included
in other liabilities. For additional information on our repurchase
liability, see Note 9 (Mortgage Banking Activities).
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: (1) projected returns using
several forward-looking capital market assumptions, and (2)
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, 2015, is 20 years. See Note 20 (Employee
Benefits and Other Expenses) 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
Wells Fargo & Company
147
Note 1: Summary of Significant Accounting Policies (continued)
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 (Common Stock and Stock Plans). 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.
Beginning 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
conditions.
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 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
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 (Fair Values of Assets
and Liabilities) 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
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Wells Fargo & Company
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 derivatives not designated as a fair value or cash flow
hedge, 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 process 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 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.
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
probable that the forecasted transaction will 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 may 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 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
derivative 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 2015 and 2014, we repurchased approximately 64 million
shares and 66 million shares of our common stock, 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 2015
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 2015 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 fourth quarter 2015, we entered into a private forward
repurchase contract and paid $500 million to an unrelated third
party. This contract settled in first quarter 2016 for 9.2 million
shares of common stock. At December 31, 2014, we had a
$750 million private forward repurchase contract outstanding
that settled in first quarter 2015 for 14.3 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.
Wells Fargo & Company
149
2015
$
46,291
1,736
9,205
90
3,274
4,972
Year ended December 31,
2014
28,604
1,302
11,021
9,849
4,094
1,810
2013
47,198
3,616
7,610
274
4,470
6,042
Note 1: Summary of Significant Accounting Policies (continued)
SUPPLEMENTAL CASH FLOW INFORMATION Noncash
activities are presented in Table 1.1, including information on
transfers affecting MHFS, LHFS, and MSRs.
Table 1.1: Supplemental Cash Flow Information
(in millions)
Trading assets retained from securitizations of MHFS
Capitalization of MSRs from sale of MHFS
Transfers from loans to MHFS
Transfers from loans to LHFS
Transfers from loans to foreclosed and other assets
Transfers from available-for-sale to held-to-maturity securities
SUBSEQUENT EVENTS We have evaluated the effects of events
that have occurred subsequent to December 31, 2015, and there
have been no material events that would require recognition in
our 2015 consolidated financial statements or disclosure in the
Notes to the consolidated financial statements, except for a
business acquisition completed on January 1, 2016, as discussed
in Note 2 (Business Combinations). Additionally, on February 1,
2016, and subsequent to the announcement of our 2015 financial
results on January 15, 2016, we reached an agreement in
principle with the Federal Government to pay $1.2 billion to
resolve certain civil claims related to our Federal Housing
Administration lending activities. This agreement was
considered to be a recognizable subsequent event under GAAP
and required adjustment to our December 31, 2015 consolidated
financial statements. Accordingly, we provided for an additional
legal accrual that increased operating losses within noninterest
expense by $200 million and, as a result, reduced net income for
the year ended December 31, 2015, by $134 million, or $0.03 per
common share. See Note 15 (Legal Actions) for additional
information.
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Wells Fargo & Company
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 (Guarantees,
Pledged Assets and Collateral).
During 2015, we completed an acquisition of a small
investment intermediary and purchased total assets of
$3 million. We had two acquisitions pending as of December 31,
2015. The first acquisition, which closed on January 1, 2016, was
the purchase of $4.0 billion of operating and capital leases
associated with GE Railcar Services, which included
77,000 railcars and just over 1,000 locomotives. The second
pending acquisition is the purchase of GE Capital's Commercial
Distribution Finance and Vendor Finance businesses. The
acquisition is expected to involve total assets of approximately
$31 billion, and is expected to close in two phases. The North
American portion, which represents approximately 90% of total
assets to be acquired, is expected to close late in the first quarter
of 2016. The international assets are expected to close in the
second quarter of 2016. Approximately 2,900 full-time
employees are expected to join Wells Fargo as a result of this
transaction.
During 2014, we completed one acquisition of a railcar and
locomotive leasing business with combined total assets of
$422 million. Additionally, no business combinations were
completed in 2013.
Wells Fargo & Company
151
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 total daily average required
reserve balance for all our subsidiary banks was $10.6 billion in
2015 and $12.9 billion in 2014.
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 (Regulatory and Agency
Capital Requirements) 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 $17.8 billion at December 31, 2015, without
obtaining prior regulatory approval. We have elected to retain
capital at our national and state-chartered subsidiary banks to
meet internal capital policy minimums and 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, 2015, our nonbank
subsidiaries could have declared additional dividends of
$9.5 billion at December 31, 2015, without obtaining prior
approval.
The FRB's Capital Plan Rule (codified at 12 CFR 225.8 of
Regulation Y) establishes capital planning and prior notice and
approval requirements for capital distributions including
dividends by certain bank holding companies. The FRB has also
published guidance regarding its supervisory expectations for
capital planning, including capital policies regarding the process
relating to common stock dividend and repurchase decisions in
SR Letter 15-18. 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
$0.375 per share as declared by the Company’s Board of
Directors on January 26, 2016, payable on March 1, 2016.
152
Wells Fargo & Company
Note 4: Federal Funds Sold, Securities Purchased under Resale Agreements and Other
Short-Term Investments
Table 4.1 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, 2015 and 2014,
were held at the Federal Reserve.
Table 4.1: Fed Funds Sold and Other Short-Term Investments
(in millions)
Dec 31,
2015
Dec 31,
2014
Federal funds sold and securities
purchased under resale agreements
$
45,828
36,856
Interest-earning deposits
220,409
219,220
Other short-term investments
3,893
2,353
Total
$ 270,130
258,429
As part of maintaining our memberships in certain clearing
organizations, we are required to stand ready to provide liquidity
meant to sustain market clearing activity in the event unforeseen
events occur or are deemed likely to occur. This includes
commitments we have entered into to purchase securities under
resale agreements from a central clearing organization that, at
its option, require us to provide funding under such agreements.
We do not have any outstanding amounts funded, and the
amount of our unfunded contractual commitment was
$2.2 billion and $2.6 billion as of December 31, 2015 and 2014,
respectively.
We have classified securities purchased under long-term
resale agreements (generally one year or more), which totaled
$20.1 billion and $14.9 billion at December 31, 2015 and 2014,
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 (Guarantees, Pledged Assets and
Collateral).
Wells Fargo & Company
153
Note 5: Investment Securities
Table 5.1 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.
Table 5.1: Amortized Cost and Fair Value
(in millions)
December 31, 2015
Available-for-sale securities:
Amortized
Cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
$
36,374
49,167
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:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Federal agency mortgage-backed securities
Collateralized loans and other debt obligations (1)
Other (2)
Total held-to-maturity securities
Total (3)
December 31, 2014
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:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Federal agency mortgage-backed securities
Collateralized loans and other debt obligations (1)
Other (2)
Total held-to-maturity securities
Total (3)
103,391
7,843
13,943
125,177
15,548
31,210
5,842
263,318
819
239
1,058
264,376
44,660
2,185
28,604
1,405
3,343
80,197
$
344,573
$
25,898
43,939
107,850
8,213
16,248
132,311
14,211
25,137
6,251
247,747
1,622
284
1,906
249,653
40,886
1,962
5,476
1,404
5,755
55,483
24
1,325
1,983
740
230
2,953
312
125
115
(148)
(502)
(828)
(25)
(85)
(938)
(449)
(368)
(46)
36,250
49,990
104,546
8,558
14,088
127,192
15,411
30,967
5,911
4,854
(2,451)
265,721
112
482
594
(13)
(2)
(15)
5,448
(2,466)
918
719
1,637
267,358
45,167
2,250
28,421
1,381
3,348
80,567
(73)
—
(314)
(24)
(3)
(414)
(2,880)
347,925
(138)
(499)
(751)
(24)
(57)
(832)
(170)
(184)
(27)
(1,850)
(70)
(2)
(72)
25,804
44,944
110,089
9,269
16,994
136,352
14,786
25,361
6,519
253,766
1,700
1,976
3,676
(1,922)
257,442
(8)
—
—
(13)
—
(21)
41,548
1,989
5,641
1,391
5,790
56,359
580
65
131
—
8
784
6,232
44
1,504
2,990
1,080
803
4,873
745
408
295
7,869
148
1,694
1,842
9,711
670
27
165
—
35
897
$
305,136
10,608
(1,943)
313,801
(1)
(2)
(3)
154
The available-for-sale portfolio includes collateralized debt obligations (CDOs) with a cost basis and fair value of $247 million and $257 million, respectively, at
December 31, 2015, and $364 million and $500 million, respectively, at December 31, 2014. The held-to-maturity portfolio only includes collateralized loan obligations.
The “Other” category of available-for-sale securities predominantly includes asset-backed securities collateralized by credit cards, student loans, home equity loans and
auto leases or loans and cash. Included in the “Other” category of held-to-maturity securities are asset-backed securities collateralized by auto leases or loans and cash
with a cost basis and fair value of $1.9 billion each at December 31, 2015, and $3.8 billion each at December 31, 2014. 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 $1.4 billion each at December 31, 2015, and
$1.9 billion and $2.0 billion, respectively, at December 31, 2014.
At December 31, 2015 and 2014, we held no securities of any single issuer (excluding the U.S. Treasury and federal agencies and government-sponsored entities (GSEs))
with a book value that exceeded 10% of stockholders’ equity.
Wells Fargo & Company
Gross Unrealized Losses and Fair Value
Table 5.2 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 have 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.
Table 5.2: Gross Unrealized Losses and Fair Value
(in millions)
December 31, 2015
Available-for-sale securities:
Less than 12 months
12 months or more
Total
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
Securities of U.S. Treasury and federal agencies
$
(148)
24,795
—
—
Securities of U.S. states and political subdivisions
(26)
3,453
(476)
12,377
(148)
(502)
24,795
15,830
Mortgage-backed securities:
Federal agencies
Residential
Commercial
(522)
36,329
(20)
(32)
1,276
4,476
(306)
(5)
(53)
9,888
285
2,363
(828)
46,217
(25)
(85)
1,561
6,839
Total mortgage-backed securities
(574)
42,081
(364)
12,536
(938)
54,617
Corporate debt securities
Collateralized loan and other debt obligations
Other
(244)
(276)
(33)
4,941
22,214
2,768
(205)
(92)
(13)
1,057
4,844
425
(449)
(368)
(46)
5,998
27,058
3,193
Total debt securities
(1,301)
100,252
(1,150)
31,239
(2,451)
131,491
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
(1)
(2)
(3)
24
40
64
(12)
—
(12)
109
—
109
(13)
(2)
(15)
133
40
173
Total available-for-sale securities
(1,304)
100,316
(1,162)
31,348
(2,466)
131,664
Held-to-maturity securities:
Securities of U.S. Treasury and federal agencies
Federal agency mortgage-backed securities
Collateralized loan and other debt obligations
Other
(73)
(314)
(20)
(3)
5,264
23,115
1,148
1,096
Total held-to-maturity securities
(410)
30,623
—
—
(4)
—
(4)
—
—
233
—
233
(73)
(314)
(24)
(3)
5,264
23,115
1,381
1,096
(414)
30,856
Total
$
(1,714)
130,939
(1,166)
31,581
(2,880)
162,520
December 31, 2014
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
(16)
(198)
(16)
(18)
(9)
(43)
(102)
(99)
(23)
7,138
10,228
1,706
946
2,202
4,854
1,674
12,755
708
(122)
(301)
5,719
3,725
(138)
(499)
12,857
13,953
(735)
37,854
(751)
39,560
(6)
(48)
144
1,532
(789)
39,530
(68)
(85)
(4)
1,265
3,958
277
(24)
(57)
(832)
(170)
(184)
(27)
1,090
3,734
44,384
2,939
16,713
985
Total debt securities
(481)
37,357
(1,369)
54,474
(1,850)
91,831
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
(2)
(2)
(4)
92
41
133
(68)
—
(68)
633
—
633
(70)
(2)
(72)
725
41
766
Total available-for-sale securities
(485)
37,490
(1,437)
55,107
(1,922)
92,597
Held-to-maturity securities:
Securities of U.S. Treasury and federal agencies
Collateralized loan and other debt obligations
Total held-to-maturity securities
(8)
(13)
(21)
1,889
1,391
3,280
—
—
—
—
—
—
(8)
(13)
(21)
1,889
1,391
3,280
Total
$
(506)
40,770
(1,437)
55,107
(1,943)
95,877
Wells Fargo & Company
155
Note 5: Investment Securities (continued)
We have assessed each security with gross unrealized losses
included in the previous table for credit impairment. As part of
that assessment we evaluated and concluded that we do not
intend to sell any of the securities and that it is more likely than
not that we will not be required to sell prior to recovery of the
amortized cost basis. For debt securities, we evaluate, where
necessary, whether credit impairment exists by comparing the
present value of the expected cash flows to the securities’
amortized cost basis. For equity securities, we consider
numerous factors in determining whether impairment exists,
including our intent and ability to hold the securities for a period
of time sufficient to recover the cost basis of the securities.
For descriptions of the factors we consider when analyzing
securities for impairment, see Note 1 (Summary of Significant
Accounting Policies) and below.
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 when
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 security losses 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 if 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 predominantly 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 evaluate these
hybrid financial instruments with investment-grade ratings for
impairment using an evaluation methodology similar to the
approach 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.
156
Wells Fargo & Company
Table 5.3 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 our 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 $17 million and
$3.7 billion, respectively, at December 31, 2015, and $25 million
and $1.6 billion, respectively, at December 31, 2014. If an
internal credit grade was not assigned, we categorized the
security as non-investment grade.
Table 5.3: Gross Unrealized Losses and Fair Value by Investment Grade
(in millions)
December 31, 2015
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 available-for-sale securities
Held-to-maturity securities:
Securities of U.S. Treasury and federal agencies
Federal agency mortgage-backed securities
Collateralized loan and other debt obligations
Other
Total held-to-maturity securities
Total
December 31, 2014
Available-for-sale securities:
Investment grade
Non-investment grade
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
(148)
(464)
24,795
15,470
(828)
46,217
(12)
(59)
(899)
(140)
(368)
(43)
795
6,361
53,373
4,167
27,058
2,915
(2,062)
127,778
(13)
133
(2,075)
127,911
(73)
(314)
(24)
(3)
(414)
5,264
23,115
1,381
1,096
30,856
—
(38)
—
(13)
(26)
(39)
(309)
—
(3)
(389)
—
(389)
—
—
—
—
—
—
360
—
766
478
1,244
1,831
—
278
3,713
—
3,713
—
—
—
—
—
$
(2,489)
158,767
(389)
3,713
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 available-for-sale securities
Held-to-maturity securities:
Securities of U.S. Treasury and federal agencies
Collateralized loan and other debt obligations
Total held-to-maturity securities
(138)
(459)
(751)
—
(24)
(775)
(39)
(172)
(23)
(1,606)
(70)
(1,676)
(8)
(13)
(21)
12,857
13,600
39,560
139
3,366
43,065
1,807
16,609
782
88,720
725
89,445
1,889
1,391
3,280
—
(40)
—
(24)
(33)
(57)
(131)
(12)
(4)
(244)
—
(244)
—
—
—
—
353
—
951
368
1,319
1,132
104
203
3,111
—
3,111
—
—
—
Total
$
(1,697)
92,725
(244)
3,111
Wells Fargo & Company
157
Note 5: Investment Securities (continued)
Contractual Maturities
Table 5.4 shows the remaining contractual maturities and
contractual weighted-average yields (taxable-equivalent basis) of
available-for-sale debt securities. The remaining contractual
principal maturities for MBS do not consider prepayments.
Remaining expected maturities will differ from contractual
maturities because borrowers may have the right to prepay
obligations before the underlying mortgages mature.
Table 5.4: Contractual Maturities
(in millions)
December 31, 2015
Available-for-sale securities (1):
Securities of U.S. Treasury and federal
agencies
Securities of U.S. states and political
subdivisions
Mortgage-backed securities:
Total
Within one year
After one year
through five years
After five years
through ten years
After ten years
amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Remaining contractual maturity
$
36,250
1.49% $
216
0.77% $ 31,602
1.44% $ 4,432
1.86% $
—
—%
49,990
5.82
1,969
2.09
7,709
2.02
3,010
5.25
37,302
6.85
Federal agencies
Residential
Commercial
104,546
8,558
14,088
Total mortgage-backed securities
127,192
3.29
4.17
5.06
3.54
4.57
2.08
2.05
3
—
—
3
6.55
—
—
6.55
373
34
61
1.58
5.11
2.79
1,735
34
—
3.84
6.03
—
102,435
8,490
14,027
3.29
4.16
5.07
468
1.99
1,769
3.88
124,952
3.55
1,960
3.84
6,731
4.47
5,459
4.76
1,261
5.47
2
0.33
804
0.90
12,707
2.01
17,454
2.19
68
2.47
1,228
2.57
953
1.94
3,662
1.89
15,411
30,967
5,911
Corporate debt securities
Collateralized loan and other debt
obligations
Other
Total available-for-sale debt
securities at fair value
December 31, 2014
Available-for-sale securities (1):
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 available-for-sale debt securities at
$ 265,721
3.55% $ 4,218
2.84% $ 48,542
1.98% $ 28,330
2.98% $184,631
4.07%
$
25,804
1.49 % $
181
1.47 % $ 22,348
1.44 % $
3,275
1.83 % $
—
— %
44,944
5.66
3,568
1.71
7,050
2.19
3,235
5.13
31,091
6.96
110,089
9,269
16,994
136,352
14,786
25,361
6,519
3.27
4.50
5.16
3.59
4.90
1.83
1.79
—
—
1
1
600
23
274
—
—
0.28
0.28
4.32
1.95
1.55
276
9
62
347
2.86
4.81
2.71
2.88
1,011
83
5
1,099
3.38
5.63
1.30
3.54
108,802
9,177
16,926
134,905
3.27
4.49
5.17
3.59
7,634
4.54
5,209
5.30
1,343
5.70
944
1,452
0.71
2.56
8,472
1,020
1.67
1.32
15,922
3,773
1.99
1.64
fair value
$
253,766
3.60 % $
4,647
2.03 % $ 39,775
2.20 % $ 22,310
3.12 % $ 187,034
3.99 %
(1) Weighted-average yields displayed by maturity bucket are weighted based on fair value and predominantly represent contractual coupon rates without effect for any related
hedging derivatives.
158
Wells Fargo & Company
Table 5.5 shows the amortized cost and weighted-average
yields of held-to-maturity debt securities by contractual
maturity.
Table 5.5: Amortized Cost by Contractual Maturity
(in millions)
December 31, 2015
Held-to-maturity securities (1):
Amortized cost:
Securities of U.S. Treasury and
federal agencies
Securities of U.S. states and
political subdivisions
Federal agency mortgage-backed
securities
Collateralized loan and other debt
obligations
Other
$
44,660
2.12% $
2,185
5.97
28,604
3.47
1,405
3,343
2.03
1.68
Total held-to-maturity debt
securities at amortized cost
$
80,197
2.69% $
December 31, 2014
Held-to-maturity securities (1):
Amortized cost:
Securities of U.S. Treasury and federal
agencies
$
40,886
2.12 % $
Securities of U.S. states and political
subdivisions
Federal agency mortgage-backed
securities
Collateralized loan and other debt
obligations
Other
Total held-to-maturity debt
securities at amortized cost
1,962
5.60
5,476
3.89
1,404
5,755
1.96
1.64
Total
Within one year
After one year
through five years
After five years
through ten years
After ten years
amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Remaining contractual maturity
—
—
—
—
—
—
—
—
—
—
—% $ 1,276
1.75% $ 43,384
2.13% $
—
—%
—
—
—
—
—
—
—
—
—
—
104
7.49
2,081
5.89
—
—
—
—
28,604
3.47
1,405
2.03
2,351
1.74
992
1.53
—
—
—% $
3,627
1.74%
$ 44,480
2.13%
$ 32,090
3.57%
— % $
—
—
—
—
—
—
—
— % $ 40,886
2.12 % $
—
— %
—
—
—
9
6.60
1,953
5.59
—
—
—
—
5,476
3.89
1,404
1.96
192
1.61
4,214
1.72
1,349
1.41
—
—
$
55,483
2.37 % $
192
1.61 % $
4,214
1.72 %
$ 42,244
2.10 %
$
8,833
3.96 %
(1) Weighted-average yields displayed by maturity bucket are weighted based on amortized cost and predominantly represent contractual coupon rates.
Table 5.6 shows the fair value of held-to-maturity debt
securities by contractual maturity.
Table 5.6: Fair Value by Contractual Maturity
(in millions)
December 31, 2015
Held-to-maturity securities:
Fair value:
Securities of U.S. Treasury and federal
agencies
Securities of U.S. states and political
subdivisions
Federal agency mortgage-backed securities
Collateralized loan and other debt obligations
Other
Total held-to-maturity debt securities at
fair value
December 31, 2014
Held-to-maturity securities:
Fair Value:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Federal agency mortgage-backed securities
Collateralized loan and other debt obligations
Other
Total held-to-maturity debt securities at fair
value
Total
Within one
year
After one year
through five years
After five years
through ten years
After ten years
amount
Amount
Amount
Amount
Amount
Remaining contractual maturity
$
45,167
2,250
28,421
1,381
3,348
80,567
41,548
1,989
5,641
1,391
5,790
56,359
$
$
$
—
—
—
—
—
—
—
—
—
—
193
193
1,298
—
—
—
2,353
3,651
—
—
—
—
4,239
4,239
43,869
105
—
—
995
44,969
41,548
9
—
—
1,358
42,915
—
2,145
28,421
1,381
—
31,947
—
1,980
5,641
1,391
—
9,012
Wells Fargo & Company
159
Note 5: Investment Securities (continued)
Realized Gains and Losses
Table 5.7 shows the gross realized gains and losses on sales and
OTTI write-downs related to the available-for-sale securities
portfolio, which includes marketable equity securities, as well as
net realized gains and losses on nonmarketable equity
investments (see Note 7 (Premises, Equipment, Lease
Commitments and Other Assets)).
Table 5.7: Realized Gains and Losses
(in millions)
Gross realized gains
Gross realized losses
OTTI write-downs
Net realized gains from available-for-sale securities
Net realized gains from nonmarketable equity investments
Net realized gains from debt securities and equity investments
Year ended December 31,
2015
$ 1,775
(67)
(185)
1,523
1,659
$ 3,182
2014
1,560
(14)
(52)
1,494
1,479
2,973
2013
492
(24)
(183)
285
1,158
1,443
Other-Than-Temporary Impairment
Table 5.8 shows the detail of total OTTI write-downs included in
earnings for available-for-sale debt securities, marketable equity
securities and nonmarketable equity investments. There were no
OTTI write-downs on held-to-maturity securities during the
years ended December 31, 2015, 2014 or 2013.
Table 5.8: OTTI Write-downs
(in millions)
OTTI write-downs included in earnings
Debt securities:
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Corporate debt securities (1)
Collateralized loan and other debt obligations
Other debt securities
Total debt securities
Equity securities:
Marketable equity securities:
Other marketable equity securities
Total marketable equity securities
Total investment securities
Nonmarketable equity investments (1)
Year ended December 31,
2015
2014
2013
$
18
—
54
4
105
—
2
183
2
2
185
374
11
—
26
9
1
2
—
49
3
3
52
270
322
2
1
72
53
4
—
26
158
25
25
183
161
344
Total OTTI write-downs included in earnings (1)
$
559
(1) December 31, 2015, includes $287 million in OTTI write-downs of energy investments, of which $104 million related to corporate debt securities and $183 million related to
nonmarketable equity investments.
160
Wells Fargo & Company
Other-Than-Temporarily Impaired Debt Securities
Table 5.9 shows the detail of OTTI write-downs on available-for-
sale debt securities included in earnings and the related changes
in OCI for the same securities.
Table 5.9: OTTI Write-downs Included in Earnings
(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 losses (reversal of losses) in non-credit-related OTTI (1):
Securities of 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,
2015
2014
2013
$
169
14
183
(1)
(42)
(16)
12
—
—
(47)
$
136
40
9
49
—
(10)
(21)
—
—
—
(31)
18
107
51
158
(2)
(27)
(90)
—
(1)
1
(119)
39
(1)
Represents amounts recorded to OCI for impairment, due to factors other than credit, on debt securities that have also had credit-related OTTI write-downs during the
period. Increases represent initial or subsequent non-credit-related OTTI on debt securities. Decreases represent partial to full reversal of impairment due to recoveries in
the fair value of securities due to non-credit factors.
Table 5.10 presents a rollforward of the OTTI credit loss that
has been recognized in earnings as a write-down of available-for-
sale debt securities we still own (referred to as "credit-impaired"
debt securities) and do not intend to sell. Recognized credit loss
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 loss.
Table 5.10: Rollforward of OTTI Credit Loss
(in millions)
Credit loss recognized, beginning of year
Additions:
For securities with initial credit impairments
For securities with previous credit impairments
Total additions
Reductions:
For securities sold, matured, or intended/required to be sold
For recoveries of previous credit impairments (1)
Total reductions
Credit loss recognized, end of year
Year ended December 31,
2015
$ 1,025
2014
1,171
2013
1,289
102
67
169
(93)
(9)
(102)
5
35
40
(169)
(17)
(186)
21
86
107
(194)
(31)
(225)
$ 1,092
1,025
1,171
(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.
Wells Fargo & Company
161
Note 6: Loans and Allowance for Credit Losses
Table 6.1 presents total loans outstanding by portfolio segment
and class of financing receivable. Outstanding balances include a
total net reduction of $3.8 billion and $4.5 billion at
December 31, 2015 and 2014, respectively, for unearned income,
net deferred loan fees, and unamortized discounts and
premiums.
Table 6.1: Loans Outstanding
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
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
Our foreign loans are reported by respective class of
financing receivable in the table above. Substantially all of our
foreign loan portfolio is commercial loans. Loans are classified
as foreign primarily based on whether the borrower’s primary
Table 6.2: Commercial Foreign Loans Outstanding
(in millions)
Commercial foreign loans:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
2015
2014
2013
2012
2011
December 31,
$ 299,892
271,795
235,358
223,703
205,824
122,160
111,996
112,427
106,392
106,028
22,164
12,367
18,728
12,307
16,934
12,371
16,983
12,736
19,470
13,387
456,583
414,826
377,090
359,814
344,709
273,869
265,386
258,507
249,912
229,408
53,004
34,039
59,966
39,098
59,717
31,119
55,740
35,763
65,950
26,882
50,808
43,049
75,503
24,651
45,998
42,473
86,041
22,905
43,508
43,060
459,976
447,725
445,196
438,537
424,922
$ 916,559
862,551
822,286
798,351
769,631
address is outside of the United States. Table 6.2 presents total
commercial foreign loans outstanding by class of financing
receivable.
2015
2014
2013
2012
2011
December 31,
$
49,049
8,350
444
274
44,707
4,776
218
336
41,547
5,328
187
338
37,148
38,609
52
79
312
53
88
269
Total commercial foreign loans
$
58,117
50,037
47,400
37,591
39,019
162
Wells Fargo & Company
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, 2015 and 2014, 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, 2015 and
2014, 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
5% 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 9% of
total loans at December 31, 2015, and 12% at December 31, 2014.
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,
2015, approximately 2% 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
Table 6.3: Loan Purchases, Sales, and Transfers
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, 2015, our lines of credit portfolio
had an outstanding balance of $63.6 billion, of which
$9.6 billion, or 15%, is in its amortization period, another
$11.3 billion, or 18%, of our total outstanding balance, will reach
their end of draw period during 2016 through 2017, $6.8 billion,
or 11%, during 2018 through 2020, and $35.9 billion, or 56%,
will convert in subsequent years. This portfolio had unfunded
credit commitments of $67.7 billion at December 31, 2015. The
lines that enter their amortization period may experience higher
delinquencies and higher loss rates than the ones in their draw
period. At December 31, 2015, $506 million, or 5%, of
outstanding lines of credit that are in their amortization period
were 30 or more days past due, compared with $937 million, 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
Table 6.3 summarizes the proceeds paid or received for
purchases and sales of loans and transfers from loans held for
investment to mortgages/loans held for sale at lower of cost or
fair value. This loan activity primarily includes loans purchased
and sales of whole loan or participating interests, whereby we
receive or transfer a portion of a loan after origination. The table
excludes PCI loans and loans recorded at fair value, including
loans originated for sale because their loan activity normally
does not impact the allowance for credit losses.
(in millions)
Purchases (1)
Sales (1)
Transfers to MHFS/LHFS (1)
Commercial
Consumer
Total
Commercial
Consumer
$
13,674
(1,214)
(91)
340
(160)
(16)
14,014
(1,374)
(107)
4,952
(1,706)
(99)
1,365
(152)
(9,778)
2015
2014
Total
6,317
(1,858)
(9,877)
(1)
All categories exclude activity in government insured/guaranteed real estate 1-4 family first mortgage loans. As servicer, we are able to buy delinquent insured/guaranteed
loans out of the Government National Mortgage Association (GNMA) pools, and manage and/or resell them in accordance with applicable requirements. These loans are
predominantly insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Accordingly, these loans have limited impact
on the allowance for loan losses.
Year ended December 31,
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
Wells Fargo & Company
163
Note 6: Loans and Allowance for Credit Losses (continued)
approximately $75 billion at December 31, 2015 and $87 billion
at December 31, 2014.
We issue commercial letters of credit to assist customers in
purchasing goods or services, typically for international trade. At
December 31, 2015 and 2014, we had $1.1 billion and
$1.2 billion, respectively, of outstanding issued commercial
letters of credit. We also originate multipurpose lending
commitments under which borrowers have the option to draw
on the facility for different purposes in one of several forms,
including a standby letter of credit. See Note 14 (Guarantees,
Pledged Assets and Collateral) for additional information on
standby letters of credit.
When we make commitments, we are exposed to credit risk.
The maximum credit risk for these commitments will generally
be lower than the contractual amount because a significant
portion of these commitments are expected to expire without
being used by the customer. In addition, we manage the
potential risk in commitments to lend by limiting the total
amount of commitments, both by individual customer and in
total, by monitoring the size and maturity structure of these
commitments and by applying the same credit standards for
these commitments as for all of our credit activities.
For loans and commitments to lend, we generally require
collateral or a guarantee. We may require various types of
collateral, including commercial and consumer real estate, autos,
other short-term liquid assets such as accounts receivable or
inventory and long-lived assets, such as equipment and other
business assets. Collateral requirements for each loan or
commitment may vary based on the loan product and our
assessment of a customer’s credit risk according to the specific
credit underwriting, including credit terms and structure.
The contractual amount of our unfunded credit
commitments, including unissued standby and commercial
letters of credit, is summarized by portfolio segment and class of
financing receivable in Table 6.4. The table excludes the standby
and commercial letters of credit and temporary advance
arrangements described above.
Table 6.4: Unfunded Credit Commitments
(in millions)
Commercial:
Dec 31,
2015
Dec 31,
2014
Commercial and industrial
$ 296,710
278,093
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
7,378
6,134
18,047
15,587
—
3
322,135
299,817
Real estate 1-4 family first mortgage
34,621
32,055
Real estate 1-4 family
junior lien mortgage
Credit card
Other revolving credit and installment
43,309
98,904
27,899
45,492
95,062
24,816
Total consumer
204,733
197,425
Total unfunded
credit commitments
$ 526,868
497,242
164
Wells Fargo & Company
Allowance for Credit Losses
Table 6.5 presents the allowance for credit losses, which consists
of the allowance for loan losses and the allowance for unfunded
credit commitments.
Table 6.5: Allowance for Credit Losses
(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
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
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,
2015
$ 13,169
2,442
(198)
2014
14,971
1,395
2013
17,477
2,309
2012
19,668
7,217
2011
23,463
7,899
(211)
(264)
(315)
(332)
(734)
(627)
(59)
(4)
(14)
(66)
(9)
(15)
(739)
(190)
(28)
(34)
(1,404)
(1,681)
(382)
(191)
(24)
(636)
(351)
(41)
(811)
(717)
(991)
(2,001)
(2,709)
(507)
(635)
(721)
(864)
(1,116)
(1,025)
(729)
(668)
(1,439)
(1,579)
(1,022)
(625)
(754)
(3,020)
(3,437)
(1,105)
(651)
(759)
(3,896)
(3,765)
(1,458)
(797)
(990)
(742)
(643)
(3,643)
(4,454)
252
127
37
8
424
245
259
175
325
134
(4,007)
(5,419)
(8,972)
(10,906)
(4,724)
(6,410)
(10,973)
(13,615)
369
160
136
8
673
212
238
161
349
146
396
226
137
17
776
246
269
127
322
161
472
163
124
20
779
157
260
188
364
191
426
143
146
25
740
405
218
257
449
247
1,138
1,562
1,106
1,779
1,125
1,901
1,160
1,939
1,576
2,316
Net loan charge-offs (2)
(2,892)
(2,945)
(4,509)
(9,034)
(11,299)
Other
Balance, end of year
Components:
(9)
(41)
(42)
(59)
(63)
$ 12,512
13,169
14,971
17,477
19,668
Allowance for loan losses
$ 11,545
12,319
14,502
17,060
19,372
Allowance for unfunded credit commitments
967
850
469
417
296
Allowance for credit losses (3)
$ 12,512
13,169
14,971
17,477
19,668
Net loan charge-offs as a percentage of average total loans (2)
Allowance for loan losses as a percentage of total loans (3)
Allowance for credit losses as a percentage of total loans (3)
0.33%
1.26
1.37
0.35
1.43
1.53
0.56
1.76
1.82
1.17
2.13
2.19
1.49
2.52
2.56
(1)
(2)
(3)
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.
For PCI loans, charge-offs are only recorded to the extent that losses exceed the purchase accounting estimates.
The allowance for credit losses includes $1 million, $11 million, $30 million, $117 million and $231 million at December 31, 2015, 2014, 2013, 2012, and 2011,
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.
Wells Fargo & Company
165
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.6 summarizes the activity in the allowance for credit
losses by our commercial and consumer portfolio segments.
Table 6.6: Allowance Activity by Portfolio Segment
Year ended December 31,
(in millions)
Balance, beginning of year
Provision for credit losses
Interest income on certain impaired loans
Loan charge-offs
Loan recoveries
Net loan charge-offs
Other
Balance, end of year
Commercial Consumer
Total
Commercial Consumer
2015
$
6,377
908
(17)
6,792
1,534
13,169
2,442
(181)
(198)
6,103
342
(20)
8,868
1,053
(191)
(211)
2014
Total
14,971
1,395
(811)
(3,643)
(4,454)
(717)
(4,007)
(4,724)
424
1,138
1,562
673
1,106
1,779
(387)
(2,505)
(2,892)
(44)
(2,901)
(2,945)
(9)
—
(9)
(4)
(37)
(41)
$
6,872
5,640
12,512
6,377
6,792
13,169
Table 6.7 disaggregates our allowance for credit losses and
recorded investment in loans by impairment methodology.
Table 6.7: Allowance by Impairment Methodology
(in millions)
December 31, 2015
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
December 31, 2014
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
Allowance for credit losses
Recorded investment in loans
Commercial
Consumer
Total
Commercial
Consumer
Total
$
5,999
872
1
3,436
2,204
—
9,435
3,076
1
452,063
420,705
872,768
3,808
20,012
23,820
712
19,259
19,971
$
6,872
5,640
12,512
456,583
459,976
916,559
$
5,482
884
11
3,706
3,086
—
9,188
3,970
11
409,560
404,263
813,823
3,759
1,507
21,649
21,813
25,408
23,320
$
6,377
6,792
13,169
414,826
447,725
862,551
(1)
(2)
(3)
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.
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.
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 3-3) 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, 2015. 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.
Table 6.8 provides a breakdown of outstanding commercial
loans by risk category. Of the $7.1 billion in criticized
commercial real estate (CRE) loans at December 31, 2015,
$1.0 billion has been placed on nonaccrual status and written
down to net realizable collateral value. CRE loans have a high
level of monitoring in place to manage these assets and mitigate
loss exposure.
166
Wells Fargo & Company
Commercial
and industrial
Real estate
mortgage
Real estate
construction
Lease
financing
Total
Table 6.8: Commercial Loans by Risk Category
(in millions)
December 31, 2015
By risk category:
Pass
Criticized
$
281,356
115,025
21,546
11,772
18,458
6,593
526
595
429,699
26,172
455,871
712
Total commercial loans (excluding PCI)
299,814
121,618
22,072
12,367
Total commercial PCI loans (carrying value)
78
542
92
—
Total commercial loans
$
299,892
122,160
22,164
12,367
456,583
December 31, 2014
By risk category:
Pass
Criticized
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
$
255,611
103,319
16,109
7,416
271,720
110,735
75
1,261
Total commercial loans
$
271,795
111,996
17,661
896
18,557
171
18,728
11,723
584
12,307
—
12,307
388,314
25,005
413,319
1,507
414,826
Table 6.9 provides past due information for commercial
loans, which we monitor as part of our credit risk management
practices.
Table 6.9: Commercial Loans by Delinquency Status
(in millions)
December 31, 2015
By delinquency status:
Commercial
and industrial
Real estate
mortgage
Real estate
construction
Lease
financing
Total
Current-29 DPD and still accruing
$
297,847
120,415
21,920
12,313
452,495
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
507
97
1,363
221
13
969
82
4
66
28
—
26
838
114
2,424
Total commercial loans (excluding PCI)
299,814
121,618
22,072
12,367
455,871
Total commercial PCI loans (carrying value)
78
542
92
—
712
Total commercial loans
$
299,892
122,160
22,164
12,367
456,583
December 31, 2014
By delinquency status:
Current-29 DPD and still accruing
$
270,624
109,032
18,345
12,251
410,252
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
527
31
538
197
16
1,490
271,720
110,735
75
1,261
Total commercial loans
$
271,795
111,996
25
—
187
18,557
171
18,728
32
—
24
12,307
—
12,307
781
47
2,239
413,319
1,507
414,826
Wells Fargo & Company
167
Note 6: Loans and Allowance for Credit Losses (continued)
CONSUMER CREDIT QUALITY INDICATORS We have various
classes of consumer loans that present unique risks. Loan
delinquency, FICO credit scores and LTV for loan types are
common credit quality indicators that we monitor and utilize in
our evaluation of the appropriateness of the allowance for credit
losses for the consumer portfolio segment.
Many of our loss estimation techniques used for the
allowance for credit losses rely on delinquency-based models;
therefore, delinquency is an important indicator of credit quality
and the establishment of our allowance for credit losses. Table
6.10 provides the outstanding balances of our consumer
portfolio by delinquency status.
Table 6.10: Consumer Loans by Delinquency Status
(in millions)
December 31, 2015
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)
Real estate
1-4 family
first
mortgage
Real estate
1-4 family
junior lien
mortgage
Credit card
Automobile
Other
revolving
credit and
installment
Total
$ 225,195
51,778
33,208
58,503
38,690
407,374
2,072
821
402
460
3,376
22,353
325
184
110
145
393
—
257
177
150
246
1
—
1,121
253
84
4
1
—
175
107
86
21
19
—
3,950
1,542
832
876
3,790
22,353
Total consumer loans (excluding PCI)
254,679
52,935
34,039
59,966
39,098
440,717
Total consumer PCI loans (carrying value)
19,190
69
—
—
—
19,259
Total consumer loans
$ 273,869
53,004
34,039
59,966
39,098
459,976
December 31, 2014
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)
$ 208,642
58,182
30,356
2,415
993
488
610
4,258
26,268
243,674
21,712
398
220
158
194
464
—
239
160
136
227
1
—
54,365
1,056
235
78
5
1
—
35,356
386,901
180
111
82
21
13
—
4,288
1,719
942
1,057
4,737
26,268
59,616
31,119
55,740
35,763
425,912
101
—
—
—
21,813
Total consumer loans
$ 265,386
59,717
31,119
55,740
35,763
447,725
(1)
Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA. Loans insured/guaranteed by the FHA/VA and 90+ DPD totaled
$12.4 billion at December 31, 2015, compared with $16.2 billion at December 31, 2014.
Of the $5.5 billion of consumer loans not government
insured/guaranteed that are 90 days or more past due at
December 31, 2015, $867 million was accruing, compared with
$6.7 billion past due and $873 million accruing at December 31,
2014.
Real estate 1-4 family first mortgage loans 180 days or more
past due totaled $3.4 billion, or 1.3% of total first mortgages
(excluding PCI), at December 31, 2015, compared with
$4.3 billion, or 1.7%, at December 31, 2014.
Table 6.11 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 security-based loans of
$7.0 billion at December 31, 2015, and $5.9 billion at
December 31, 2014.
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Wells Fargo & Company
Table 6.11: Consumer Loans by FICO
(in millions)
December 31, 2015
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
1-4 family
first
mortgage
Real estate
1-4 family
junior lien
mortgage
Credit card
Automobile
Other
revolving
credit and
installment
$
8,716
6,961
13,006
24,460
38,309
92,975
44,452
3,447
—
22,353
3,025
2,367
4,613
7,863
10,966
16,369
6,895
837
—
—
2,927
2,875
5,354
6,857
7,017
5,693
3,090
226
—
—
9,260
6,619
10,014
10,947
8,279
7,761
6,654
432
—
—
Total
24,893
19,908
35,403
54,515
70,581
131,149
67,601
7,337
6,977
965
1,086
2,416
4,388
6,010
8,351
6,510
2,395
6,977
—
22,353
Total consumer loans (excluding PCI)
254,679
52,935
34,039
59,966
39,098
440,717
Total consumer PCI loans (carrying value)
19,190
69
—
—
—
19,259
Total consumer loans
$ 273,869
53,004
34,039
59,966
39,098
459,976
December 31, 2014
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)
$
11,166
7,866
13,894
24,412
35,490
82,123
39,219
3,236
—
26,268
243,674
21,712
4,001
2,794
5,324
8,970
12,171
17,897
7,581
878
—
—
2,639
2,588
4,931
6,285
6,407
5,234
2,758
277
—
—
8,825
6,236
9,352
9,994
7,475
7,315
6,184
359
—
—
894
1,058
2,366
4,389
5,896
7,673
5,819
1,814
5,854
27,525
20,542
35,867
54,050
67,439
120,242
61,561
6,564
5,854
—
26,268
59,616
31,119
55,740
35,763
425,912
101
—
—
—
21,813
Total consumer loans
$ 265,386
59,717
31,119
55,740
35,763
447,725
(1) Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
LTV refers to the ratio comparing the loan’s unpaid
principal balance to the property’s collateral value. CLTV refers
to the combination of first mortgage and junior lien mortgage
(including unused line amounts for credit line products) ratios.
LTVs and CLTVs are updated quarterly using a cascade approach
which first uses values provided by automated valuation models
(AVMs) for the property. If an AVM is not available, then the
value is estimated using the original appraised value adjusted by
the change in Home Price Index (HPI) for the property location.
If an HPI is not available, the original appraised value is used.
The HPI value is normally the only method considered for high
value properties, generally with an original value of $1 million or
more, as the AVM values have proven less accurate for these
properties.
Table 6.12 shows the most updated LTV and CLTV
distribution of the real estate 1-4 family first and junior lien
mortgage loan portfolios. We consider the trends in residential
real estate markets as we monitor credit risk and establish our
allowance for credit losses. In the event of a default, any loss
should be limited to the portion of the loan amount in excess of
the net realizable value of the underlying real estate collateral
value. Certain loans do not have an LTV or CLTV primarily due
to industry data availability and portfolios acquired from or
serviced by other institutions.
Wells Fargo & Company
169
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.12: Consumer Loans by LTV/CLTV
December 31, 2015
December 31, 2014
(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)
Real estate
1-4 family
first
mortgage
by LTV
Real estate
1-4 family
junior lien
mortgage
by CLTV
Real estate
1-4 family
first
mortgage
by LTV
Real estate
1-4 family
junior lien
mortgage
by CLTV
Total
$ 109,558
15,805
125,363
16,579
108,584
92,005
22,765
4,480
2,065
1,453
22,353
11,385
5,545
3,051
570
—
34,150
10,025
5,116
2,023
95,719
86,112
25,170
6,133
2,856
1,416
15,603
17,651
14,004
7,254
4,058
1,046
22,353
26,268
—
26,268
Total
111,322
103,763
39,174
13,387
6,914
2,462
Total consumer loans (excluding PCI)
254,679
52,935
307,614
243,674
59,616
303,290
Total consumer PCI loans (carrying value)
19,190
69
19,259
21,712
101
21,813
Total consumer loans
$ 273,869
53,004
326,873
265,386
59,717
325,103
(1)
(2)
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.
Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
LOANS IN PROCESS OF FORECLOSURE Our recorded
investment in consumer mortgage loans collateralized by
residential real estate property that are in process of foreclosure
was $11.0 billion and $12.7 billion at December 31, 2015 and
2014, respectively, which included $6.2 billion and $6.6 billion,
respectively, of loans that are government insured/guaranteed.
We commence the foreclosure process on consumer real estate
loans when a borrower becomes 120 days delinquent in
accordance with Consumer Finance Protection Bureau
Guidelines. Foreclosure procedures and timelines vary
depending on whether the property address resides in a judicial
or non-judicial state. Judicial states require the foreclosure to be
processed through the state's courts while non-judicial states are
processed without court intervention. Foreclosure timelines vary
according to state law.
NONACCRUAL LOANS Table 6.13 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.
Table 6.13: Nonaccrual Loans
(in millions)
Commercial:
December 31,
2015
2014
Commercial and industrial
$
1,363
538
Real estate mortgage
Real estate construction
Lease financing
Total commercial (1)
Consumer:
969
1,490
66
26
187
24
2,424
2,239
Real estate 1-4 family first mortgage (2)
7,293
8,583
Real estate 1-4 family junior lien
mortgage
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans
(excluding PCI)
1,495
1,848
121
49
137
41
8,958
10,609
$ 11,382
12,848
(1)
(2)
Includes LHFS of $0 million and $1 million at December 31, 2015 and 2014,
respectively.
Includes MHFS of $177 million and $177 million at December 31, 2015 and
2014, respectively.
170
Wells Fargo & Company
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 $2.9 billion at December 31, 2015, and
$3.7 billion at December 31, 2014, 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.
Table 6.14 shows non-PCI loans 90 days or more past due
and still accruing by class for loans not government insured/
guaranteed.
Table 6.14: Loans 90 Days or More Past Due and Still Accruing
(in millions)
Loans 90 days or more past due and still
accruing:
Total (excluding PCI):
Dec 31,
Dec 31,
2015
2014
$ 14,380
17,810
Less: FHA insured/guaranteed by the VA
(1)(2)
13,373
16,827
Less: Student loans guaranteed under
the FFELP (3)
26
Total, not government insured/
guaranteed
$
981
By segment and class, not government
insured/guaranteed:
Commercial:
Commercial and industrial
$
Real estate mortgage
Real estate construction
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
Total consumer
97
13
4
114
224
65
397
79
102
867
Total, not government
insured/guaranteed
$
981
63
920
31
16
—
47
260
83
364
73
93
873
920
(1)
(2)
(3)
Represents loans whose repayments are predominantly insured by the FHA or
guaranteed by the VA.
Includes mortgage loans held for sale 90 days or more past due and still
accruing.
Represents loans whose repayments are predominantly guaranteed by
agencies on behalf of the U.S. Department of Education under the FFELP.
Wells Fargo & Company
171
Note 6: Loans and Allowance for Credit Losses (continued)
IMPAIRED LOANS Table 6.15 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
Table 6.15: Impaired Loans Summary
loans are currently performing in accordance with their terms
and for which no loss has been estimated. Impaired loans
exclude PCI loans. Table 6.15 includes trial modifications that
totaled $402 million at December 31, 2015, and $452 million at
December 31, 2014.
For additional information on our impaired loans and
allowance for credit losses, see Note 1 (Summary of Significant
Accounting Policies).
(in millions)
December 31, 2015
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
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 (2)
Total impaired loans (excluding PCI)
December 31, 2014
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
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 (2)
Total impaired loans (excluding PCI)
Recorded investment
Unpaid
principal
balance (1)
Impaired
loans
Impaired
loans with
related
allowance for
credit losses
Related
allowance for
credit losses
$
2,746
2,369
262
38
1,835
1,815
131
27
1,648
1,773
112
27
5,415
3,808
3,560
19,626
2,704
299
173
86
22,888
$
28,303
$
1,524
3,190
491
33
5,238
21,324
3,094
338
190
60
25,006
$
30,244
17,121
2,408
299
105
79
20,012
23,820
926
2,483
331
19
3,759
18,600
2,534
338
127
50
21,649
25,408
11,057
1,859
299
41
71
13,327
16,887
757
2,405
308
19
3,489
12,433
2,009
338
55
42
14,877
18,366
435
405
23
9
872
1,643
447
94
5
15
2,204
3,076
240
591
45
8
884
2,322
653
98
8
5
3,086
3,970
(1)
(2)
Excludes the unpaid principal balance for loans that have been fully charged off or otherwise have zero recorded investment.
Years ended December 31, 2015 and 2014, include the recorded investment of $1.8 billion and $2.1 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. Impaired loans may also have limited, if any, allowance when the
recorded investment of the loan approximates estimated net realizable value as a result of charge-offs prior to a TDR modification.
172
Wells Fargo & Company
Commitments to lend additional funds on loans whose
terms have been modified in a TDR amounted to $363 million
and $341 million at December 31, 2015 and 2014, respectively.
Table 6.16 provides the average recorded investment in
impaired loans and the amount of interest income recognized on
impaired loans by portfolio segment and class.
Table 6.16: Average Recorded Investment in Impaired Loans
(in millions)
Commercial:
2015
2014
2013
Average
recorded
investment
Recognized
interest
income
Average
recorded
investment
Recognized
interest
income
Average
recorded
investment
Recognized
interest
income
Year ended December 31,
Commercial and industrial
$
Real estate mortgage
Real estate construction
Lease financing
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
1,240
2,128
246
26
3,640
17,924
2,480
317
115
61
20,897
Total impaired loans (excluding PCI)
$
24,537
80
140
25
—
245
921
137
39
13
5
1,115
1,360
1,089
2,924
457
28
4,498
19,086
2,547
381
154
39
22,207
26,705
Interest income:
Cash basis of accounting
Other (1)
Total interest income
$
$
412
948
1,360
77
150
39
—
266
934
142
46
18
4
1,144
1,410
435
975
1,410
1,508
3,842
966
38
6,354
19,419
2,498
480
232
30
22,659
29,013
94
141
35
1
271
973
143
57
29
3
1,205
1,476
426
1,050
1,476
(1)
Includes interest recognized on accruing TDRs, interest recognized related to certain impaired loans which have an allowance calculated using discounting, and amortization
of purchase accounting adjustments related to certain impaired loans.
Wells Fargo & Company
173
Note 6: Loans and Allowance for Credit Losses (continued)
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 consumer borrowers experiencing
financial difficulty to make trial payments generally for a period
of three to four months, according to the terms of a planned
permanent modification, to determine if they can perform
according to those terms. These arrangements represent trial
modifications, which we classify and account for as TDRs. While
loans are in trial payment programs, their original terms are not
considered modified and they continue to advance through
delinquency status and accrue interest according to their original
terms. The planned modifications for these arrangements
predominantly involve interest rate reductions or other interest
rate concessions; however, the exact concession type and
resulting financial effect are usually not finalized and do not take
effect until the loan is permanently modified. The trial period
terms are developed in accordance with our proprietary
programs or the U.S. Treasury’s Making Home Affordable
programs for real estate 1-4 family first lien (i.e. Home
Affordable Modification Program – HAMP) and junior lien (i.e.
Second Lien Modification Program – 2MP) mortgage loans.
At December 31, 2015, the loans in trial modification period
were $130 million under HAMP, $32 million under 2MP and
$240 million under proprietary programs, compared with
$149 million, $34 million and $269 million at December 31,
2014, respectively. Trial modifications with a recorded
investment of $136 million at December 31, 2015, and
$167 million at December 31, 2014, were accruing loans and
$266 million and $285 million, respectively, were nonaccruing
loans. Our experience is that substantially all 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.
Table 6.17 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. Loans that both modify and pay off
within the period, as well as changes in recorded investment
during the period for loans modified in prior periods, are not
included in the table.
174
Wells Fargo & Company
Table 6.17: TDR Modifications
(in millions)
Year ended December 31, 2015
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
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, 2014
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
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, 2013
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Total commercial
Consumer:
$
$
$
$
$
10
14
11
35
400
34
—
1
—
—
435
470
4
7
—
11
571
50
—
2
—
—
623
634
19
33
—
52
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
1,143
103
—
3
—
—
1,249
$
1,301
Primary modification type (1)
Financial effects of modifications
Principal (2)
Interest rate
reduction
Other
concessions (3)
Total Charge- offs (4)
Weighted
average
interest rate
reduction
Recorded
investment
related to
interest rate
reduction (5)
33
133
15
181
339
99
166
5
27
—
636
817
51
182
10
243
401
114
155
5
12
—
687
930
177
307
12
496
1,170
181
182
12
10
—
1,555
2,051
1,806
904
72
2,782
1,892
172
—
87
8
44
2,203
4,985
914
929
270
2,113
2,690
246
—
85
16
(74)
2,963
5,076
1,081
1,391
381
2,853
3,681
472
—
97
12
50
4,312
7,165
1,849
1,051
98
2,998
2,631
305
166
93
35
44
3,274
6,272
969
1,118
280
2,367
3,662
410
155
92
28
(74)
4,273
6,640
1,277
1,731
393
3,401
5,994
756
182
112
22
50
7,116
10,517
62
1
—
63
53
43
—
38
1
—
135
198
36
—
—
36
92
64
—
36
—
—
192
228
17
8
4
29
233
42
—
34
—
—
309
338
1.11 % $
1.47
0.95
1.36
2.50
3.09
11.44
8.28
5.94
—
4.21
33
133
15
181
656
127
166
5
27
—
981
3.77 % $
1,162
1.53 % $
1.21
2.12
1.32
2.50
3.27
11.40
8.56
5.26
—
3.84
51
182
10
243
833
157
155
5
12
—
1,162
3.41 % $
1,405
4.71 % $
1.66
1.07
2.72
2.64
3.33
10.38
7.66
4.87
—
3.31
177
308
12
497
2,019
276
182
12
10
—
2,499
3.21 % $
2,996
(1)
(2)
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 $2.1 billion, $2.1 billion and
$3.1 billion, for the years ended December 31, 2015, 2014, and 2013, respectively.
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
(4)
(5)
(6)
reduce the contractual interest rate.
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 $100 million, $149 million and $393 million for the years ended
December 31, 2015, 2014, and 2013, respectively.
Reflects the effect of reduced interest rates on loans with an interest rate concession as one of their concession types, which includes loans reported as a principal primary
modification type that also have an interest rate concession.
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.
Wells Fargo & Company
175
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.18 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
Table 6.18: Defaulted TDRs
for the commercial portfolio segment and 60 days past due for
the consumer portfolio segment.
Recorded investment of defaults
Year ended December 31,
2015
2014
2013
$
$
66
104
4
174
187
17
52
13
3
272
446
62
117
4
183
334
29
51
14
2
430
613
235
303
70
608
370
34
59
18
1
482
1,090
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
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, at which time we acquired commercial
and consumer loans with a carrying value of $18.7 billion and
$40.1 billion, respectively. The unpaid principal balance on
December 31, 2008 was $98.2 billion for the total of commercial
and consumer PCI loans. Table 6.19 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.
Table 6.19: PCI Loans
(in millions)
Commercial:
Commercial and industrial
$
Real estate mortgage
Real estate construction
Total commercial
Consumer:
Dec 31, Dec 31,
2015
2014
78
542
92
712
75
1,261
171
1,507
Real estate 1-4 family first mortgage
19,190
21,712
Real estate 1-4 family junior lien
mortgage
Total consumer
69
101
19,259
21,813
Total PCI loans (carrying value)
$ 19,971
23,320
Total PCI loans (unpaid principal balance)
$ 28,278
32,924
176
Wells Fargo & Company
ACCRETABLE YIELD The excess of cash flows expected to be
collected over the carrying value of PCI loans is referred to as
the accretable yield and is recognized in interest income using an
effective yield method over the remaining life of the loan, or
pools of loans. The accretable yield is affected by:
•
changes in interest rate indices for variable rate PCI loans –
expected future cash flows are based on the variable rates in
effect at the time of the regular evaluations of cash flows
expected to be collected;
changes in prepayment assumptions – prepayments affect
the estimated life of PCI loans which may change the
amount of interest income, and possibly principal, expected
to be collected; and
•
•
changes in the expected principal and interest payments
over the estimated life – updates to expected cash flows are
driven by the credit outlook and actions taken with
borrowers. Changes in expected future cash flows from loan
modifications are included in the regular evaluations of cash
flows expected to be collected.
The change in the accretable yield related to PCI loans since
the merger with Wachovia is presented in Table 6.20.
Table 6.20: Change in Accretable Yield
(in millions)
Total, beginning of period
Addition of accretable yield due to acquisitions
Accretion into interest income (1)
Accretion into noninterest income due to sales (2)
Reclassification from nonaccretable difference for loans with improving credit-related
cash flows
Changes in expected cash flows that do not affect nonaccretable difference (3)
Total, end of period
2015
2014
2013
2009-2012
$ 17,790
17,392
18,548
10,447
—
—
1
131
(1,429)
(1,599)
(1,833)
(9,351)
(28)
(37)
(151)
(242)
1,166
(1,198)
2,243
(209)
971
(144)
$ 16,301
17,790
17,392
5,354
12,209
18,548
(1)
(2)
(3)
Includes accretable yield released as a result of settlements with borrowers, which is included in interest income.
Includes accretable yield released as a result of sales to third parties, which is included in noninterest income.
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.
COMMERCIAL PCI CREDIT QUALITY INDICATORS Table
6.21 provides a breakdown of commercial PCI loans by risk
category.
Table 6.21: Commercial PCI Loans by Risk Category
(in millions)
December 31, 2015
By risk category:
Pass
Criticized
Total commercial PCI loans
December 31, 2014
By risk category:
Pass
Criticized
Total commercial PCI loans
Commercial
and
industrial
Real estate
mortgage
Real estate
construction
Total
$
$
$
$
35
43
78
21
54
75
298
244
542
783
478
1,261
68
24
92
118
53
171
401
311
712
922
585
1,507
Wells Fargo & Company
177
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.22 provides past due information for commercial
PCI loans.
Table 6.22: Commercial PCI Loans by Delinquency Status
(in millions)
December 31, 2015
By delinquency status:
Current-29 DPD and still accruing
30-89 DPD and still accruing
90+ DPD and still accruing
Total commercial PCI loans
December 31, 2014
By delinquency status:
Current-29 DPD and still accruing
30-89 DPD and still accruing
90+ DPD and still accruing
Total commercial PCI loans
Commercial
and
industrial
Real estate
mortgage
Real estate
construction
Total
$
$
$
$
78
—
—
78
75
—
—
75
510
2
30
542
90
—
2
92
678
2
32
712
1,135
161
1,371
48
78
5
5
53
83
1,261
171
1,507
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. Table 6.23 provides the
delinquency status of consumer PCI loans.
Table 6.23: Consumer PCI Loans by Delinquency Status
(in millions)
By delinquency status:
December 31, 2015
December 31, 2014
Real estate Real estate
1-4 family
junior lien
mortgage
1-4 family
first
mortgage
Real estate
1-4 family
first
mortgage
Real estate
1-4 family
junior lien
mortgage
Total
Total
Current-29 DPD and still accruing
$
18,086
202
18,288
19,236
168
19,404
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
1,686
716
293
319
7
3
2
3
1,693
719
295
322
1,987
1,051
402
440
3,035
12
3,047
3,654
Total consumer PCI loans (adjusted unpaid
principal balance)
Total consumer PCI loans (carrying value)
$
$
24,135
19,190
229
24,364
26,770
69
19,259
21,712
7
3
2
3
83
266
101
1,994
1,054
404
443
3,737
27,036
21,813
178
Wells Fargo & Company
Table 6.24 provides FICO scores for consumer PCI loans.
Table 6.24: Consumer PCI Loans by FICO
(in millions)
By FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
Total consumer PCI loans (adjusted unpaid
principal balance)
Total consumer PCI loans (carrying value)
December 31, 2015
December 31, 2014
Real estate Real estate
1-4 family
junior lien
mortgage
1-4 family
first
mortgage
$
5,737
4,754
6,208
4,283
1,914
910
241
88
52
38
48
43
24
13
3
8
Real estate
1-4 family
first
mortgage
Real estate
1-4 family
junior lien
mortgage
7,708
5,416
6,718
4,008
1,728
875
220
97
75
53
69
39
13
6
1
10
Total
5,789
4,792
6,256
4,326
1,938
923
244
96
Total
7,783
5,469
6,787
4,047
1,741
881
221
107
$
$
24,135
19,190
229
24,364
26,770
69
19,259
21,712
266
101
27,036
21,813
Table 6.25 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.
Table 6.25: Consumer PCI Loans by LTV/CLTV
December 31, 2015
December 31, 2014
(in millions)
By LTV/CLTV:
0-60%
60.01-80%
80.01-100%
100.01-120% (1)
> 120% (1)
No LTV/CLTV available
Real estate
1-4 family
first
mortgage
by LTV
Real estate
1-4 family
junior lien
mortgage
by CLTV
$
5,437
10,036
6,299
1,779
579
5
32
65
80
36
15
1
Total
5,469
10,101
6,379
1,815
594
6
4,309
11,264
7,751
2,437
1,000
9
Total consumer PCI loans (adjusted unpaid
principal balance)
Total consumer PCI loans (carrying value)
$
$
24,135
19,190
229
24,364
26,770
69
19,259
21,712
Real estate
1-4 family
first
mortgage
by LTV
Real estate
1-4 family
junior lien
mortgage
by CLTV
Total
4,343
11,335
7,843
2,481
1,024
10
27,036
21,813
34
71
92
44
24
1
266
101
(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.
Wells Fargo & Company
179
Note 7: Premises, Equipment, Lease Commitments and Other Assets
Table 7.1: Premises and Equipment
Table 7.3 presents the components of other assets.
Dec 31,
2015
Dec 31,
2014
Table 7.3: Other Assets
(in millions)
Land
Buildings
Furniture and equipment
Leasehold improvements
$
1,743
8,479
7,289
2,131
1,748
8,155
7,215
2,009
Premises and equipment leased under
capital leases
79
79
Total premises and equipment
19,721
19,206
Less: Accumulated depreciation and
amortization
Net book value, premises and
equipment
11,017
10,463
$
8,704
8,743
Depreciation and amortization expense for premises and
equipment was $1.2 billion in 2015, 2014 and 2013, respectively.
Dispositions of premises and equipment, included in
noninterest expense, resulted in a net gain of $75 million in
2015, a net gain of $28 million in 2014 and a net loss of
$15 million in 2013.
We have obligations under a number of noncancelable
operating leases for premises and equipment. The leases
predominantly expire over the next fifteen 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. Table 7.2
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, 2015.
Table 7.2: Minimum Lease Payments
(in millions)
Year ended December 31,
Operating
leases
Capital
leases
(in millions)
Nonmarketable equity investments:
Cost method:
Federal bank stock
Private equity
Auction rate securities (1)
Dec 31,
2015
Dec 31,
2014
$
4,814
1,626
595
4,733
2,300
—
Total cost method
7,035
7,033
Equity method:
LIHTC (2)
Private equity
Tax-advantaged renewable energy
New market tax credit and other
8,314
3,300
1,625
408
7,278
3,043
1,710
379
Total equity method
13,647
12,410
Fair value (3)
3,065
2,512
Total nonmarketable equity
investments
Corporate/bank-owned life insurance
Accounts receivable (4)
Interest receivable
Core deposit intangibles
Customer relationship and other amortized
intangibles
Foreclosed assets:
Residential real estate:
Government insured/guaranteed (4)
Non-government insured/guaranteed
Non-residential real estate
Operating lease assets
Due from customers on acceptances
23,747
19,199
26,251
5,065
2,539
21,955
18,982
27,151
4,871
3,561
614
857
446
414
565
3,782
273
982
671
956
2,714
201
2016
2017
2018
2019
2020
Thereafter
$
1,131
1,026
902
781
628
2,234
Total minimum lease payments
$
6,702
Executory costs
Amounts representing interest
Present value of net minimum lease
payments
$
$
2
2
3
3
3
6
19
(7)
(4)
8
Other (5)
17,887
16,156
Total other assets
$ 100,782
99,057
(1)
(2)
(3)
(4)
(5)
Reflects auction rate perpetual preferred equity securities that were
reclassified during 2015 with a cost basis of $689 million (fair value of
$640 million) from available-for-sale securities because they do not trade on a
qualified exchange.
Represents low income housing tax credit investments.
Represents nonmarketable equity investments for which we have elected the
fair value option. See Note 17 (Fair Values of Assets and Liabilities) for
additional information.
Certain government-guaranteed residential real estate mortgage loans upon
foreclosure are included in Accounts receivable. 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.
Includes derivatives designated as hedging instruments, derivatives not
designated as hedging instruments, and derivative loan commitments, which
are carried at fair value. See Note 16 (Derivatives) for additional information.
Operating lease rental expense (predominantly for
premises), net of rental income, was $1.3 billion, in 2015, 2014
and 2013, respectively.
180
Wells Fargo & Company
Table 7.4 presents income (expense) related to
nonmarketable equity investments.
Table 7.4: Nonmarketable Equity Investments
(in millions)
Net realized gains from
Year ended December 31,
2015
2014
2013
nonmarketable equity investments $ 1,659
1,479
1,158
All other
Total
(743)
(741)
(287)
$
916
738
871
Low Income Housing Tax Credit Investments We invest
in affordable housing projects that qualify for the low income
housing tax credit, which is designed to promote private
development of low income housing. These investments generate
a return primarily through realization of federal tax credits.
Total low income housing tax credit (LIHTC) investments
were $8.3 billion and $7.3 billion at December 31, 2015 and
2014, respectively. In 2015, we recognized pre-tax losses of
$708 million related to our LIHTC investments. We also
recognized a total tax benefit of $1.1 billion in 2015, which
included a tax credit of $829 million recorded in income taxes.
We are periodically required to provide additional financial
support during the investment period. Our liability for these
unfunded commitments was $3.0 billion at December 31, 2015,
of which predominantly all is expected to be paid over the next
three years. This liability is included in long-term debt.
Wells Fargo & Company
181
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 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
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 where we
transferred assets from our balance sheet, 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 formed in connection with securitization transactions
are generally considered variable interest entities (VIEs). SPEs
formed for other corporate purposes may be VIEs as well. 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 whose value 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.
182
Wells Fargo & Company
Table 8.1 provides the classifications of assets and liabilities
in our balance sheet for our transactions with VIEs.
Table 8.1: Balance Sheet Transactions with VIEs
(in millions)
December 31, 2015
Cash
Trading assets
Investment securities (1)
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, 2014
Cash
Trading assets
Investment securities (1)
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 do not
consolidate
VIEs that
we
consolidate
Transfers
that we
account for
as secured
borrowings
$
—
1,340
12,388
9,661
12,518
8,938
44,845
—
629
3,021
3,650
—
157
1
425
4,811
—
242
5,636
—
57
1,301
1,358
93
(2)
(2)
$ 41,195
4,185
$
—
2,165
18,271
13,195
12,562
7,456
53,649
—
848
2,585
3,433
—
$
50,216
117
—
875
4,509
—
316
5,817
—
49 (2)
1,628 (2)
1,677
103
4,037
—
203
2,171
4,887
—
26
7,287
1,799
1
4,844
6,644
—
643
4
204
4,592
5,280
—
52
10,132
3,141
1
4,990
8,132
—
Total
157
1,544
14,984
19,359
12,518
9,206
57,768
1,799
687
9,166
11,652
93
46,023
121
2,369
23,738
22,984
12,562
7,824
69,598
3,141
898
9,203
13,242
103
2,000
56,253
(1)
(2)
Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and
GNMA.
There were no VIE liabilities with recourse to the general credit of Wells Fargo for the periods presented.
Transactions with Unconsolidated VIEs
Our transactions with VIEs include securitizations of residential
mortgage loans, CRE loans, student loans, auto loans and leases
and dealer floorplan loans; investment and financing activities
involving collateralized debt obligations (CDOs) backed by asset-
backed and CRE securities, tax credit structures, collateralized
loan obligations (CLOs) backed by corporate loans, and other
types of structured financing. We have various forms of
involvement with VIEs, including servicing, 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, other liabilities, and long-
term debt, as appropriate.
Table 8.2 provides 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 (unless we are servicer and have other significant
forms of involvement) or if we were the sponsor only or sponsor
and servicer but do not have any other forms of significant
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 (other than those held temporarily in trading), loans,
guarantees, liquidity agreements, written options and servicing
of collateral to be other forms of involvement that may be
significant. We have excluded certain transactions with
unconsolidated VIEs from the balances presented in the
following table where we have determined that our continuing
involvement is not significant due to the temporary nature and
size of our variable interests, because we were not the transferor
or because we were not involved in the design of the
unconsolidated VIEs. We also exclude from the table secured
Wells Fargo & Company
183
Note 8: Securitizations and Variable Interest Entities (continued)
borrowing transactions with unconsolidated VIEs (for
information on these transactions, see the Transactions with
Consolidated VIEs and Secured Borrowings section in this Note).
Table 8.2: Unconsolidated VIEs
(in millions)
December 31, 2015
Residential mortgage loan securitizations:
Conforming (2)
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (3)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (4)
Total
Residential mortgage loan securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (3)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (4)
Total
(continued on following page)
Total
VIE
assets
Debt and
equity
interests (1)
Servicing
Other
commitments
and
assets Derivatives
guarantees Net assets
Carrying value – asset (liability)
$ 1,199,225
24,809
184,959
3,247
3,314
13,063
26,099
898
1,131
12,690
2,458
1,228
6,323
—
3,207
8,956
9,094
213
47
511
11,665
141
712
—
—
—
—
—
—
—
$ 1,469,435
32,037
12,518
—
—
203
64
—
(66)
—
—
—
(44)
157
Debt and
equity
interests (1)
Servicing
assets Derivatives
(386)
13,737
(1)
(26)
(57)
—
—
(3,047)
—
—
—
1,368
7,212
7
3,207
8,890
6,047
213
47
467
(3,517)
41,195
Maximum exposure to loss
Other
commitments
and
guarantees
Total
exposure
$
2,458
1,228
6,323
—
3,207
8,956
9,094
213
47
511
11,665
141
712
—
—
—
—
—
—
—
$
32,037
12,518
—
—
203
64
—
76
—
—
—
117
460
1,452
15,575
1
1,370
7,152
14,390
57
—
444
866
—
—
150
121
3,207
9,476
9,960
213
47
778
10,122
55,137
184
Wells Fargo & Company
(continued from previous page)
(in millions)
December 31, 2014
Residential mortgage loan securitizations:
Conforming (2)
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (3)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (4)
Total
Residential mortgage loan securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (3)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (4)
Total
Total
VIE
Debt and
equity
assets interests (1)
Servicing
assets
Derivatives
Carrying value - asset (liability)
Other
commitments
and
guarantees
Net assets
$ 1,268,200
32,213
196,510
5,039
5,347
18,954
22,859
1,251
2,764
12,912
2,846
1,644
8,756
11
5,221
13,044
7,809
518
49
747
11,684
209
650
—
—
—
—
—
—
19
$ 1,566,049
40,645
12,562
—
—
251
163
—
(71)
—
—
—
(18)
325
Debt and
equity
interests (1)
Servicing
assets
Derivatives
(581)
13,949
(8)
(32)
1,845
9,625
(105)
—
—
(2,585)
—
—
(5)
69
5,221
12,973
5,224
518
49
743
(3,316)
50,216
Maximum exposure to loss
Other
commitments
and
guarantees
Total
exposure
$
2,846
1,644
8,756
11
5,221
13,044
7,809
518
49
747
11,684
209
650
—
—
—
—
—
—
19
$
40,645
12,562
—
—
251
163
—
89
—
—
—
150
653
2,507
345
5,715
105
—
656
725
38
—
156
17,037
2,198
15,372
279
5,221
13,789
8,534
556
49
1,072
10,247
64,107
(1)
(2)
(3)
(4)
Includes total equity interests of $8.9 billion and $8.1 billion at December 31, 2015 and 2014, respectively. Also includes debt interests in the form of both loans and
securities. Excludes certain debt securities held related to loans serviced for FNMA, FHLMC and GNMA.
Excludes assets and related liabilities with a recorded carrying value on our balance sheet of $1.3 billion and $1.7 billion at December 31, 2015 and 2014, respectively, for
certain delinquent loans that are eligible for repurchase primarily from GNMA loan securitizations. The recorded carrying value represents the amount that would be
payable if the Company was to exercise the repurchase option. The carrying amounts are excluded from the table because the loans eligible for repurchase do not
represent interests in the VIEs.
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 70% were rated as investment grade by the primary rating agencies at both December 31, 2015 and 2014. These senior
loans are accounted for at amortized cost and are subject to the Company’s allowance and credit charge-off policies.
Includes structured financing 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.
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-rate 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
Wells Fargo & Company
185
Note 8: Securitizations and Variable Interest Entities (continued)
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 the 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, including 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.
In addition to our role as arranger we may have other forms
of involvement with these CDOs. 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
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 loans and 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.
In fourth quarter 2014, we sold $8.3 billion of government
guaranteed student loans, including the rights to service the
loans, to a third party, resulting in a $217 million gain. In
connection with the sale, we provided $6.5 billion in floating-
rate loan financing to an asset backed financing entity (VIE)
formed by the third party purchaser. Our financing, which is
fully collateralized by government guaranteed student loans, is
measured at amortized cost and classified in loans on the
balance sheet. The collateral supporting our loan includes a
portion of the student loans we sold. We are not the primary
beneficiary of the VIE and, therefore, are not required to
consolidate the entity as we do not have power over the
significant activities of the entity. For information on the
estimated fair value of the loan and related sensitivity analysis,
see the Retained Interests from Unconsolidated VIEs section in
this Note.
In addition, we also have investments in asset-backed
securities that are collateralized by auto leases or loans and cash.
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
186
Wells Fargo & Company
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.
OTHER TRANSACTIONS WITH VIEs Other VIEs include
entities that issue auction rate securities (ARS) which are debt
instruments with long-term maturities that re-price more
frequently, and preferred equities with no maturity. At
December 31, 2015, we held $502 million of ARS issued by VIEs
compared with $567 million at December 31, 2014. We acquired
the ARS pursuant to agreements entered into in 2008 and 2009.
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’
Table 8.3: Cash Flows From Sales and Securitization Activity
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, 2015 and 2014, we
reported the debt securities issued to the VIEs as long-term
junior subordinated debt with a carrying value of $2.2 billion
and $2.1 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.
Loan Sales and Securitization Activity
We periodically transfer consumer and CRE loans and other
types of financial assets in securitization and whole loan sale
transactions. We typically retain the servicing rights from these
sales and may continue to hold other beneficial interests in the
transferred financial assets. We may also provide liquidity to
investors in the beneficial interests and credit enhancements in
the form of standby letters of credit. Through these transfers we
may be exposed to liability under limited amounts of recourse as
well as standard representations and warranties we make to
purchasers and issuers. Table 8.3 presents the cash flows for our
transfers accounted for as sales.
(in millions)
2015
Other
financial
assets
Mortgage
loans
2014
Other
financial
assets
Mortgage
loans
Proceeds from securitizations and whole loan sales
$ 202,335
531
164,331
Fees from servicing rights retained
Cash flows from other interests held (1)
Repurchases of assets/loss reimbursements (2):
Non-agency securitizations and whole loan transactions
Agency securitizations (3)
Servicing advances, net of repayments
3,675
1,297
14
300
(764)
5
38
—
—
—
4,062
1,417
6
316
(170)
—
8
75
—
—
—
Year ended December 31,
2013
Other
financial
assets
—
10
93
—
—
—
Mortgage
loans
357,807
4,240
2,284
18
1,079
(34)
(1)
(2)
(3)
Cash flows from other interests held include principal and interest payments received on retained bonds and excess cash flows received on interest-only strips.
Consists of cash paid to repurchase loans from investors and cash paid to investors to reimburse them for losses on individual loans that are already liquidated. In addition,
during 2015, we paid $19 million to third-party investors to settle repurchase liabilities on pools of loans, compared to $78 million and $1.3 billion in 2014 and 2013,
respectively.
Represent loans repurchased from GNMA, FNMA, and FHLMC under representation and warranty provisions included in our loan sales contracts. Excludes $11.3 billion in
delinquent insured/guaranteed loans that we service and have exercised our option to purchase out of GNMA pools in 2015, compared with $13.8 billion and $15.8 billion in
2014 and 2013, respectively. These loans are predominantly insured by the FHA or guaranteed by the VA.
In 2015, 2014, and 2013, we recognized net gains of
$506 million, $288 million and $149 million, respectively, from
transfers accounted for as sales of financial assets. 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 2015, 2014 and
2013 predominantly related to securitizations of residential
mortgages that are sold to the government-sponsored entities
(GSEs), including FNMA, FHLMC and GNMA (conforming
residential mortgage securitizations). During 2015, 2014 and
2013 we transferred $186.6 billion, $155.8 billion and
$343.9 billion, respectively, in fair value of residential mortgages
to unconsolidated VIEs and third-party investors 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 2015 we
recorded a $1.6 billion servicing asset, measured at fair value
using a Level 3 measurement technique, securities of
$1.9 billion, classified as Level 2, and a $43 million liability for
repurchase losses which reflects management’s estimate of
probable losses related to various representations and
Wells Fargo & Company
187
Note 8: Securitizations and Variable Interest Entities (continued)
warranties for the loans transferred, initially measured at fair
value. In 2014, we recorded a $1.2 billion servicing asset,
securities of $751 million and a $44 million liability. In 2013, we
recorded a $3.5 billion servicing asset and a $143 million
liability.
Table 8.4 presents the key weighted-average assumptions
we used to measure residential mortgage servicing rights at the
date of securitization.
Table 8.4: Residential Mortgage Servicing Rights
Residential mortgage servicing rights
2015
2014
2013
Year ended December 31,
Prepayment speed (1)
Discount rate
Cost to service ($ per loan) (2) $
12.1%
7.3
223
12.4
7.6
259
11.2
7.3
184
(1)
(2)
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.
Includes costs to service and unreimbursed foreclosure costs, which can vary
period to period depending on the mix of modified government-guaranteed
loans sold to GNMA.
During 2015, 2014 and 2013, we transferred $17.3 billion,
$10.3 billion and $5.6 billion, respectively, in carrying value of
commercial mortgages to unconsolidated VIEs and third-party
investors and recorded the transfers as sales. These transfers
resulted in gains of $338 million in 2015, $198 million in 2014
and $152 million in 2013, respectively, because the loans were
carried at lower of cost or market value (LOCOM). In connection
with these transfers, in 2015 we recorded a servicing asset of
$180 million, initially measured at fair value using a Level 3
measurement technique, and securities of $241 million,
classified as Level 2. In 2014, we recorded a servicing asset of
$99 million and securities of $100 million. In 2013, we recorded
a servicing asset of $20 million and securities of $54 million.
Retained Interests from Unconsolidated VIEs
Table 8.5 provides key economic assumptions and the sensitivity
of the current fair value of residential mortgage servicing rights
and other interests held to immediate adverse changes in those
assumptions. “Other interests held” relate predominantly to
residential and commercial mortgage loan securitizations.
Residential mortgage-backed securities retained in
securitizations issued through GSEs, such as FNMA, FHLMC
and GNMA, are excluded from the table because these securities
have a remote risk of credit loss due to the GSE guarantee. These
securities also have economic characteristics similar to GSE
mortgage-backed securities that we purchase, which are not
included in the table. Subordinated interests include only those
bonds whose credit rating was below AAA by a major rating
agency at issuance. Senior interests include only those bonds
whose credit rating was AAA by a major rating agency at
issuance. The information presented excludes trading positions
held in inventory.
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Wells Fargo & Company
Table 8.5: Retained Interests from Unconsolidated VIEs
($ in millions, except cost to service amounts)
Residential
mortgage
servicing
rights (1)
Fair value of interests held at December 31, 2015
$ 12,415
Expected weighted-average life (in years)
6.0
34
3.6
1
11.6
342
1.9
Key economic assumptions:
Prepayment speed assumption (3)
11.4%
19.0
15.1
Consumer
Commercial (2)
Other interests held
Interest-only
strips
Subordinated
bonds
Subordinated
bonds
Senior
bonds
673
5.8
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
$
616
1,463
1
3
—
—
7.3%
13.8
10.5
5.3
3.0
1
1
—
—
6
11
33
63
$
605
1,154
168
567
1,417
$
117
3.9
Fair value of interests held at December 31, 2014
$ 12,738
Expected weighted-average life (in years)
5.7
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
12.5 %
11.4
$
738
1,754
2
6
7.6 %
18.7
$
617
1,178
179
579
1,433
2
4
$
1.1%
—
—
36
5.5
7.1
—
—
3.9
2
3
0.4 %
—
—
2.8
—
2
294
2.9
4.7
8
15
4.1
3
10
—
—
—
546
6.2
2.8
29
55
—
—
—
(1)
(2)
(3)
See narrative following this table for a discussion of commercial mortgage servicing rights.
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.
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.
Wells Fargo & Company
189
Note 8: Securitizations and Variable Interest Entities (continued)
In addition to residential mortgage servicing rights (MSRs)
included in the previous table, we have a small portfolio of
commercial MSRs with a fair value of $1.7 billion and
$1.6 billion at December 31, 2015 and 2014, 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, 2015, and 2014, results in a decrease in fair value
of $150 million and $185 million, respectively. See Note 9
(Mortgage Banking Activities) for further information on our
commercial MSRs.
We also have a loan to an unconsolidated third party VIE
that we extended in fourth quarter 2014 in conjunction with our
sale of government guaranteed student loans. The loan is carried
at amortized cost and approximates fair value at December 31,
2015 and 2014. The carrying amount of the loan at December 31,
2015 and 2014, was $4.9 billion and $6.5 billion, respectively.
The estimated fair value of the loan is considered a Level 3
measurement that is determined using discounted cash flows
Table 8.6: Off-Balance Sheet Loans Sold or Securitized
that are based on changes in the discount rate due to changes in
the risk premium component (credit spreads). The primary
economic assumption impacting the fair value of our loan is the
discount rate. Changes in the credit loss assumption are not
expected to affect the estimated fair value of the loan due to the
government guarantee of the underlying collateral. The
sensitivity of the current fair value to an immediate adverse
increase of 200 basis points in the risk premium component of
the discount rate assumption is a decrease in fair value of
$82 million and $130 million at December 31, 2015 and 2014,
respectively. For more information on the student loan sale, see
the discussion on Asset-Based Finance Structures earlier in this
Note.
The sensitivities in the preceding paragraphs 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.
Off-Balance Sheet Loans
Table 8.6 presents information about the principal balances of
off-balance sheet loans that were sold or securitized, including
residential mortgage loans sold to FNMA, FHLMC, GNMA and
other investors, for which we have some form of continuing
involvement (primarily servicer). Delinquent loans include loans
90 days or more past due and loans in bankruptcy, regardless of
delinquency status. For loans sold or securitized where servicing
is our only form of continuing involvement, we would only
experience a loss if we were required to repurchase a delinquent
loan or foreclosed asset 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 and
foreclosed assets (1)
Net charge-offs
Year ended
December 31,
December 31,
December 31,
2015
2014
2015
2014
2015
2014
$
110,815
114,081
110,815
114,081
6,670
6,670
7,949
7,949
383
383
621
621
Real estate 1-4 family first mortgage
1,235,662
1,322,136
20,904
28,639
814
1,209
Real estate 1-4 family junior lien mortgage
Other revolving credit and installment
—
—
1
1,599
—
—
—
75
—
—
Total consumer
1,235,662
1,323,736
20,904
28,714
814
Total off-balance sheet sold or securitized loans (2)
$ 1,346,477
1,437,817
27,574
36,663
1,197
—
1
1,210
1,831
(1)
(2)
Includes $5.0 billion and $3.3 billion of commercial foreclosed assets and $2.2 billion and $2.7 billion of consumer foreclosed assets at December 31, 2015 and 2014,
respectively.
At December 31, 2015 and 2014, the table includes total loans of $1.2 trillion and $1.3 trillion, delinquent loans of $12.1 billion and $16.5 billion, and foreclosed assets of
$1.7 billion and $2.4 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.
190
Wells Fargo & Company
Transactions with Consolidated VIEs and Secured
Borrowings
Table 8.7 presents a summary of financial assets and liabilities
for asset transfers accounted for as secured borrowings and
involvements with consolidated VIEs. “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.
Table 8.7: Transactions with Consolidated VIEs and Secured Borrowings
(in millions)
December 31, 2015
Secured borrowings:
Total VIE
assets
Assets
Liabilities
Noncontrolling
interests
Net assets
Carrying value
Municipal tender option bond securitizations
$
2,818
2,400
(1,800)
Commercial real estate loans
Residential mortgage securitizations
Total secured borrowings
Consolidated VIEs:
Nonconforming residential mortgage loan securitizations
Commercial real estate loans
Structured asset finance
Investment funds
Other
—
4,738
7,556
4,134
1,185
54
482
305
—
4,887
7,287
3,654
1,185
20
482
295
—
(4,844)
(6,644)
(1,239)
—
(18)
—
(101)
Total consolidated VIEs
6,160
5,636
(1,358)
Total secured borrowings and consolidated VIEs
$ 13,716
12,923
(8,002)
December 31, 2014
Secured borrowings:
Municipal tender option bond securitizations
Commercial real estate loans
Residential mortgage securitizations
Total secured borrowings
Consolidated VIEs:
$
5,422
250
4,804
4,837
250
5,045
10,476
10,132
(3,143)
(63)
(4,926)
(8,132)
Nonconforming residential mortgage loan securitizations
5,041
4,491
(1,509)
Structured asset finance
Investment funds
Other
Total consolidated VIEs
47
904
431
47
904
375
(23)
(2)
(143)
6,423
5,817
(1,677)
—
—
—
—
—
—
—
—
(93)
(93)
(93)
—
—
—
—
—
—
—
(103)
(103)
600
—
43
643
2,415
1,185
2
482
101
4,185
4,828
1,694
187
119
2,000
2,982
24
902
129
4,037
Total secured borrowings and consolidated VIEs
$
16,899 $
15,949 $
(9,809) $
(103) $
6,037
In addition to the structure types included in the previous
table, at both December 31, 2015 and 2014, 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, 2015, we pledged approximately $529 million in
loans (principal and interest eligible to be capitalized), and
$5.9 billion in available-for-sale securities to collateralize the
VIE's borrowings, compared with $637 million and $5.7 billion,
respectively, at December 31, 2014. 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 investment portfolio activities, we consolidate
municipal bond trusts that hold highly rated, long-term, fixed-
rate municipal bonds, the majority of which are rated AA or
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
Wells Fargo & Company
191
Note 8: Securitizations and Variable Interest Entities (continued)
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.
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.
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Wells Fargo & Company
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.
We apply the amortization method to commercial MSRs and
apply the fair value method to residential MSRs. Table 9.1
presents the changes in MSRs measured using the fair value
method.
Table 9.1: Analysis of Changes in Fair Value MSRs
(in millions)
Fair value, beginning of year
Servicing from securitizations or asset transfers
Sales and other (1)
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
Year ended December 31,
2015
2014
2013
$ 12,738
15,580
11,538
1,556
1,196
3,469
(9)
(7)
(583)
1,547
1,189
2,886
247
(83)
—
50
(2,150)
4,362
(20)
(55)
103
(228)
—
(736)
214
(2,122)
3,398
(2,084)
(1,909)
(2,242)
(1,870)
(4,031)
1,156
$ 12,415
12,738
15,580
(1)
(2)
(3)
(4)
(5)
(6)
Includes sales and transfers of MSRs, which can result in an increase of total reported MSRs if the sales or transfers are related to nonperforming loan portfolios.
Includes prepayment speed changes as well as other valuation changes due to changes in mortgage interest rates (such as changes in estimated interest earned on
custodial deposit balances).
Includes costs to service and unreimbursed foreclosure costs.
Reflects discount rate assumption change, excluding portion attributable to changes in mortgage interest rates.
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 and other external factors that occur independent of interest rate changes.
Represents changes due to collection/realization of expected cash flows over time.
Table 9.2 presents the changes in amortized MSRs.
Table 9.2: Analysis of Changes in Amortized MSRs
(in millions)
Balance, beginning of year
Purchases
Servicing from securitizations or asset transfers
Amortization
Balance, end of year (1)
Fair value of amortized MSRs:
Beginning of year
End of year
Year ended December 31,
2015
$
1,242
144
180
2014
1,229
157
110
2013
1,160
176
147
(258)
(254)
(254)
$
1,308
1,242
1,229
$
1,637
1,680
1,575
1,637
1,400
1,575
(1) Commercial amortized MSRs are evaluated for impairment purposes by the following risk strata: agency (GSEs) and non-agency. There was no valuation allowance
recorded for the periods presented on the commercial amortized MSRs.
Wells Fargo & Company
193
Note 9: Mortgage Banking Activities (continued)
We present the components of our managed servicing
portfolio in Table 9.3 at unpaid principal balance for loans
serviced and subserviced for others and at book value for owned
loans serviced.
Table 9.3: Managed Servicing Portfolio
(in billions)
Residential mortgage servicing:
Serviced for others
Owned loans serviced
Subserviced for others
Total residential servicing
Commercial mortgage servicing:
Serviced for others
Owned loans serviced
Subserviced for others
Total commercial servicing
Total managed servicing portfolio
Total serviced for others
Ratio of MSRs to related loans serviced for others
Table 9.4 presents the components of mortgage banking
noninterest income.
Table 9.4: Mortgage Banking Noninterest Income
(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:
Dec 31,
2015
Dec 31,
2014
$ 1,300
1,405
345
4
342
5
1,649
1,752
478
122
7
607
$ 2,256
$ 1,778
0.77%
456
112
7
575
2,327
1,861
0.75
Year ended December 31,
2015
2014
2013
$
4,037
4,285
4,442
198
288
203
319
216
343
(625)
(694)
(1,074)
3,898
4,113
3,927
Due to changes in valuation model inputs or assumptions (2)
(A)
214
(2,122)
3,398
Other changes in fair value (3)
Total changes in fair value of MSRs carried at fair value
Amortization
Net derivative gains (losses) from economic hedges (4)
(B)
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)
(A)+(B)
(2,084)
(1,909)
(2,242)
(1,870)
(4,031)
1,156
(258)
(254)
(254)
671
2,441
4,060
6,501
885
$
$
3,509
3,337
3,044
6,381
1,387
(2,909)
1,920
6,854
8,774
489
(1)
(2)
(3)
(4)
Primarily associated with foreclosure expenses and unreimbursed interest advances to investors.
Refer to the changes in fair value of MSRs table in this Note for more detail.
Represents changes due to collection/realization of expected cash flows over time.
Represents results from economic hedges used to hedge the risk of changes in fair value of MSRs. See Note 16 (Derivatives Not Designated as Hedging Instruments) for
additional discussion and detail.
194
Wells Fargo & Company
Table 9.5 summarizes the changes in our liability for
mortgage loan repurchase losses. This liability is in “Accrued
expenses and other liabilities” in our consolidated balance sheet
and the provision for repurchase losses reduces net gains on
mortgage loan origination/sales activities in "Mortgage banking"
in our consolidated income statement. Because 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 exceeded our recorded liability by $293 million at
December 31, 2015, and was determined based upon modifying
the assumptions (particularly to assume significant changes in
investor repurchase demand practices) used in our best estimate
of probable loss to reflect what we believe to be the high end of
reasonably possible adverse assumptions. Our estimate of
reasonably possible losses decreased in 2015 as court rulings
during the year provided a better understanding of our exposure
to repurchase risk.
Table 9.5: Analysis of Changes in Liability for Mortgage Loan
Repurchase Losses
Year ended December 31,
(in millions)
2015
2014
2013
Balance, beginning of year
$ 615
899
2,206
Provision for repurchase losses:
Loan sales
Change in estimate (1)
43
(202)
Net additions (reductions)
(159)
44
(184)
(140)
143
285
428
Losses (2)
(78)
(144)
(1,735)
Balance, end of year
$ 378
615
899
(1)
(2)
Results from changes in investor demand, mortgage insurer practices, credit
and the financial stability of correspondent lenders.
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.
Wells Fargo & Company
195
Note 10: Intangible Assets
Table 10.1 presents the gross carrying value of intangible assets
and accumulated amortization.
Table 10.1: Intangible Assets
December 31, 2015
December 31, 2014
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
Gross
carrying
value
Accumulated
amortization
Net carrying
value
(in millions)
Amortized intangible assets (1):
MSRs (2)
Core deposit intangibles
Customer relationship and other intangibles
$
3,228
12,834
3,163
(1,920)
(10,295)
(2,549)
Total amortized intangible assets
$
19,225
(14,764)
Unamortized intangible assets:
MSRs (carried at fair value) (2)
$
12,415
Goodwill
Trademark
25,529
14
(1) Excludes fully amortized intangible assets.
(2) See Note 9 (Mortgage Banking Activities) for additional information on MSRs.
(1,664)
(9,273)
(2,322)
(13,259)
1,242
3,561
857
5,660
1,308
2,539
614
4,461
2,906
12,834
3,179
18,919
12,738
25,705
14
Table 10.2 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, 2015. Future amortization
expense may vary from these projections.
Table 10.2: Amortization Expense for Intangible Assets
Amortized MSRs
Core deposit
intangibles
Customer
relationship and
other
intangibles
$
$
258
1,022
227
259
206
170
148
135
919
851
769
—
—
208
193
185
10
6
Total
1,507
1,386
1,250
1,124
158
141
(in millions)
Year ended December 31, 2015 (actual)
Estimate for year ended December 31,
2016
2017
2018
2019
2020
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 (Operating Segments) for further
information on management reporting.
196
Wells Fargo & Company
Table 10.3 shows the allocation of goodwill to our reportable
operating segments for purposes of goodwill impairment testing.
Table 10.3: Goodwill
(in millions)
December 31, 2013 (1)
Reduction in goodwill related to divested businesses and other
Goodwill from business combinations
December 31, 2014
Reduction in goodwill related to divested businesses and other
Goodwill from business combinations
December 31, 2015
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Consolidated
Company
$
16,878
7,557
1,202
25,637
(8)
—
$
16,870
(21)
—
$
16,849
(11)
87
7,633
(158)
—
7,475
—
—
(19)
87
1,202
25,705
—
3
(179)
3
1,205
25,529
(1) December 31, 2013 has been revised to reflect realignment of our operating segments. See Note 24 (Operating Segments) for additional information.
Note 11: Deposits
Table 11.1 presents a summary of the time certificates of deposit
(CDs) and other time deposits issued by domestic and foreign
offices.
The contractual maturities of the domestic time deposits
with a denomination of $100,000 or more are presented in
Table 11.3.
Table 11.1: Time Certificates of Deposit
Table 11.3: Contractual Maturities of Domestic Time Deposits
(in billions)
December 31,
(in millions)
2015
2014
Three months or less
Total domestic and foreign
$
98.5
124.9
After three months through six months
2015
$
36,683
6,010
2,143
4,091
$
48,927
After six months through twelve months
After twelve months
Total
Demand deposit overdrafts of $523 million and
$581 million were included as loan balances at December 31,
2015 and 2014, respectively.
Domestic:
$100,000 or more
$250,000 or more
Foreign:
$100,000 or more
$250,000 or more
48.9
43.0
9.5
9.5
14.7
6.9
16.4
16.4
Substantially all CDs and other time deposits issued by
domestic and foreign offices were interest bearing. The
contractual maturities of these deposits are presented in Table
11.2.
Table 11.2: Contractual Maturities of CDs and Other Time
Deposits
(in millions)
2016
2017
2018
2019
2020
Thereafter
Total
December 31, 2015
$
81,846
5,549
3,643
2,200
1,121
4,155
$
98,514
Wells Fargo & Company
197
0.18
0.31
0.12
0.08
0.25
0.22
0.13
N/A
N/A
N/A
Note 12: Short-Term Borrowings
Table 12.1 shows selected information for short-term
borrowings, which generally 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 (Guarantees, Pledged Assets and Collateral).
Table 12.1: Short-Term Borrowings
(in millions)
As of December 31,
Federal funds purchased and securities sold under agreements to
repurchase
Commercial paper
Other short-term borrowings (1)
Total
Year ended December 31,
Average daily balance
Amount
2015
Rate
Amount
2014
Rate
Amount
2013
Rate
$
82,948
0.21%
$
51,052
0.07%
$
36,263
0.05%
334
0.81
14,246
(0.10)
2,456
10,010
0.34
0.07
5,162
12,458
$
97,528
0.17
$
63,518
0.08
$
53,883
Federal funds purchased and securities sold under agreements to
repurchase
Commercial paper
Other short-term borrowings (1)
Total
Maximum month-end balance
$
75,021
0.09
$
44,680
0.08
$
36,227
1,583
0.36
10,861
(0.08)
4,751
10,680
0.17
0.18
4,702
13,787
$
87,465
0.07
$
60,111
0.10
$
54,716
Federal funds purchased and securities sold under agreements to
repurchase (2)
Commercial paper (3)
Other short-term borrowings (4)
$
89,800
N/A
$
51,052
N/A
$
39,451
3,552
14,246
N/A
N/A
6,070
12,209
N/A
N/A
5,700
16,564
N/A- Not applicable
(1)
Negative other short-term borrowings rate in 2015 is a result of increased customer demand for certain securities in stock loan transactions combined with the impact of
low interest rates.
(2)
(3)
(4)
Highest month-end balance in each of the last three years was October 2015, December 2014 and May 2013.
Highest month-end balance in each of the last three years was March 2015, March 2014 and March 2013.
Highest month-end balance in each of the last three years was December 2015, June 2014 and March 2013.
198
Wells Fargo & Company
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, a major
portion of the long-term debt presented below is hedged in a fair
value or cash flow hedge relationship. See Note 16 (Derivatives)
for further information on qualifying hedge contracts.
Table 13.1: Long-Term Debt
Table 13.1 presents 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, 2015. These interest
rates do not include the effects of any associated derivatives
designated in a hedge accounting relationship.
(in millions)
Maturity date(s)
Stated interest rate(s)
Wells Fargo & Company (Parent only)
December 31,
2015
2014
2016-2045
2016-2048
2016-2053
2016-2045
2016
2029-2036
2027
2016-2053
2016-2017
2016-2031
2017-2020
2016-2025
2016-2025
2016-2038
2016-2017
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)
0.375-6.75%
$
68,604
0.070-3.152
0.00-3.890
15,942
5,672
90,218
3.45-7.574%
25,119
0.691
5.95-7.95%
0.821-1.321
639
25,758
1,398
280
1,678
54,441
15,317
4,825
74,583
19,688
1,215
20,903
1,378
272
1,650
117,654
97,136
0.084-0.806%
0.407-0.766
3.83-7.50
0.32-0.87
2.45-7.15
7.045-17.775
5.25-7.74%
0.572-2.64
—
6,694
6,315
102
500
4,969
11,048
125
37,000
34,000
1
8
4
9
50,120
50,655
7,927
989
8,916
322
322
456
845
10,310
994
11,304
313
313
609
996
16,365
77,024
16,239
80,116
2027
0.932-0.971%
2020-2047
2016-2047
2016-2065
0.00-7.00%
0.00-18.78
0.37-9.20
Wells Fargo & Company
199
Note 13: Long-Term Debt (continued)
(continued from previous page)
(in millions)
Other consolidated subsidiaries
Senior
Fixed-rate notes
FixFloat notes
Structured notes (1)
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)
Maturity date(s)
Stated interest rate(s)
December 31,
2015
2014
2016-2023
2.774-3.70%
4,628
6,317
2021
2027
0.427%
0.822%
—
1
20
1
4,629
6,338
155
155
—
74
155
155
23
175
4,858
6,691
$ 199,536
183,943
Mortgage notes and other (7)
2017-2018
1.625-5.125%
Total long-term debt - Other consolidated subsidiaries
Total long-term debt
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Largely 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 the "Derivatives Not Designated as Hedging Instruments" section in
Note 16 (Derivatives). In addition, a major portion consists of zero coupon callable notes where interest is paid as part of the final redemption amount.
Includes fixed-rate subordinated notes issued by the Parent at a discount of $137 million and $139 million in 2015 and 2014, respectively, 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 (Parent-Only Financial Statements).
Represents junior subordinated debentures held by unconsolidated wholly-owned trusts formed for the sole purpose of issuing trust preferred securities. See Note 8
(Securitizations and Variable Interest Entities) for additional information on our trust preferred security structures.
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.
At December 31, 2015, FHLB advances were secured by residential loan collateral. Outstanding advances at December 31, 2014, were secured by investment securities
and residential loan collateral.
For additional information on VIEs, see Note 8 (Securitizations and Variable Interest Entities).
Predominantly related to securitizations and secured borrowings, see Note 8 (Securitizations and Variable Interest Entities).
The aggregate carrying value of long-term debt that matures
(based on contractual payment dates) as of December 31, 2015,
in each of the following five years and thereafter is presented in
Table 13.2.
Table 13.2: Maturity of Long-Term Debt
(in millions)
Parent
Company
2016
2017
2018
2019
2020
Thereafter
Total
$
14,713
13,259
8,189
6,384
12,998
62,111
31,904
21,953
22,961
21,402
20,236
81,080
$ 117,654
199,536
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, 2015, we were in compliance with all the
covenants.
200
Wells Fargo & Company
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, written put options,
recourse obligations, and other types of arrangements. Table 14.1
shows carrying value, maximum exposure to loss on our
guarantees and the related non-investment grade amounts.
Table 14.1: Guarantees – Carrying Value and Maximum Exposure to Loss
December 31, 2015
Maximum exposure to loss
(in millions)
Carrying
value
Expires in
one year
or less
Expires
after one
year
through
three
years
Expires
after three
years
through
five years
Expires
after five
years
Non-
investment
grade
Total
Standby letters of credit (1)
$
38
16,360
9,618
4,116
642
30,736
8,981
Securities lending and other
indemnifications
Written put options (2)
Loans and MHFS sold with recourse
Factoring guarantees
Other guarantees
Total guarantees
—
371
62
—
28
—
7,387
112
1,598
62
—
6,463
723
—
17
—
4,505
690
—
17
1,841
1,440
6,434
—
2,482
1,841
19,795
7,959
1,598
2,578
—
9,583
4,864
1,598
53
$
499
25,519
16,821
9,328
12,839
64,507
25,079
December 31, 2014
Maximum exposure to loss
(in millions)
Carrying
value
Expires in
one year or
less
Expires
after one
year
through
three years
Expires
after three
years
through five
years
Expires
after five
years
Non-
investment
grade
Total
Standby letters of credit (1)
$
41
16,271
10,269
6,295
645
33,480
8,447
Securities lending and other
indemnifications
Written put options (2)
Loans and MHFS sold with recourse
Factoring guarantees
Other guarantees
Total guarantees
—
469
72
—
24
—
7,644
131
3,460
9
2
2
5,256
2,822
486
—
85
822
—
22
5,948
2,409
5,386
—
2,158
5,952
18,131
6,825
3,460
2,274
—
7,902
3,945
3,460
69
$
606
27,515
16,098
9,963
16,546
70,122
23,823
(1)
Total maximum exposure to loss includes direct pay letters of credit (DPLCs) of $11.8 billion and $15.0 billion at December 31, 2015 and 2014, 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)
Written put options, which are in the form of derivatives, are also included in the derivative disclosure in Note 16 (Derivatives).
“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 (Loans and Allowance for Credit Losses).
Maximum exposure to loss represents the estimated loss
that would be incurred under an assumed hypothetical
circumstance, despite what we believe is its extremely remote
possibility, where the value of our interests and any associated
collateral declines to zero. Maximum exposure to loss estimates
in the table above do not reflect economic hedges or collateral we
could use to offset or recover losses we may incur under our
guarantee agreements. Accordingly, this required disclosure is
not an indication of expected loss. We believe the carrying value,
which is either fair value for derivative-related products or the
allowance for lending-related commitments, is more
representative of our exposure to loss than maximum exposure
to loss.
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 if 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.
Wells Fargo & Company
201
Note 14: Guarantees, Pledged Assets and Collateral (continued)
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, and 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. For the transactions subject to the
indemnifications, the fair value of securities loaned out at
December 31, 2015 and 2014, totaled $0 million and
$211 million, respectively. The fair value of collateral supporting
the loaned securities was $0 million and $218 million at
December 31, 2015 and 2014, 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
$352 million and $950 million and the related collateral was
$1.5 billion and $5.6 billion at December 31, 2015 and 2014,
respectively. Our estimate of maximum exposure to loss, which
requires judgment regarding the range and likelihood of future
events, was $1.8 billion as of December 31, 2015, and $5.7 billion
as of December 31, 2014.
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 (Mortgage Banking
Activities) for additional information on the liability for
mortgage loan repurchase losses.
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 may
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 if 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 (Derivatives) 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. Predominantly 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 2015 and
2014 we repurchased $6 million and $14 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 (Mortgage Banking Activities) for
additional information on the liability for mortgage loan
repurchase losses.
FACTORING GUARANTEES Under certain factoring
arrangements, we are required to purchase trade receivables
from third parties, generally upon their request, if receivable
debtors default on their payment obligations.
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.
Other guarantees also include liquidity agreements and
contingent performance arrangements. 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 (Securitization and Variable
Interest Entities) for additional information on securitization
and VIEs.
Under our contingent performance arrangements, we are
required to pay the counterparties to transactions related to
various customer relationships and lease agreements if third
parties default on certain obligations.
202
Wells Fargo & Company
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), securities lending
arrangements, and for other purposes as required or permitted
by law or insurance statutory requirements. The types of
collateral we pledge include securities issued by federal agencies,
GSEs, domestic and foreign companies and various commercial
and consumer loans. Table 14.2 provides the total carrying
amount of pledged assets by asset type. The table excludes
pledged consolidated VIE assets of $5.6 billion and $5.8 billion
at December 31, 2015 and 2014, respectively, which can only be
used to settle the liabilities of those entities. The table also
excludes $7.3 billion and $10.1 billion in assets pledged in
transactions accounted for as secured borrowings at
December 31, 2015 and 2014, respectively. See Note 8
(Securitizations and Variable Interest Entities) for additional
information on consolidated VIE assets and secured borrowings.
Table 14.2: Pledged Assets
(in millions)
Trading assets and other (1)
Investment securities (2)
Mortgages held for sale and loans (3)
Total pledged assets
Dec 31,
2015
$
73,396
113,912
453,058
$
640,366
Dec 31,
2014
49,685
101,997
418,338
570,020
(1)
(2)
(3)
Represent assets pledged to collateralize repurchase agreements and other securities financings. Balance includes $73.0 billion and $49.4 billion at December 31, 2015 and
2014, respectively, under agreements that permit the secured parties to sell or repledge the collateral.
Includes carrying value of $6.5 billion and $6.6 billion (fair value of $6.5 billion and $6.8 billion) in collateral for repurchase agreements at December 31, 2015 and 2014,
respectively, which are pledged under agreements that do not permit the secured parties to sell or repledge the collateral. Also includes $13.0 billion and $164 million in
collateral pledged under repurchase agreements at December 31, 2015 and 2014, respectively, that permit the secured parties to sell or repledge the collateral.
Substantially all other pledged securities are pursuant to agreements that do not permit the secured party to sell or repledge the collateral.
Includes mortgages held for sale of $8.7 billion at both December 31, 2015 and 2014. Balance consists of mortgages held for sale and loans that are pledged under
agreements that do not permit the secured parties to sell or repledge the collateral. Amounts exclude $1.3 billion and $1.7 billion at December 31, 2015 and 2014,
respectively, of pledged loans recorded on our balance sheet representing certain delinquent loans that are eligible for repurchase primarily from GNMA loan securitizations.
See Note 8 (Securitizations and Variable Interest Entities) for additional information.
Wells Fargo & Company
203
Note 14: Guarantees, Pledged Assets and Collateral (continued)
Securities Financing Activities
We enter into resale and repurchase agreements and securities
borrowing and lending agreements (collectively, “securities
financing activities”) primarily to finance inventory positions,
acquire securities to cover short trading positions, accommodate
customers’ financing needs, and settle other securities
obligations. These activities are conducted through our broker
dealer subsidiaries and to a lesser extent through other bank
entities. The majority of our securities financing activities
involve high quality, liquid securities, such as U.S. Treasury
securities and government agency securities, and to a lesser
extent, less liquid securities, including equity securities,
corporate bonds and asset-backed securities. We account for
these transactions as collateralized financings in which we
typically receive or pledge securities as collateral. We believe
these financing transactions generally do not have material
credit risk given the collateral provided and the related
monitoring processes.
OFFSETTING OF RESALE AND REPURCHASE AGREEMENTS
AND SECURITIES BORROWING AND LENDING
AGREEMENTS Table 14.3 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
Table 14.3: Offsetting – Resale and Repurchase Agreements
(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)
Collateral not recognized in consolidated balance sheet (3)
Net amount (4)
Liabilities:
Repurchase and securities lending agreements
Gross amounts recognized (5)
Gross amounts offset in consolidated balance sheet (1)
Net amounts in consolidated balance sheet (6)
Collateral pledged but not netted in consolidated balance sheet (7)
Net amount (8)
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 liability. Collateral we received includes
securities or loans and is not recognized on our balance sheet.
Collateral pledged or received 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 Table 14.3, we also
have balance sheet netting related to derivatives that is disclosed
in Note 16 (Derivatives).
Dec 31,
2015
Dec 31,
2014
$
74,935
(9,158)
65,777
58,148
(6,477)
51,671
(65,035)
(51,624)
$
742
47
$
91,278
(9,158)
82,120
56,583
(6,477)
50,106
(81,772)
(49,713)
$
348
393
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
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.
At December 31, 2015 and 2014, includes $45.7 billion and $36.8 billion, respectively, classified on our consolidated balance sheet in federal funds sold, securities
purchased under resale agreements and other short-term investments and $20.1 billion and $14.9 billion, respectively, in loans.
Represents the fair value of collateral we have received under enforceable MRAs or MSLAs, limited for table presentation purposes to the amount of the recognized asset
due from each counterparty. At December 31, 2015 and 2014, we have received total collateral with a fair value of $84.9 billion and $64.5 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 $51.1 billion at December 31, 2015 and
$40.8 billion at December 31, 2014.
Represents the amount of our exposure that is not collateralized and/or is not subject to an enforceable MRA or MSLA.
For additional information on underlying collateral and contractual maturities, see the "Repurchase and Securities Lending Agreements" section in this Note.
Amount is classified in short-term borrowings on our consolidated balance sheet.
Represents the fair value of collateral we have pledged, related to enforceable MRAs or MSLAs, limited for table presentation purposes to the amount of the recognized
liability owed to each counterparty. At December 31, 2015 and 2014, we have pledged total collateral with a fair value of $92.9 billion and $56.5 billion, respectively, of
which, the counterparty does not have the right to sell or repledge $6.9 billion at both December 31, 2015 and 2014.
Represents the amount of our obligation that is not covered by pledged collateral and/or is not subject to an enforceable MRA or MSLA.
204
Wells Fargo & Company
REPURCHASE AND SECURITIES LENDING AGREEMENTS
Securities sold under repurchase agreements and securities
lending arrangements are effectively short-term collateralized
borrowings. In these transactions, we receive cash in exchange
for transferring securities as collateral and recognize an
obligation to reacquire the securities for cash at the transaction's
maturity. These types of transactions create risks, including (1)
the counterparty may fail to return the securities at maturity, (2)
the fair value of the securities transferred may decline below the
amount of our obligation to reacquire the securities, and
therefore create an obligation for us to pledge additional
amounts, and (3) the counterparty may accelerate the maturity
Table 14.4: Underlying Collateral Types of Gross Obligations
on demand, requiring us to reacquire the security prior to
contractual maturity. We attempt to mitigate these risks by the
fact that the majority of our securities financing activities involve
highly liquid securities, we underwrite and monitor the financial
strength of our counterparties, we monitor the fair value of
collateral pledged relative to contractually required repurchase
amounts, and we monitor that our collateral is properly returned
through the clearing and settlement process in advance of our
cash repayment. Table 14.4 provides the underlying collateral
types of our gross obligations under repurchase and securities
lending agreements.
(in millions)
Repurchase agreements:
Securities of U.S. Treasury and federal agencies
Securities of U.S. States and political subdivisions
Federal agency mortgage-backed securities
Non-agency mortgage-backed securities
Corporate debt securities
Asset-backed securities
Equity securities
Other
Total repurchases
Securities lending:
Securities of U.S. Treasury and federal agencies
Federal agency mortgage-backed securities
Corporate debt securities
Equity securities (1)
Total securities lending
Total repurchases and securities lending
December 31, 2015
Total Gross Obligation
$
$
32,254
7
37,033
1,680
4,674
2,275
2,457
1,162
81,542
61
76
899
8,700
9,736
91,278
(1)
Equity securities are generally exchange traded and either re-hypothecated under margin lending agreements or obtained through contemporaneous securities borrowing
transactions with other counterparties.
Table 14.5 provides the contractual maturities of our gross
obligations under repurchase and securities lending agreements.
Table 14.5: Contractual Maturities of Gross Obligations
(in millions)
Repurchase agreements
Securities lending
Total repurchases and securities lending (1)
Overnight/
Continuous
$
$
58,021
7,845
65,866
Up to 30 days
30-90 days
>90 days
19,561
362
19,923
2,935
1,529
4,464
1,025
—
1,025
Total Gross
Obligation
81,542
9,736
91,278
December 31, 2015
(1)
Repurchase and securities lending transactions are largely conducted under enforceable master lending agreements that allow either party to terminate the transaction on
demand. These transactions have been reported as continuous obligations unless the MRA or MSLA has been modified with an overriding agreement that specifies an
alternative termination date.
Wells Fargo & Company
205
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 February 1, 2016,
Wells Fargo reached an agreement in principle with the United
States Department of Justice, the United States Attorney’s Office
for the Southern District of New York, the United States
Attorney’s Office for the Northern District of California, and
HUD (collectively, the Federal Government) to pay $1.2 billion
to resolve the complaint’s allegations, as well as other potential
civil claims relating to Wells Fargo’s FHA lending activities for
other periods. Although Wells Fargo and the Federal
Government have reached an agreement in principle to resolve
these matters, there can be no assurance that Wells Fargo and
the Federal Government will agree on the final documentation of
the settlement.
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 settlement payments to be made by all defendants
in the consolidated class and individual actions total
approximately $6.6 billion before reductions applicable to
certain merchants opting out of the settlement. The class
settlement also provided 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 District
Court granted final approval of the settlement, which has been
appealed to the Second Circuit Court of Appeals by settlement
objector merchants. Other merchants have opted out of the
settlement and are pursuing several individual actions. Several
merchants have now filed a motion to vacate the class
settlement.
MORTGAGE RELATED REGULATORY INVESTIGATIONS
Federal and state government agencies, including the United
States Department of Justice, 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 these 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 (the "MDL proceedings") in the
U.S. District Court for the Southern District of Florida. The court
in the MDL proceedings has certified a class of putative plaintiffs
and Wells Fargo has moved to compel arbitration of the claims
of unnamed class members.
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 MDL
proceedings described above, 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.
Following appellate proceedings which reversed in part and
206
Wells Fargo & Company
affirmed in part the trial court's judgment, Wells Fargo filed a
petition for writ of certiorari to the United States Supreme Court
on April 10, 2015. The Supreme Court has not yet acted on the
petition.
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 approximately $1.3 billion as of
December 31, 2015. 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.
Wells Fargo & Company
207
Note 16: Derivatives
We primarily use derivatives to manage exposure to market risk,
including interest rate risk, credit risk and foreign currency risk,
and to assist customers with their risk management objectives.
We designate certain derivatives as hedging instruments in a
qualifying hedge accounting relationship (fair value or cash flow
hedge). Our remaining derivatives consist of economic hedges
that do not qualify for hedge accounting and derivatives held for
customer accommodation, trading or other 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
values of assets and liabilities, and cash flows caused by interest
rate, foreign currency and other market risk 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 fair 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 hedged asset or liability is not adjusted
and the unrealized gain or loss on the derivative 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. These derivative
transactions, which involve us engaging in market-making
activities or acting as an intermediary, are conducted in an effort
to help customers manage their market risks. We usually offset
our exposure from such derivatives by entering into other
financial contracts, such as separate derivative or security
transactions. The customer accommodations and any offsetting
derivatives are treated as customer accommodation, trading and
other derivatives in our disclosures. Additionally, this category
includes embedded derivatives that are required to be accounted
for separately from their host contracts.
Table 16.1 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 hedging instruments and economic hedges are
recorded on the balance sheet at fair value in other assets or
other liabilities. Customer accommodation, trading and other
derivatives are recorded on the balance sheet at fair value in
trading assets, other assets or other liabilities.
208
Wells Fargo & Company
Table 16.1: Notional or Contractual Amounts and Fair Values of Derivatives
December 31, 2015
December 31, 2014
Notional or
Fair value
Notional or
Fair value
contractual
Asset
Liability
contractual
Asset
Liability
(in millions)
amount derivatives derivatives
amount
derivatives
derivatives
Derivatives designated as hedging instruments
Interest rate contracts (1)
Foreign exchange contracts (1)
Total derivatives designated as
qualifying hedging instruments
Derivatives not designated as hedging instruments
$ 191,684
25,115
7,477
378
2,253
2,494
148,967
26,778
6,536
752
2,435
1,347
7,855
4,747
7,288
3,782
Economic hedges:
Interest rate contracts (2)
Equity contracts
Foreign exchange contracts
Subtotal (3)
Customer accommodation, trading and
other derivatives:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts - protection sold
Credit contracts - protection purchased
Other contracts
Subtotal
Total derivatives not designated as hedging instruments
Total derivatives before netting
Netting (3)
Total
211,375
7,427
16,407
195
531
321
1,047
221,527
5,219
14,405
315
47
100
462
697
367
275
1,339
487
96
28
611
4,685,898
55,053
55,409
4,378,767
56,465
57,137
47,571
139,956
295,962
10,544
18,018
1,041
4,659
7,068
8,248
83
567
—
5,519
4,761
8,339
541
88
58
88,640
138,422
253,742
12,304
16,659
1,994
75,678
74,715
76,725
75,177
84,580
79,924
7,461
8,638
6,377
151
755
—
79,847
81,186
88,474
7,702
6,942
6,452
943
168
44
79,388
79,999
83,781
(66,924)
(66,004)
(65,869)
(65,043)
$ 17,656
13,920
22,605
18,738
(1)
Notional amounts presented exclude $1.9 billion of interest rate contracts at both December 31, 2015 and 2014, for certain derivatives that are combined for designation
as a hedge on a single instrument. The notional amount for foreign exchange contracts at December 31, 2015 and 2014, excludes $7.8 billion and $2.7 billion, respectively
for certain derivatives that are combined for designation as a hedge on a single instrument.
Includes economic hedge derivatives used to hedge the risk of changes in the fair value of residential MSRs, MHFS, loans, derivative loan commitments and other interests
held.
Represents balance sheet netting of derivative asset and liability balances, related cash collateral and portfolio level counterparty valuation adjustments. See the next table
in this Note for further information.
(2)
(3)
Table 16.2 provides information on the gross fair values of
derivative assets and liabilities, the balance sheet netting
adjustments and the resulting net fair value amount recorded on
our balance sheet, as well as the non-cash collateral associated
with such arrangements. We execute substantially all of our
derivative transactions under master netting arrangements. We
reflect all derivative balances and related cash collateral subject
to enforceable master netting arrangements on a net basis within
the balance sheet. The “Gross amounts recognized” column in
the following table include $69.9 billion and $74.0 billion of
gross derivative assets and liabilities, respectively, at
December 31, 2015, and $69.6 billion and $75.0 billion,
respectively, at December 31, 2014, with counterparties subject
to enforceable master netting arrangements that are carried on
the balance sheet net of offsetting amounts. The remaining gross
derivative assets and liabilities of $14.6 billion and $5.9 billion,
respectively, at December 31, 2015 and $18.9 billion and
$8.8 billion, respectively, at December 31, 2014, 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.
Balance sheet netting does not include non-cash collateral
that we receive and pledge. For disclosure purposes, we present
the fair value of this non-cash collateral 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
Wells Fargo & Company
209
Note 16: Derivatives (continued)
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
Table 16.2: Gross Fair Value of Derivative Assets and Liabilities
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 (Guarantees,
Pledged Assets and Collateral).
Gross
amounts
offset in
consolidated
balance
sheet (1)
Gross
amounts
recognized
Net amounts in
consolidated
balance sheet (2)
Gross amounts
not offset in
consolidated
balance sheet
(Disclosure-only
netting) (3)
Net
amounts
Percent
exchanged in
over-the-counter
market (4)
(in millions)
December 31, 2015
Derivative assets
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
$ 62,725
(56,612)
4,659
7,599
8,947
83
567
(998)
(2,625)
(6,141)
(79)
(469)
6,113
3,661
4,974
2,806
4
98
(749)
(76)
(471)
(34)
—
(2)
5,364
3,585
4,503
2,772
4
96
Total derivative assets
$ 84,580
(66,924)
17,656
(1,332)
16,324
Derivative liabilities
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
Other contracts
$ 57,977
(53,259)
5,519
4,808
10,933
541
88
58
(1,052)
(2,241)
(8,968)
(434)
(50)
—
4,718
4,467
2,567
1,965
107
38
58
(3,543)
(40)
(154)
(634)
(107)
(6)
—
1,175
4,427
2,413
1,331
—
32
58
Total derivative liabilities
$ 79,924
(66,004)
13,920
(4,484)
9,436
December 31, 2014
Derivative assets
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
$ 63,698
(56,051)
7,461
9,005
7,404
151
755
(1,233)
(2,842)
(4,923)
(131)
(689)
7,647
6,228
6,163
2,481
20
66
(769)
(72)
(405)
(85)
—
(1)
6,878
6,156
5,758
2,396
20
65
Total derivative assets
$ 88,474
(65,869)
22,605
(1,332)
21,273
Derivative liabilities
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
Other contracts
$ 60,059
(54,394)
7,702
7,038
7,827
943
168
44
(1,459)
(2,845)
(5,511)
(713)
(121)
—
5,665
6,243
4,193
2,316
230
47
44
(4,244)
(33)
(484)
(270)
(199)
(18)
—
1,421
6,210
3,709
2,046
31
29
44
39%
35
51
98
76
100
35%
84
85
100
100
70
100
45 %
27
54
98
90
100
44 %
81
82
100
100
86
100
Total derivative liabilities
$ 83,781
(65,043)
18,738
(5,248)
13,490
(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 $375 million and $266 million related to derivative assets and
$81 million and $56 million related to derivative liabilities as of December 31, 2015 and 2014, respectively. Cash collateral totaled $5.3 billion and $4.7 billion, netted
against derivative assets and liabilities, respectively, at December 31, 2015, and $5.2 billion and $4.6 billion, respectively, at December 31, 2014.
(2)
Net derivative assets of $12.4 billion and $16.9 billion are classified in Trading assets as of December 31, 2015 and 2014, respectively. $5.3 billion and $5.7 billion are
classified in Other assets in the consolidated balance sheet as of December 31, 2015 and 2014, respectively. Net derivative liabilities are classified in Accrued expenses and
other liabilities in the consolidated balance sheet.
Represents the fair value of 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.
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.
Wells Fargo & Company
(3)
(4)
210
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-
Table 16.3: Derivatives in Fair Value Hedging Relationships
term debt hedged with foreign currency forward derivatives for
which the time value component of the derivative gain or loss
related to the changes in the difference between the spot and
forward price is excluded from the assessment of hedge
effectiveness.
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.
Table 16.3 shows the net gains (losses) recognized in the
income statement related to derivatives in fair value hedging
relationships.
(in millions)
Year ended December 31, 2015
Interest rate contracts hedging:
Foreign exchange
contracts hedging:
Available-
for-sale
securities
Mortgages
held for
sale
Long-term
debt
Available-
for-sale
securities
Long-term
debt
Total net
gains
(losses) on
fair value
hedges
Net interest income (expense) recognized on derivatives
$
(782)
(13)
1,955
—
182
1,342
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, 2014
(18)
7
(9)
(4)
327
253
(2,370)
(1,817)
(251)
(247)
2,390
1,895
$
(11)
(13)
76
6
20
78
Net interest income (expense) recognized on derivatives
$
(722)
(15)
1,843
(10)
308
1,404
Gains (losses) recorded in noninterest income
Recognized on derivatives
Recognized on hedged item
(1,943)
1,911
Net recognized on fair value hedges (ineffective portion) (1)
$
(32)
Year ended December 31, 2013
(49)
32
(17)
3,623
(3,143)
480
391
(388)
3
(1,418)
1,490
72
604
(98)
506
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
47
(57)
(10)
(3,767)
3,521
(246)
(49)
(847)
(2,727)
49
—
722
(125)
2,361
(366)
(1)
Included $(7) million, $(1) million and $(5) million, respectively, for years ended December 31, 2015, 2014, and 2013 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.
Wells Fargo & Company
211
Note 16: Derivatives (continued)
Cash Flow Hedges
We use interest rate swaps to hedge the variability in interest
payments received on certain floating-rate commercial loans and
paid on certain floating-rate debt due to changes in the
benchmark interest rate. Gains and losses on derivatives that are
reclassified from OCI to interest income (for loans) and interest
expense (for debt) 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
Table 16.4: Derivatives in Cash Flow Hedging Relationships
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
$826 million (pre tax) of deferred net gains on derivatives in OCI
at December 31, 2015, 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.
Table 16.4 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 (Other Comprehensive Income) for detail on components of net income.
(2) None of the change in value of the derivatives was excluded from the assessment of hedge effectiveness.
2015
1,549
1,089
1
Year ended December 31,
2014
952
545
2
2013
(32)
296
1
Derivatives Not Designated as Hedging Instruments
We use economic hedge derivatives primarily 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 hedge derivatives 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 gains of $671 million in
2015, net derivative gains of $3.5 billion in 2014 and net
derivative losses of $2.9 billion in 2013, which are included in
mortgage banking noninterest income. The aggregate fair value
of these derivatives was a net liability of $3 million at
December 31, 2015 and a net asset of $492 million at
December 31, 2014. 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 mortgage loans that we
intend to sell are considered derivatives. Our interest rate
exposure on these derivative loan commitments, as well as
substantially all residential MHFS, is hedged with economic
hedge derivatives such as swaps, forwards and options,
Eurodollar futures and options, and Treasury futures, forwards
and options contracts. The derivative loan commitments,
economic hedge 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 asset of $56 million and $98 million at
December 31, 2015 and 2014, respectively, and is included in the
caption “Interest rate contracts” under “Customer
accommodation, trading and other derivatives” in Table 16.1.
We also enter into various derivatives primarily to provide
derivative products to customers. 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 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.
Customer accommodation, trading and other 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 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.
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Wells Fargo & Company
Table 16.5 shows the net gains recognized in the income
statement related to derivatives not designated as hedging
instruments.
Table 16.5: Derivatives Not Designated as Hedging Instruments
(in millions)
Net gains (losses) recognized on economic hedge derivatives:
Interest rate contracts
Recognized in noninterest income:
Mortgage banking (1)
Other (2)
Equity contracts (3)
Foreign exchange contracts (2)
Credit contracts (2)
Subtotal
Net gains (losses) recognized on customer accommodation, trading and other
$
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
Net gains recognized related to derivatives not designated as hedging instruments
$
Year ended December 31,
2015
2014
2013
723
(42)
(393)
496
—
784
941
265
88
563
812
44
(15)
2,698
3,482
1,759
(230)
(469)
758
(1)
1,817
1,350
(855)
77
(719)
593
7
(39)
414
1,412
119
(317)
24
(6)
1,232
(561)
743
324
(622)
746
(53)
—
577
2,231
1,809
(1)
(2)
(3)
(4)
(5)
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.
Predominantly included in other noninterest income.
Predominantly included in net gains (losses) from equity investments in noninterest income.
Predominantly mortgage banking noninterest income including gains (losses) on interest rate lock commitments.
Predominantly included in net gains from trading activities in noninterest income.
Credit Derivatives
Credit derivative contracts are arrangements whose value is
derived from the transfer of credit risk of a reference asset or
entity from one party (the purchaser of credit protection) to
another party (the seller of credit protection). 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.
Wells Fargo & Company
213
Note 16: Derivatives (continued)
Table 16.6 provides details of sold and purchased credit
derivatives.
Table 16.6: Sold and Purchased Credit Derivatives
Fair value
liability
Protection
sold (A)
Protection
sold - non-
investment
grade
Protection
purchased with
identical
underlyings (B)
Net
protection
sold (A)-(B)
Other
protection
purchased
Range of
maturities
Notional amount
(in millions)
December 31, 2015
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-backed securities index
Asset-backed securities index
Other
$
44
275
—
203
18
1
4,838
598
1,727
822
47
2,512
Total credit derivatives
$
541
10,544
December 31, 2014
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-backed securities index
Asset-backed securities index
Other
$
23
654
—
246
19
1
6,344
1,055
1,659
1,058
52
2,136
Total credit derivatives
$
943
12,304
1,745
463
370
—
—
2,512
5,090
2,904
874
292
—
1
2,136
6,207
3,602
395
1,717
766
1
—
6,481
4,894
608
777
608
1
—
6,888
1,236
203
10
56
46
2,512
4,063
1,450
447
882
450
51
2,136
5,416
2,272
2016 - 2025
142
2017 - 2047
960
316
71
2016 - 2020
2047 - 2057
2045 - 2046
7,776
2016 - 2025
11,537
2,831
277
2015 - 2021
2017 - 2052
1,042
2015 - 2019
355
81
5,185
9,771
2047 - 2063
2045 - 2046
2015 - 2025
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.
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Wells Fargo & Company
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
$12.3 billion at December 31, 2015, and $13.6 billion at
December 31, 2014, respectively, for which we posted
$8.8 billion and $10.5 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,
2015, or December 31, 2014, we would have been required to
post additional collateral of $3.6 billion or $3.1 billion,
respectively, or potentially settle the contract in an amount equal
to its fair value. Some contracts require that we provide more
collateral than the fair value of derivatives that are in a net
liability position if a downgrade occurs.
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.
Wells Fargo & Company
215
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,
nonmarketable equity investments and certain other assets.
These nonrecurring fair value adjustments typically involve
application of LOCOM accounting or write-downs of individual
assets.
Following is a 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:
•
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 that are 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.
•
•
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. 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.
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 if 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 vendors (predominantly third-party pricing
services), 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. These investment
securities, which include those measured using unadjusted
vendor prices, are generally classified as Level 2 and typically
involve using quoted market prices for the same or 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, other asset-backed
securities 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
techniques 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
216
Wells Fargo & Company
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 prices are not readily available, we use
management's best estimate.
MORTGAGES HELD FOR SALE (MHFS) MHFS are carried at
LOCOM or at fair value. 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. Predominantly all 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 LOCOM
or at fair value. The fair value of LHFS is based on current
offerings in secondary markets 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 (Summary of Significant
Accounting Policies). 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 estimated fair value of consumer loans is generally
calculated by discounting the contractual cash flows, adjusted for
prepayment 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 adjusted for
the related allowance.
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
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.
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
LOCOM 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.
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.
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-
NONMARKETABLE EQUITY INVESTMENTS For certain
equity securities that are not publicly traded, we have elected the
fair value option, and we use a market comparable pricing
technique to estimate their fair value. The remaining
Wells Fargo & Company
217
Note 17: Fair Values of Assets and Liabilities (continued)
nonmarketable equity investments include low income housing
tax credit investments, Federal Reserve Bank and Federal Home
Loan Bank (FHLB) stock, and private equity investments that
are recorded under the cost or equity method of accounting. We
estimate fair value to record OTTI write-downs on a
nonrecurring basis. Additionally, we provide fair value estimates
in this disclosure for cost method investments that are not
measured at fair value on a recurring or nonrecurring basis.
Federal Bank stock carrying values approximate fair value.
For the remaining cost or equity method investments for which
we determine fair value, we estimate the fair value using all
available information and consider the range of potential inputs
including discounted cash flow models, transaction prices,
trading multiples of comparable public companies, and entry
level multiples. Where appropriate these metrics are adjusted to
account for comparative differences with public companies and
for company-specific issues like liquidity or marketability. For
investments in private equity funds, we generally use the NAV
provided by the fund sponsor as a practical expedient to measure
fair value. In some cases, NAVs may 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.
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), primarily include
short sale liabilities. Short sale liabilities are predominantly
classified as either Level 1 or Level 2, generally depending upon
whether the underlying securities have readily obtainable quoted
prices in active exchange markets.
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 and generally do so using the
discounted cash flow method. 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 vendors, which predominantly
consist of third-party pricing services. Our valuation processes
vary depending on which approach is utilized.
INTERNAL MODEL VALUATIONS Our internally-developed
models primarily use 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
transactions or other market data within the same or similar
asset classes. This process 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 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 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.
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
218
Wells Fargo & Company
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 Vendors
For certain assets and liabilities, we obtain fair value
measurements from vendors, which predominantly consist of
third-party pricing services, and record the unadjusted fair value
in our financial statements. For instruments where we utilize
vendor prices to record the price of an instrument, we perform
additional procedures (see the "Vendor-Developed Valuation"
section). Methodologies employed, controls relied upon 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.
Table 17.1 presents unadjusted fair value measurements
provided by brokers or third-party pricing services fair value
hierarchy level . 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
excluded from Table 17.1.
Table 17.1: Fair Value Measurements by Brokers or Third-Party Pricing Services
(in millions)
December 31, 2015
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, 2014
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
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Brokers
Third-party pricing services
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
226
503
729
—
729
—
—
—
—
—
—
152
1,035
1,187
—
1,187
1
(1)
—
—
—
—
—
409
409
—
409
—
—
—
—
—
—
—
601
601
—
601
—
—
—
—
5
32,868
—
—
—
3,382
48,443
126,525
48,721
32,868
227,071
—
484
32,868
227,555
—
—
—
2
224
(221)
(1)
105
19,899
—
—
—
5,905
42,666
135,997
41,933
19,899
226,501
—
569
19,899
227,070
—
—
—
290
(292)
(1)
—
—
51
73
345
469
—
469
—
—
—
—
—
61
133
541
735
—
735
—
—
—
(1)
Includes corporate debt securities, collateralized loan and other debt obligations, asset-backed securities, and other debt securities.
Wells Fargo & Company
219
Note 17: Fair Values of Assets and Liabilities (continued)
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis
Table 17.2 presents the balances of assets and liabilities recorded
at fair value on a recurring basis.
Table 17.2: Fair Value on a Recurring Basis
(in millions)
December 31, 2015
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
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
Netting
Total derivative assets (6)
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 (6)
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)
Level 1
Level 2
Level 3
Netting
Total
$
$
$
13,357
—
—
—
—
—
15,010
28,367
—
28,367
32,868
—
—
—
—
—
54
—
—
—
—
—
—
3,469
1,667
346
7,909
20,619
1,005
101
35,116
891
36,007
3,382
48,490
104,546
8,557
14,015
127,118
14,952
30,402
15
414
4,290
4,719
10
32,922
229,073
434
719
1,153
34,075
—
—
—
—
16
—
3,726
48
—
—
3,790
—
66,232
(41)
—
(704)
(37)
—
—
—
484
—
484
229,557
12,457
—
—
—
62,390
4,623
2,907
8,899
375
—
79,194
—
357,215
(57,905)
(5,495)
(3,027)
(10,896)
(351)
—
—
—
8
343
56
—
—
—
407
34
441
—
1,500 (3)
—
1
73
74
405
565 (3)
—
—
1,182 (3)
1,182
—
3,726
—
—
—
3,726
1,082
—
5,316
12,415
319
36
966
—
275
—
1,596
3,088
27,664
(31)
(24)
(1,077)
—
(278)
(58)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(66,924) (5)
(66,924)
—
(66,924)
—
—
—
—
—
—
66,004 (5)
(782)
(77,674)
(1,468)
66,004
(8,621)
(1,074)
—
—
(1,692)
—
(10,313)
—
—
(4,209)
(4)
(70)
(5,357)
—
—
—
—
—
—
—
(30)
(1,498)
—
—
—
—
—
—
—
66,004
16,826
1,675
689
7,965
20,619
1,005
15,111
63,890
925
64,815
36,250
49,990
104,546
8,558
14,088
127,192
15,411
30,967
15
414
5,472
5,901
10
265,721
918
719
1,637
267,358
13,539
—
5,316
12,415
62,725
4,659
7,599
8,947
650
(66,924)
17,656
3,088
384,187
(57,977)
(5,519)
(4,808)
(10,933)
(629)
(58)
66,004
(13,920)
(9,695)
—
(4,209)
(1,696)
(70)
(15,670)
(30)
(29,620)
Total liabilities recorded at fair value
$
(11,095)
(83,031)
(1)
(2)
(3)
(4)
(5)
(6)
The entire balance is collateralized loan obligations.
Net gains from trading activities recognized in the income statement for the year ended December 31, 2015, include $1.0 billion in net unrealized losses on trading
securities held at December 31, 2015.
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.
Includes collateralized debt obligations of $257 million.
Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 16 (Derivatives) for additional information.
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
Wells Fargo & Company
(continued from previous page)
(in millions)
December 31, 2014
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
Netting
Total derivative assets (7)
Other assets
Level 1
Level 2
Level 3
Netting
Total
$
10,506
—
—
—
—
—
18,512
29,018
—
29,018
19,899
—
—
—
—
—
83
—
—
—
—
—
—
3,886
1,537
274
7,517
16,273
776
38
30,301
1,398
31,699
5,905
42,667
110,089
9,245
16,885
136,219
14,451
24,274
31
662
4,189
4,882
20
19,982
228,418
468
1,952
2,420
22,402
—
—
—
—
27
—
4,102
65
—
—
4,194
—
569
24
593
229,011
13,252
1
—
—
63,306
7,438
3,544
7,339
440
—
82,067
—
356,030
(59,958)
(7,680)
(4,305)
(7,767)
(456)
—
—
(80,166)
(1,636)
(26)
(5,055)
(2)
(73)
(6,792)
—
—
7
445
54
—
79
10
595
55
650
—
2,277 (3)
—
24
109
133
252
1,087 (3)
245 (3)
—
1,372 (3)
1,617
—
5,366
663 (3)
—
663
6,029
2,313
—
5,788
12,738
365
23
1,359
—
466
—
2,213
2,593
32,324
(72)
(22)
(1,443)
—
(655)
(44)
—
(2,236)
—
—
—
—
(6)
(6)
(28)
(2,270)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(65,869) (6)
(65,869)
—
(65,869)
—
—
—
—
—
—
65,043 (6)
65,043
—
—
—
—
—
—
—
65,043
14,392
1,544
719
7,571
16,273
855
18,560
59,914
1,453
61,367
25,804
44,944
110,089
9,269
16,994
136,352
14,786
25,361
276
662
5,561
6,499
20
253,766
1,700
1,976
3,676
257,442
15,565
1
5,788
12,738
63,698
7,461
9,005
7,404
906
(65,869)
22,605
2,593
378,099
(60,059)
(7,702)
(7,038)
(7,827)
(1,111)
(44)
65,043
(18,738)
(8,679)
(26)
(5,055)
(2,261)
(79)
(16,100)
(28)
(34,866)
Total assets recorded at fair value
$
55,614
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)
(29)
—
(1,290)
(60)
—
—
—
(1,379)
(7,043)
—
—
(2,259)
—
(9,302)
—
Total liabilities recorded at fair value
$
(10,681)
(86,958)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The entire balance is collateralized loan obligations.
Net gains from trading activities recognized in the income statement for the year ended December 31, 2014, include $211 million in net unrealized gains on trading
securities held at December 31, 2014.
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.
Includes collateralized debt obligations of $500 million.
Perpetual preferred securities include ARS and corporate preferred securities. See Note 8 (Securitizations and Variable Interest Entities) for additional information.
Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 16 (Derivatives) for additional information.
Derivative assets and derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets and trading
liabilities, respectively.
Wells Fargo & Company
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
Table 17.3: Transfers Between Fair Value Levels
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 Table 17.3. 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, 2015
Trading assets (excluding derivatives)
$
15
(9)
Available-for-sale securities (2)
Mortgages held for sale
Loans
Net derivative assets and liabilities (3)
Short sale liabilities
Total transfers
Year ended December 31, 2014
Trading assets (excluding derivatives)
Available-for-sale securities
Mortgages held for sale
Loans
Net derivative assets and liabilities (4)
Short sale liabilities
Total transfers
Year ended December 31, 2013
Trading assets (excluding derivatives) (5)
Available-for-sale securities (5) (6)
Mortgages held for sale
Loans
Net derivative assets and liabilities (4)
Short sale liabilities
Total transfers
$
$
$
$
$
—
—
—
—
(1)
14
—
—
—
—
—
—
—
—
17
—
—
—
—
17
—
—
—
—
1
103
76
471
—
48
(1)
(28)
(8)
(194)
—
15
1
(8)
697
(214)
(11)
(8)
—
—
—
—
(19)
(242)
—
—
—
—
—
70
370
229
49
(134)
—
584
535
12,830
343
193
(142)
—
(31)
(148)
(440)
(270)
20
—
(869)
(56)
(117)
(336)
—
13
—
(242)
13,759
(496)
13
8
194
—
(15)
—
200
31
148
440
270
(20)
—
869
52
100
336
—
(13)
—
475
(94)
(76)
(471)
—
(48)
—
(689)
(59)
(362)
(229)
(49)
134
—
(565)
(289)
(12,830)
(343)
(193)
142
—
(13,513)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1)
(2)
(3)
(4)
(5)
(6)
All transfers in and out of Level 3 are disclosed within the recurring Level 3 rollforward tables in this Note.
Transfers out of Level 3 exclude $640 million in auction rate perpetual preferred equity securities that were transferred in second quarter 2015 from available-for-sale
securities to nonmarketable equity investments in other assets. See Note 7 (Premises, Equipment, Lease Commitments and Other Assets) for additional information.
Includes net derivatives assets 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.
Includes 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.
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.
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.
222
Wells Fargo & Company
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2015,
are presented in Table 17.4.
Table 17.4: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2015
(in millions)
Year ended December 31, 2015
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
Total net gains
(losses) included in
Balance,
beginning
of period
Net
income
Other
compre-
hensive
income
Purchases,
sales,
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)
$
7
445
54
—
79
10
595
55
650
—
8
2
1
16
1
28
3
31
—
—
—
—
—
—
—
—
—
1
(110)
—
(1)
(14)
(11)
(135)
(24)
(159)
2,277
6
(16)
(691)
24
109
133
252
5
12
17
12
(6)
(18)
(24)
(46)
(22)
(30)
(52)
179
1,087
218
(169)
(571)
245
—
1,372
1,617
5,366
663
—
663
6,029
2,313
5,788
—
—
2
2
19
—
(13)
6
(264)
—
(179)
(443)
255
(249)
(1,578)
(2)
—
(2)
(24)
—
(24)
(251)
(1,602)
3
—
3
258
23
(128)
—
—
12
—
—
—
12
1
13
—
—
—
—
8
—
—
—
—
—
8
—
—
—
8
—
—
(12)
—
(81)
—
(93)
(1)
8
343
56
—
—
—
407
34
—
(28)
(2)
1
—
—
(29)
(14)
(94)
441
(43) (3)
(76)
1,500
—
—
—
—
—
—
—
—
—
1
73
74
405
565
—
—
1,182
1,182
(5)
—
(2)
(2)
(32)
—
—
—
(1)
(1)
(76)
3,726
(40) (4)
(640)
—
(640)
—
—
—
(716)
3,726
Mortgage servicing rights (residential) (7)
12,738
(1,870)
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)
293
1
(84)
—
(189)
(44)
1,132
7
116
—
19
(15)
(23)
1,259
2,593
(6)
(28)
443
—
(13)
—
—
—
—
—
—
—
—
—
—
—
—
—
(977)
(344)
1,547
(1,137)
6
(82)
—
167
1
(1,045)
52
6
11
194
(471)
1,082
—
—
—
(2)
(13)
—
—
—
(15)
—
—
—
—
—
5,316
12,415
—
—
(48)
—
—
—
(48)
—
—
—
288
12
(111)
—
(3)
(58)
128
3,088
—
(30)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
See Table 17.5 for detail.
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.
Included in net gains (losses) from trading activities and other noninterest income in the income statement.
Included in net gains (losses) from debt securities in the income statement.
Included in net gains (losses) from equity investments in the income statement.
Included in mortgage banking and other noninterest income in the income statement.
For more information on the changes in mortgage servicing rights, see Note 9 (Mortgage Banking Activities).
Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.
(continued on following page)
Wells Fargo & Company
223
—
—
— (5)
(40)
(23) (6)
(117) (6)
214 (6)
97
10
74
—
10
(15)
176 (8)
457 (3)
— (3)
— (6)
Note 17: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
Table 17.5 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, 2015.
Table 17.5: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2015
(in millions)
Year ended December 31, 2015
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
$
4
1,093
45
—
—
—
(2)
(1,203)
(45)
(1)
(5)
—
1,142
(1,256)
4
(27)
1,146
(1,283)
—
—
—
—
—
—
—
—
—
(1)
—
—
—
(9)
(11)
(21)
(1)
(22)
1
(110)
—
(1)
(14)
(11)
(135)
(24)
(159)
—
—
—
—
200
109
—
—
141
141
450
—
—
—
450
202
72
—
—
—
15
—
12
—
27
97
21
—
(65)
555
(1,181)
(691)
(22)
(8)
(30)
(11)
(325)
—
—
(1)
(1)
(432)
—
—
—
(432)
(1,605)
—
(3)
—
—
(103)
—
(3)
—
(106)
(20)
(15)
—
—
—
—
—
—
—
—
274
274
829
—
—
—
829
777
379
1,556
—
—
—
—
—
—
—
—
—
—
—
(22)
(22)
(10)
(22)
(30)
(52)
179
(355)
(571)
(264)
—
(593)
(857)
(264)
—
(179)
(443)
(2,425)
(1,578)
(24)
—
(24)
(24)
—
(24)
(2,449)
(1,602)
(351)
(795)
(6)
(977)
(344)
1,547
(1,137)
(1,137)
6
6
—
158
1
(966)
(25)
—
11
6
(82)
—
167
1
(1,045)
52
6
11
224
Wells Fargo & Company
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2014,
are summarized in Table 17.6.
Table 17.6: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2014
Total net gains
(losses) included in
Balance,
beginning
of period
Net
income
Other
compre-
hensive
income
Purchases,
sales,
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)
(5)
(1)
(6)
(25)
(46)
(37)
(83)
(29)
1,420
117
(47)
(403)
(in millions)
Year ended December 31, 2014
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
$
39
541
53
1
122
13
769
54
823
3,214
64
138
202
281
1
36
—
—
32
—
69
(10)
59
21
11
9
20
25
492
—
1,657
2,149
7,266
729
—
729
7,995
2,374
5,723
—
—
5
5
188
8
4
12
200
4
(52)
Mortgage servicing rights (residential) (7)
15,580
(4,031)
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)
(40)
(10)
(46)
9
(375)
(3)
1,588
(21)
96
5
26
(41)
(465)
1,653
1,503
—
(39)
514
1
(10)
—
(48)
1
—
32
—
(15)
(1)
(16) (3)
(2)
—
(4)
(4)
—
(2)
—
—
—
—
(8) (4)
—
—
— (5)
(8)
7 (6)
(32) (6)
—
—
—
—
—
—
—
—
—
(2)
(121)
(21)
2
(70)
(3)
(215)
11
(204)
—
4
26
—
—
—
30
1
31
(31)
7
(15)
445
(4)
(3)
(5)
—
(58)
(1)
(59)
54
—
79
10
595
55
650
(86)
(569)
59
(362)
2,277
(1,671)
148
(362)
24
109
133
252
1,087
245
—
1,372
1,617
5,366
663
—
663
6,029
2,313
5,788
—
—
—
—
—
—
—
89
89
—
—
—
—
—
—
—
—
—
—
—
—
148
440
270
—
—
(3)
(17)
—
—
—
—
—
—
(362)
(229)
(49)
—
37
97
—
—
—
(232)
(1,720)
(214)
—
(373)
(587)
(45)
(4)
(49)
(276)
(104)
1,189
(1,255)
(2)
(214)
(14)
160
—
(33)
—
(6)
(39)
(203)
(29)
—
(29)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12,738
(2,122) (6)
293
1
(84)
—
(189)
(44)
(23)
2,593
(6)
(28)
317
(1)
(42)
—
(38)
(40)
196 (8)
(8) (3)
1 (3)
(1) (6)
(1,325)
(20)
134
576
(7)
21
—
—
—
—
—
—
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
See Table 17.7 for detail.
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.
Included in net gains (losses) from trading activities and other noninterest income in the income statement.
Included in net gains (losses) from debt securities in the income statement.
Included in net gains (losses) from equity investments in the income statement.
Included in mortgage banking and other noninterest income in the income statement.
For more information on the changes in mortgage servicing rights, see Note 9 (Mortgage Banking Activities).
Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.
(continued on following page)
Wells Fargo & Company
225
Note 17: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
Table 17.7 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, 2014.
Table 17.7: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2014
(in millions)
Year ended December 31, 2014
Trading assets (excluding derivatives):
Purchases
Sales
Issuances
Settlements
Net
Securities of U.S. states and political subdivisions
Collateralized loan and other debt obligations
$
10
1,057
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)
85
3
17
—
1,172
11
1,183
73
—
—
—
21
134
—
—
117
117
345
—
—
—
345
208
76
—
—
—
—
—
3
—
3
608
20
—
(12)
(1,174)
(106)
(1)
(47)
—
(1,340)
(1)
(1,341)
—
—
—
—
—
—
—
1
1
—
(4)
—
—
(40)
(3)
(47)
—
(47)
(2)
(121)
(21)
2
(70)
(3)
(215)
11
(204)
(144)
336
(834)
(569)
(44)
(31)
(75)
(32)
(34)
—
—
(16)
(16)
(301)
—
(4)
(4)
(305)
(276)
—
(7)
—
—
(116)
—
(2)
—
(118)
(1)
(27)
—
—
—
—
10
—
—
—
522
522
868
—
—
—
868
167
438
1,196
—
—
—
—
—
—
—
—
—
—
(2)
(6)
(8)
(28)
(503)
(214)
—
(996)
(1,210)
(2,583)
(45)
—
(45)
(46)
(37)
(83)
(29)
(403)
(214)
—
(373)
(587)
(1,671)
(45)
(4)
(49)
(2,628)
(1,720)
(375)
(618)
—
(276)
(104)
1,189
(1,255)
(1,255)
(2)
(98)
(14)
159
—
(2)
(214)
(14)
160
—
(1,210)
(1,325)
(31)
—
21
576
(7)
21
226
Wells Fargo & Company
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 in Table 17.8.
Table 17.8: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2013
Total net gains
(losses) included in
Balance,
beginning
of period
Net
income
Other
compre-
hensive
income
Purchases,
sales,
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)
74
—
—
—
—
—
—
—
—
—
(10)
(37)
(1)
9
(35)
(3)
(77)
—
(77)
3,631
11
(85)
(182)
Total trading assets (excluding derivatives)
1,063
(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
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
94
203
297
274
13,188
5,921
51
3,283
9,255
26,645
794
—
794
27,439
3,250
6,021
17
(13)
4
10
8
(1)
3
27
29
62
10
—
10
72
5
(211)
Mortgage servicing rights (residential) (8)
11,538
1,156
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)
659
21
(662)
—
(122)
(151)
21
(1,150)
(78)
(649)
162
—
(49)
(15)
(30)
75
(783)
315
—
3
625
—
(12,525)
1,420
(1,067)
(5)
31
(1,041)
—
—
24
24
(4,327)
(48)
(1,727)
(6,102)
(709)
100
(18,872)
—
—
13
—
25
13
51
1
52
53
—
—
—
23
—
(231)
(20)
(15)
(22)
—
(288)
(1)
(289)
39
541
53
1
122
13
769
54
823
(214)
3,214
(6)
(22)
(28)
(3)
64
138
202
281
492
—
1,657
2,149
7,266
729
—
729
7,995
2,374
5,723
(40)
(10)
(46)
9
(375)
(3)
(465)
1,503
—
(39)
—
15,580
—
—
—
100
336
—
—
—
(1)
(14)
2
—
—
—
—
—
(18,872)
(343)
(193)
2
36
104
—
—
—
(13)
142
—
—
—
—
—
—
(1)
28
27
(10)
124
(34)
(1)
19
(16)
40
(2)
—
(2)
38
—
—
—
—
—
—
—
—
—
—
—
—
—
(40)
(58)
(98)
(13)
(73)
—
(73)
(782)
(874)
106
2,886
(39)
(66)
137
1
805
—
838
1,026
—
7
—
(33)
6
1
15
—
(11)
(8)
(19) (3)
—
—
(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)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
See Table 17.9 for detail.
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.
Included in net gains (losses) from trading activities and other noninterest income in the income statement.
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.
Included in net gains (losses) from debt securities in the income statement.
Included in net gains (losses) from equity investments in the income statement.
Included in mortgage banking and other noninterest income in the income statement.
For more information on the changes in mortgage servicing rights, see Note 9 (Mortgage Banking Activities).
Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.
(continued on following page)
Wells Fargo & Company
227
Note 17: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
Table 17.9 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.
Table 17.9: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 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
—
1,756
—
—
—
—
—
1,008
1,751
—
1,164
2,915
3,923
—
—
—
3,923
286
23
—
—
—
—
—
7
—
7
1,064
8
—
(136)
(1,064)
(117)
(420)
(45)
(3)
(1,785)
—
(1,785)
(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)
(40)
(58)
(98)
(13)
625
(3,865)
(1,067)
—
(2,213)
(6,078)
(7,301)
(53)
—
(53)
(7,354)
(586)
(369)
—
(39)
(66)
285
1
807
—
988
(36)
—
11
(5)
31
(1,041)
(709)
(73)
—
(73)
(782)
(874)
106
2,886
(39)
(66)
137
1
805
—
838
1,026
—
7
Table 17.10 and Table 17.11 provide 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
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 that
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.
228
Wells Fargo & Company
Table 17.10: Valuation Techniques – Recurring Basis – 2015
($ in millions, except cost to service amounts)
Fair Value
Level 3
Valuation Technique(s)
Significant
Unobservable Input
Range of
Inputs
Weighted
Average (1)
December 31, 2015
Trading and available-for-sale securities:
Securities of U.S. states and
political subdivisions:
Government, healthcare and
other revenue bonds
Auction rate securities and other
municipal bonds
Collateralized loan and other debt
obligations (2)
Asset-backed securities:
$ 1,213
Discounted cash flow
Discount rate
0.8 -
5.6 %
1.9
51
244
343
565
Vendor priced
Discounted cash flow
Discount rate
0.8 -
4.5
Market comparable
pricing
Vendor priced
Weighted average life
1.0 -
10.0 yrs
Comparability
adjustment
(20.0) -
20.3 %
Diversified payment rights (3)
608
Discounted cash flow
Other commercial and consumer
508 (4)
Discounted cash flow
Discount rate
Discount rate
Weighted average life
1.0 -
2.5 -
1.0 -
5.0
6.3
9.4 yrs
Mortgages held for sale (residential)
66
1,033
Vendor priced
Discounted cash flow
Default rate
0.5 -
13.7 %
Loans
5,316 (5)
Discounted cash flow
Discount rate
0.0 -
49
Market comparable
pricing
Comparability
adjustment
(53.3) -
0.0
3.9
Discount rate
1.1 -
6.3
Loss severity
0.1 -
22.7
Prepayment rate
2.6 -
9.6
Mortgage servicing rights (residential)
12,415
Discounted cash flow
Prepayment rate
0.2 - 100.0
Utilization rate
0.0 -
0.8
Cost to service per
loan (6) $ 70 -
599
Discount rate
6.8 -
11.8 %
Prepayment rate (7)
10.1 -
18.9
Net derivative assets and (liabilities):
Interest rate contracts
230
Discounted cash flow
Default rate
0.1 -
9.6
Loss severity
50.0 -
50.0
Prepayment rate
0.3 -
2.5
Interest rate contracts: derivative loan
commitments
58 (8)
Discounted cash flow
Fall-out factor
1.0 -
99.0
Initial-value
servicing
(30.6) - 127.0 bps
Equity contracts
72
Discounted cash flow
Conversion factor
(10.6) -
0.0 %
Credit contracts
(183)
Option model
Correlation factor
(77.0) -
98.5 %
Weighted average life
0.5 -
2.0 yrs
Volatility factor
6.5 -
91.3
(9)
6
Market comparable
pricing
Comparability
adjustment
(53.6) -
18.2
Option model
Credit spread
0.0 -
Loss severity
13.0 -
19.9
73.0
2.0
4.7
2.9
3.2
3.8
4.3
3.6
4.7
11.2
6.4
(32.6)
3.1
14.6
0.3
168
7.3
11.4
2.6
50.0
2.2
18.8
41.5
(8.1)
1.5
66.0
24.2
(0.6)
1.6
49.6
Other assets: nonmarketable equity investments
3,065
Market comparable
pricing
Comparability
adjustment
(19.1) -
(5.5)
(15.1)
Insignificant Level 3 assets, net of liabilities
516 (9)
Total level 3 assets, net of liabilities
$ 26,166 (10)
(1)
Weighted averages are calculated using outstanding unpaid principal balance for cash instruments, such as loans and securities, and notional amounts for derivative
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
instruments.
Includes $257 million of collateralized debt obligations.
Securities backed by specified sources of current and future receivables generated from foreign originators.
Consists largely of investments in asset-backed securities that are revolving in nature, in which the timing of advances and repayments of principal are uncertain.
Consists predominantly of reverse mortgage loans securitized with GNMA that were accounted for as secured borrowing transactions.
The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $70 - $335.
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.
Total derivative loan commitments were a net asset of $56 million, of which a $2 million derivative liability was classified as level 2 at December 31, 2015.
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, certain other assets, other liabilities and certain net derivative assets and liabilities, such as
commodity contracts and other derivative contracts.
(10)
Consists of total Level 3 assets of $27.7 billion and total Level 3 liabilities of $1.5 billion, before netting of derivative balances.
Wells Fargo & Company
229
Note 17: Fair Values of Assets and Liabilities (continued)
Table 17.11: Valuation Techniques – Recurring Basis – 2014
3.9
6.4
0.9
0.4
2.9
5.0
4.0
6.6
9.7
2.6
5.2
18.3
8.1
($ in millions, except cost to service amounts)
December 31, 2014
Trading and available-for-sale securities:
Securities of U.S. states and
political subdivisions:
Government, healthcare and
other revenue bonds
Auction rate securities and other
municipal bonds
Collateralized loan and other debt
obligations (2)
Asset-backed securities:
Auto loans and leases
Other asset-backed securities:
Diversified payment rights (3)
Fair Value
Level 3
Valuation Technique(s)
Significant
Unobservable Input
Range of Inputs
Weighted
Average (1)
$
1,900
Discounted cash flow
Discount rate
0.4 -
5.6 %
1.5
Vendor priced
Discounted cash flow
Discount rate
1.5 -
7.6
Market comparable
pricing
Vendor priced
Weighted average life
1.3 -
19.4 yrs
Comparability
adjustment
(53.9) -
25.0 %
Discounted cash flow
Discount rate
0.4 -
0.4
61
323
565
967
245
661
Other commercial and consumer
750 (4)
Discounted cash flow
Discounted cash flow
Discount rate
Discount rate
Weighted average life
Marketable equity securities:
perpetual preferred
40
Vendor priced
663 (5)
Discounted cash flow
Discount rate
Mortgages held for sale (residential)
2,235
Discounted cash flow
78
Market comparable
pricing
Weighted average life
Default rate
Discount rate
Loss severity
Prepayment rate
Comparability
adjustment
0.9 -
1.9 -
1.6 -
4.1 -
1.0 -
0.4 -
1.1 -
0.1 -
2.0 -
7.1
21.5
10.7 yrs
9.3 %
11.8 yrs
15.0 %
7.7
26.4
15.5
(93.0) -
10.0
(30.0)
Loans
5,788 (6)
Discounted cash flow
Discount rate
0.0 -
3.8
Mortgage servicing rights (residential)
12,738
Discounted cash flow
Net derivative assets and (liabilities):
Interest rate contracts
196
Discounted cash flow
Prepayment rate
0.6 -
100.0
Utilization rate
0.0 -
1.0
Cost to service per
loan (7)
Discount rate
Prepayment rate (8)
$
86 -
683
5.9 -
8.0 -
16.9 %
22.0
Default rate
Loss severity
0.00 -
50.0 -
0.02
50.0
Interest rate contracts: derivative loan
commitments
Equity contracts
Credit contracts
97
162
Discounted cash flow
Fall-out factor
1.0 -
99.0
Discounted cash flow
Conversion factor
(11.2) -
0.0 %
Initial-value servicing
(31.1) -
113.3 bps
(246)
Option model
Correlation factor
(56.0) -
96.3 %
Weighted average life
1.0 -
2.0 yrs
(192)
3
Market comparable
pricing
Comparability
adjustment
(28.6) -
Option model
Credit spread
0.0 -
Loss severity
11.5 -
26.3
17.0
72.5
Volatility factor
8.3 -
80.9
3.1
11.2
0.4
179
7.6
12.5
0.01
50.0
24.5
46.5
(8.4)
1.3
42.1
28.3
1.8
0.9
48.7
Other assets: nonmarketable equity investments
2,512
Market comparable
pricing
Comparability
adjustment
(19.7) -
(4.0)
(14.7)
Insignificant Level 3 assets, net of liabilities
507 (9)
Total level 3 assets, net of liabilities
$ 30,054 (10)
(1)
Weighted averages are calculated using outstanding unpaid principal balance for cash instruments such as loans and securities, and notional amounts for derivative
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
instruments.
Includes $500 million of collateralized debt obligations.
Securities backed by specified sources of current and future receivables generated from foreign originators.
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.
Consists of auction rate preferred equity securities with no maturity date that are callable by the issuer.
Consists predominantly of reverse mortgage loans securitized with GNMA that were accounted for as secured borrowing transactions.
The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $86 - $270.
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.
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, certain other assets, other liabilities and certain net derivative assets and liabilities, such as
commodity contracts and other derivative contracts.
(10)
Consists of total Level 3 assets of $32.3 billion and total Level 3 liabilities of $2.3 billion, before netting of derivative balances.
230
Wells Fargo & Company
The valuation techniques used for our Level 3 assets and
liabilities, as presented in the previous tables, are described as
follows:
• Discounted cash flow - Discounted cash flow valuation
techniques generally consist of developing an estimate of
future cash flows that are expected to occur over the life of
an instrument and then discounting those cash flows at a
rate of return that results in the fair value amount.
• Market comparable pricing - Market comparable pricing
valuation techniques are used to determine the fair value of
certain instruments by incorporating known inputs, such as
recent transaction prices, pending transactions, or prices of
other similar investments that require significant
adjustment to reflect differences in instrument
characteristics.
• 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.
Vendor-priced – Prices obtained from third party pricing
vendors or brokers that are used to record the fair value of
the asset or liability, of which the related valuation
technique and significant unobservable inputs are not
provided.
•
Significant unobservable inputs presented in the previous
tables are those we consider significant to the fair value of the
Level 3 asset or liability. We consider unobservable inputs to be
significant if by their exclusion the fair value of the Level 3 asset
or liability would be impacted by a predetermined percentage
change, or based on qualitative factors, such as nature of the
instrument, type of valuation technique used, and the
significance of the unobservable inputs relative to other inputs
used within the valuation. Following is a description of the
significant unobservable inputs provided in the table.
•
•
•
Comparability adjustment – is an adjustment made to
observed market data, such as a transaction price in order to
reflect dissimilarities in underlying collateral, issuer, rating,
or other factors used within a market valuation approach,
expressed as a percentage of an observed price.
Conversion Factor – is the risk-adjusted rate in which a
particular instrument may be exchanged for another
instrument upon settlement, expressed as a percentage
change from a specified rate.
Correlation factor - is the likelihood of one instrument
changing in price relative to another based on an
established relationship expressed as a percentage of
relative change in price over a period over time.
•
•
Cost to service - is the expected cost per loan of servicing a
portfolio of loans, which includes estimates for
unreimbursed expenses (including delinquency and
foreclosure costs) that may occur as a result of servicing
such loan portfolios.
Credit spread – is the portion of the interest rate in excess of
a benchmark interest rate, such as OIS, LIBOR or U.S.
Treasury rates, that when applied to an investment captures
changes in the obligor’s creditworthiness.
• Default rate – is an estimate of the likelihood of not
collecting contractual amounts owed expressed as a
constant default rate (CDR).
•
• Discount rate – is a rate of return used to present value the
future expected cash flow to arrive at the fair value of an
instrument. The discount rate consists of a benchmark rate
component and a risk premium component. The benchmark
rate component, for example, OIS, LIBOR or U.S. Treasury
rates, is generally observable within the market and is
necessary to appropriately reflect the time value of money.
The risk premium component reflects the amount of
compensation market participants require due to the
uncertainty inherent in the instruments’ cash flows resulting
from risks such as credit and liquidity.
Fall-out factor - is the expected percentage of loans
associated with our interest rate lock commitment portfolio
that are likely of not funding.
Initial-value servicing - is the estimated value of the
underlying loan, including the value attributable to the
embedded servicing right, expressed in basis points of
outstanding unpaid principal balance.
Loss severity – is the percentage of contractual cash flows
lost in the event of a default.
Prepayment rate – is the estimated rate at which forecasted
prepayments of principal of the related loan or debt
instrument are expected to occur, expressed as a constant
prepayment rate (CPR).
•
•
•
• Utilization rate – is the estimated rate in which incremental
•
portions of existing reverse mortgage credit lines are
expected to be drawn by borrowers, expressed as an
annualized rate.
Volatility factor – is the extent of change in price an item is
estimated to fluctuate over a specified period of time
expressed as a percentage of relative change in price over a
period over time.
• Weighted average life – is the weighted average number of
years an investment is expected to remain outstanding
based on its expected cash flows reflecting the estimated
date the issuer will call or extend the maturity of the
instrument or otherwise reflecting an estimate of the timing
of an instrument’s cash flows whose timing is not
contractually fixed.
Wells Fargo & Company
231
Note 17: Fair Values of Assets and Liabilities (continued)
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 generally 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 are 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, a 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
(Securitizations and Variable Interest Entities).
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 tables. 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
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, MORTGAGES HELD FOR SALE and
NONMARKETABLE EQUITY INVESTMENTS 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, comparability
adjustment 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 and would generally
decrease (increase) in value based upon an increase (decrease) in
prepayment rate. Conversely, the fair value of these Level 3
assets would generally increase (decrease) in value 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. The comparability
adjustment input may have a positive or negative impact on fair
value depending on the change in fair value the comparability
adjustment references. Unobservable inputs for comparability
adjustment, 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.
232
Wells Fargo & Company
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
Table 17.12: Fair Value on a Nonrecurring Basis
assets. Table 17.12 provides the fair value hierarchy and carrying
amount of all assets that were still held as of December 31,
2015, and 2014, and for which a nonrecurring fair value
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, 2015
December 31, 2014
Mortgages held for sale (LOCOM) (1)
$
Loans held for sale
Loans:
Commercial
Consumer
Total loans (2)
Other assets (3)
—
—
—
—
—
—
4,667
1,047
5,714
279
191
1,406
1,597
—
—
7
7
279
191
1,413
1,604
280
654
934
—
—
—
—
—
—
2,197
1,098
3,295
—
243
2,018
2,261
417
—
—
5
5
460
—
243
2,023
2,266
877
(1)
(2)
(3)
Consists of commercial mortgages and residential real estate 1-4 family first mortgage loans.
Represents carrying value of loans for which adjustments are based on the appraised value of the collateral.
Includes the fair value of foreclosed real estate, other collateral owned and nonmarketable equity investments.
Table 17.13 presents the increase (decrease) in value of
certain assets for which a nonrecurring fair value adjustment
was recognized during the periods presented.
Table 17.13: Change in Value of Assets with Nonrecurring Fair
Value Adjustment
(in millions)
Year ended December 31,
2015
2014
Mortgages held for sale (LOCOM)
$
(3)
(3)
33
—
Loans held for sale
Loans:
Commercial
Consumer
Total loans (1)
Other assets (2)
Total
(165)
(125)
(1,001)
(1,336)
(1,166)
(1,461)
(396)
(341)
$
(1,568)
(1,769)
(1)
(2)
Represents write-downs of loans based on the appraised value of the
collateral.
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.
Wells Fargo & Company
233
Note 17: Fair Values of Assets and Liabilities (continued)
Table 17.14 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. The table is limited to financial
instruments that had nonrecurring fair value adjustments during
the periods presented.
We have excluded from the table classes of Level 3 assets
and liabilities measured using an internal model that we
Table 17.14: Valuation Techniques – Nonrecurring Basis
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, 2015
Residential mortgages held
for sale (LOCOM)
Fair Value
Level 3
Valuation Technique(s) (1)
Significant Unobservable
Inputs (1)
Range of inputs
Weighted
Average (2)
$ 1,047 (3)
Discounted cash flow
Default rate (4)
0.5 -
5.0%
4.2%
Other assets: nonmarketable
equity investments
Insignificant level 3 assets
286
228
147
Total
$ 1,708
Discount rate
1.5 -
8.5
Loss severity
0.0 -
26.1
Prepayment rate (5)
2.6 -
100.0
3.5
2.9
65.4
Net asset value
Net asset value (6)
Market comparable
pricing
Comparability
adjustment
5.0 -
9.2
8.5
December 31, 2014
Residential mortgages held for
sale (LOCOM)
$
1,098 (3)
Discounted cash flow
Default rate (4)
0.9 -
3.8 %
2.1 %
Other assets: nonmarketable
equity investments
Insignificant level 3 assets
Total
171
294
$
1,563
Market comparable pricing
Discount rate
Loss severity
1.5 -
0.0 -
8.5
29.8
Prepayment rate (5)
2.0 -
100.0
Comparability
adjustment
6.0 -
6.0
3.6
3.8
65.5
6.0
(1)
(2)
(3)
(4)
(5)
(6)
Refer to the narrative following Table 17.11 for a definition of the valuation technique(s) and significant unobservable inputs.
For residential MHFS, weighted averages are calculated using outstanding unpaid principal balance of the loans.
Consists of $1.0 billion government insured/guaranteed loans purchased from GNMA-guaranteed mortgage securitization at both December 31, 2015 and 2014, and
$41 million and $78 million of other mortgage loans that are not government insured/guaranteed at December 31, 2015 and 2014, respectively.
Applies only to non-government insured/guaranteed loans.
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.
The range and weighted average have not been provided since the investments have been recorded at their net asset redemption values.
234
Wells Fargo & Company
Alternative Investments
Table 17.15 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
Table 17.15: Alternative Investments
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, 2015
Offshore funds
Hedge funds
Private equity funds (1)(2)
Venture capital funds (2)
Total (3)
December 31, 2014
Offshore funds
Hedge funds
Private equity funds (1)(2)
Venture capital funds (2)
Total (3)
Fair value
Unfunded
commitments
Redemption frequency
Redemption
notice period
$
$
$
$
2
—
555
85
642
125
1
1,313
68
1,507
—
—
135
9
144
—
—
243
9
252
Daily - Monthly
1 - 30 days
Daily - Quarterly
1 - 90 days
N/A
N/A
N/A
N/A
Daily - Quarterly
1 - 60 days
Daily - Quarterly
1-90 days
N/A
N/A
N/A
N/A
N/A - Not applicable
(1)
(2)
(3)
Excludes a private equity fund investment of $0 million and $171 million at December 31, 2015 and 2014, respectively. This investment was sold in second quarter 2015
for an amount different from the fund's NAV.
Includes certain investments subject to the Volcker Rule that we may have to divest.
December 31, 2015 and 2014, include $602 million and $1.3 billion respectively, of fair value for nonmarketable equity investments carried at cost for which we use NAVs
as a practical expedient for determining nonrecurring fair value adjustments. The fair values of investments that had nonrecurring fair value adjustments were $154 million
and $108 million at December 31, 2015 and 2014, respectively.
Offshore funds primarily invest in foreign mutual funds.
Redemption restrictions are in place for investments with a fair
value of $0 million and $24 million at December 31, 2015 and
2014, respectively.
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. These investments do not allow redemptions.
Alternatively, we receive distributions as the underlying assets of
the funds liquidate, which we expect to occur over the next 2
years.
Venture capital funds invest in domestic and foreign
companies in a variety of industries, including information
technology, financial services and healthcare. These investments
can never be redeemed with the funds. Instead, we receive
distributions as the underlying assets of the fund liquidate,
which we expect to occur over the next 5 years.
Wells Fargo & Company
235
Note 17: Fair Values of Assets and Liabilities (continued)
Fair Value Option
The fair value option is an irrevocable election, generally only
permitted upon initial recognition of financial assets or
liabilities, to measure eligible financial instruments at fair value
with changes in fair value reflected in earnings. We may elect the
fair value option to align the measurement model with how the
financial assets or liabilities are managed or to reduce
complexity or accounting asymmetry. Following is a discussion
of the portfolios for which we elected the fair value option.
TRADING ASSETS - LOANS We engage in holding loans for
market-making purposes to support the buying and selling
demands of our customers. These loans are generally held for a
short period of time and managed within parameters of
internally approved market risk limits. We have elected to
measure and carry them at fair value, which best aligns with our
risk management practices. Fair value for these loans is
primarily determined using readily available market data based
on recent transaction prices for similar loans.
MORTGAGES HELD FOR SALE (MHFS) 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 economic hedge
derivatives 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.
Table 17.16: Fair Value Option
LOANS HELD FOR SALE (LHFS) We elected to measure certain
LHFS portfolios at fair value in conjunction with customer
accommodation activities, which better aligns the measurement
basis of the assets held with our management objectives given
the trading nature of these portfolios.
LOANS 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.
OTHER FINANCIAL INSTRUMENTS We elected to measure at
fair value certain nonmarketable equity securities that are
hedged with derivative instruments to better reflect the
economics of the transactions. These securities are included in
other assets.
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.
Table 17.16 reflects differences between the fair value
carrying amount of certain assets and liabilities for which we
have elected the fair value option and the contractual aggregate
unpaid principal amount at maturity.
(in millions)
Trading assets - loans:
Total loans
Nonaccrual loans
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 (1)
December 31, 2015
December 31, 2014
Fair value Aggregate
unpaid
principal
carrying
amount
$
886
—
935
—
13,539
13,265
161
19
—
—
5,316
305
3,065
228
22
5
5
5,184
322
N/A
Fair value
carrying
amount less
aggregate
unpaid
principal
(49)
—
274
(67)
(3)
(5)
(5)
132
(17)
N/A
Fair value
carrying
amount
Aggregate
unpaid
principal
1,387
1,410
—
1
15,565
15,246
160
27
1
1
5,788
367
2,512
252
30
10
10
5,527
376
N/A
Fair value
carrying
amount less
aggregate
unpaid
principal
(23)
(1)
319
(92)
(3)
(9)
(9)
261
(9)
N/A
(1) Consists of nonmarketable equity investments carried at fair value. See Note 7 (Premises, Equipment, Lease Commitments and Other Assets) for more information.
236
Wells Fargo & Company
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 in Table 17.17 by income statement line
item.
Table 17.17: Fair Value Option – Changes in Fair Value Included in Earnings
2015
2014
Mortgage
banking
noninterest
income
Net gains
(losses)
from
trading
activities
Other
noninterest
income
Mortgage
banking
noninterest
income
Net gains
(losses)
from
trading
activities
Other
noninterest
income
Mortgage
banking
noninterest
income
Net gains
(losses)
from
trading
activities
—
1,808
—
—
—
—
4
—
—
—
—
(6)
4
—
—
(122)
457
—
—
2,211
—
—
—
—
29
—
—
—
—
(12)
4
—
—
(49)
518
—
—
2,073
—
—
—
—
40
—
—
—
—
(15)
2013
Other
noninterest
income
3
—
—
(216)
324
—
(in millions)
Trading assets - loans
$
Mortgages held for sale
Loans held for sale
Loans
Other assets
Other interests held (1)
Year ended December 31,
(1)
Includes retained interests in securitizations.
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. Table 17.18 shows the estimated
gains and losses from earnings attributable to instrument-
specific credit risk related to assets accounted for under the fair
value option.
Table 17.18: Fair Value Option – Gains/Losses Attributable to
Instrument-Specific Credit Risk
(in millions)
2015
2014
2013
Year ended December 31,
Gains (losses) attributable to
instrument-specific credit risk:
Trading assets - loans
Mortgages held for sale
Total
$
$
4
29
33
29
60
89
40
126
166
Wells Fargo & Company
237
Note 17: Fair Values of Assets and Liabilities (continued)
Disclosures about Fair Value of Financial
Instruments
Table 17.19 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 Table 17.2
included earlier in this Note. The carrying amounts in the
following table are recorded on the balance sheet under the
indicated captions, except for nonmarketable equity
investments, which are included in other assets.
We have not included assets and liabilities that are not
financial instruments in our disclosure, such as the value of the
Table 17.19: Fair Value Estimates for Financial Instruments
(in millions)
December 31, 2015
Financial assets
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.
Carrying
amount
Level 1
Level 2
Level 3
Total
Estimated fair value
Cash and due from banks (1)
$ 19,111
19,111
—
—
19,111
Federal funds sold, securities purchased under resale
agreements and other short-term investments (1)
270,130
14,057
255,911
162
270,130
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, 2014
Financial assets
80,197
45,167
32,052
6,064
279
887,497
7,035
1,223,312
97,528
199,528
—
—
—
—
—
—
—
5,019
279
3,348
1,047
—
80,567
6,066
279
60,848
839,816
900,664
14
7,890
7,904
1,194,781
28,616
1,223,397
97,528
—
97,528
188,015
10,468
198,483
Cash and due from banks (1)
$
19,571
19,571
—
Federal funds sold, securities purchased under resale agreements and
other short-term investments (1)
258,429
8,991
249,438
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)
55,483
41,548
3,971
721
832,671
7,033
1,168,310
63,518
183,934
—
—
—
—
—
—
—
—
—
5,790
1,098
—
19,571
258,429
56,359
3,973
739
9,021
2,875
739
60,052
784,786
844,838
—
8,377
8,377
1,132,845
35,566
1,168,411
63,518
—
63,518
174,996
10,479
185,475
(1)
(2)
(3)
(4)
Amounts consist of financial instruments in which carrying value approximates fair value.
Balance reflects MHFS and LHFS, as applicable, other than those MHFS and LHFS for which we elected the fair value option.
Loans exclude balances for which the fair value option was elected and also exclude lease financing with a carrying amount of $12.4 billion and $12.3 billion at
December 31, 2015 and 2014, respectively.
The carrying amount and fair value exclude obligations under capital leases of $8 million and $9 million at December 31, 2015 and 2014, respectively.
Loan commitments, standby letters of credit and
commercial and similar letters of credit are not included in the
table above. The estimated fair value of these instruments
totaled $1.0 billion and $945 million at December 31, 2015 and
2014, respectively.
238
Wells Fargo & Company
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 along with the Employee Stock Ownership Plan (ESOP)
Cumulative Convertible Preferred Stock.
Table 18.1: Preferred Stock Shares
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
December 31, 2015
December 31, 2014
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
20,000
50,000
20,000
50,000
100,000
25,010
100,000
25,010
8.00% Non-Cumulative Perpetual Class A Preferred Stock
1,000
2,300,000
1,000
2,300,000
Series K
7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
1,000
3,500,000
1,000
3,500,000
Series L
7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock
1,000
4,025,000
1,000
4,025,000
Series N
5.20% Non-Cumulative Perpetual Class A Preferred Stock
25,000
30,000
25,000
30,000
Series O
5.125% Non-Cumulative Perpetual Class A Preferred Stock
25,000
27,600
25,000
27,600
Series P
5.25% Non-Cumulative Perpetual Class A Preferred Stock
25,000
26,400
25,000
26,400
Series Q
5.85% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
25,000
69,000
25,000
69,000
Series R
6.625% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
25,000
34,500
25,000
34,500
Series S
5.900% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
25,000
80,000
25,000
80,000
Series T
6.000% Non-Cumulative Perpetual Class A Preferred Stock
25,000
32,200
25,000
32,200
Series U
5.875% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
25,000
80,000
Series V
6.000% Non-Cumulative Perpetual Class A Preferred Stock
25,000
40,000
ESOP
Cumulative Convertible Preferred Stock (1)
Total
—
1,252,386
11,669,096
—
—
—
—
—
1,251,287
11,597,997
(1) See the ESOP Cumulative Convertible Preferred Stock section of this Note for additional information about the liquidation preference for the ESOP Cumulative Preferred
Stock.
Wells Fargo & Company
239
Note 18: Preferred Stock (continued)
Table 18.2: Preferred Stock – Par and Carrying Value
(in millions, except shares)
DEP Shares
December 31, 2015
December 31, 2014
Shares
issued and
outstanding Par value
Carrying
value
Discount
Shares issued
and
outstanding
Par value
Carrying
value
Discount
Dividend Equalization Preferred Shares (DEP)
96,546 $
—
—
Series I (1)
Floating Class A Preferred Stock
25,010
2,501
2,501
Series J (1)
—
—
96,546
$
—
—
25,010
2,501
2,501
—
—
8.00% Non-Cumulative Perpetual Class A Preferred Stock
2,150,375
2,150
1,995
155
2,150,375
2,150
1,995
155
Series K (1)
7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A
Preferred Stock
Series L (1)
7.50% Non-Cumulative Perpetual Convertible Class A
Preferred Stock
Series N (1)
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
5.20% Non-Cumulative Perpetual Class A Preferred Stock
30,000
750
750
Series O (1)
5.125% Non-Cumulative Perpetual Class A Preferred Stock
26,000
650
650
Series P (1)
5.25% Non-Cumulative Perpetual Class A Preferred Stock
25,000
625
625
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
Series S (1)
5.900% Fixed-to-Floating Non-Cumulative Perpetual Class A
Preferred Stock
Series T (1)
69,000
1,725
1,725
33,600
840
840
80,000
2,000
2,000
6.000% Non-Cumulative Perpetual Class A Preferred Stock
32,000
800
800
Series U (1)
5.875% Fixed-to-Floating Non-Cumulative Perpetual Class A
Preferred Stock
Series V (1)
80,000
2,000
2,000
6.000% Non-Cumulative Perpetual Class A Preferred Stock
40,000
1,000
1,000
ESOP
—
—
—
—
—
—
—
—
—
30,000
750
750
26,000
650
650
25,000
625
625
69,000
1,725
1,725
33,600
840
840
80,000
2,000
2,000
32,000
800
800
—
—
—
—
—
—
Cumulative Convertible Preferred Stock
1,252,386
1,252
1,252
—
1,251,287
1,251
1,251
—
—
—
—
—
—
—
—
—
—
Total
11,259,917 $ 23,613
22,214
1,399
11,138,818
$ 20,612
19,213
1,399
(1) Preferred shares qualify as Tier 1 capital.
In January 2015, we issued 2 million Depositary Shares,
each representing a 1/25th interest in a share of Non-Cumulative
Perpetual Class A Preferred Stock, Series U, for an aggregate
public offering price of $2.0 billion. In September 2015, we
issued 40 million Depositary Shares each representing a
1/1,000th interest in a share of the Non-Cumulative Perpetual
Class A Preferred Stock, Series V, for an aggregate public
offering price of $1.0 billion.
See Note 8 (Securitizations and Variable Interest Entities)
for additional information on our trust preferred securities. We
do not have a commitment to issue Series H preferred stock.
240
Wells Fargo & Company
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
Table 18.3: ESOP Preferred Stock
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
2015
2014
2013
2012
2011
2010
2008
2007
2006
Shares issued and outstanding
Carrying value
Dec 31,
Dec 31,
Dec 31,
Dec 31,
Adjustable dividend rate
2015
2014
2015
2014
Minimum
Maximum
220,408
283,791
251,304
166,353
177,614
113,234
28,972
10,710
—
— $
352,158
288,000
189,204
205,263
141,011
42,204
24,728
8,719
220
284
251
166
178
113
29
11
—
—
352
288
189
205
141
42
25
9
8.90%
8.70
8.50
10.00
9.00
9.50
10.50
10.75
10.75
9.90
9.70
9.50
11.00
10.00
10.50
11.50
11.75
11.75
Total ESOP Preferred Stock (1)
Unearned ESOP shares (2)
1,252,386
1,251,287 $
1,252
1,251
$
(1,362)
(1,360)
(1)
(2)
At December 31, 2015 and 2014, additional paid-in capital included $110 million and $109 million, respectively, related to ESOP preferred stock.
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.
Wells Fargo & Company
241
Note 19: Common Stock and Stock Plans
Common Stock
Table 19.1 presents our reserved, issued and authorized shares of
common stock at December 31, 2015.
Table 19.1: Common Stock Shares
Dividend reinvestment and common stock
purchase plans
Director plans
Stock plans (1)
Convertible securities and warrants
Total shares reserved
Shares issued
Shares not reserved or issued
Total shares authorized
Number of shares
9,011,692
825,868
414,005,566
100,652,100
524,495,226
5,481,811,474
2,993,693,300
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, 2015, we had warrants outstanding and
exercisable to purchase 34,816,632 shares of our common stock
with an exercise price of $33.92 per share, expiring on October
28, 2018. We purchased none of these warrants in 2015 or 2014.
Warrants to purchase 3,607,802 and 684,430 shares of our
common stock were exercised in 2015 and 2014, respectively.
These warrants were issued in connection with our participation
in the Troubled Asset Relief Program (TARP) Capital Purchase
Program (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 (Summary of Significant
Accounting Policies).
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), performance units and stock
awards with or without restrictions.
Beginning in 2010, 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.
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; beginning 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. Table 19.2
summarizes the major components of stock incentive
compensation expense and the related recognized tax benefit.
Table 19.2: Stock Incentive Compensation Expense
(in millions)
RSRs
Performance shares
$
Total stock incentive
compensation expense
$
Related recognized tax benefit $
Year ended December 31,
2015
2014
2013
675
169
844
318
639
219
858
324
568
157
725
273
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, 2015, was 214 million.
242
Wells Fargo & Company
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 12 months through the tenth
anniversary of the grant date. Options granted prior to 2005 may
include 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, 2015, none of the options outstanding included a
reload feature.
Restricted Share Rights
A summary of the status of our RSRs and restricted share awards
at December 31, 2015, and changes during 2015 is presented in
Table 19.3.
Table 19.3: Restricted Share Rights
Weighted-
average
grant-date
fair value
Number
Nonvested at January 1, 2015
53,572,149
$
Granted
Vested
Canceled or forfeited
13,363,597
(25,712,018)
(588,936)
Nonvested at December 31, 2015
40,634,792
36.46
55.34
37.39
41.98
42.00
The weighted-average grant date fair value of RSRs granted
during 2014 and 2013 was $36.46 and $35.52, respectively.
At December 31, 2015, there was $686 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 2015,
2014 and 2013 was $1.4 billion, $1.0 billion and $472 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, 2015, the determination of the number of
performance shares that will vest will occur in first quarter of
2016 after review of the Company’s performance by the Human
Resources Committee of the Board of Directors. Beginning 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, 2015,
and changes during 2015 is in Table 19.4, based on the
performance adjustments recognized as of December 2015.
Table 19.4: Performance Share Awards
Weighted-
average
grant-date
fair value (1)
Number
Nonvested at January 1, 2015
9,294,768 $
Granted
Vested
3,530,859
(5,399,517)
Nonvested at December 31, 2015
7,426,110
36.87
45.52
37.75
40.34
(1) Reflects approval date fair value for grants subject to variable accounting.
The weighted-average grant date fair value of performance
awards granted during 2014 and 2013 was $36.87 and $33.56,
respectively.
At December 31, 2015, there was $34 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. The total fair value of
PSAs that vested during 2015, 2014 and 2013 was $299 million,
$262 million, and $168 million, respectively.
Wells Fargo & Company
243
Note 19: Common Stock and Stock Plans (continued)
Stock Options
Table 19.5 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.
Table 19.5: Stock Option Activity
Incentive compensation plans
Options outstanding as of December 31, 2014
Canceled or forfeited
Exercised
Options exercisable and outstanding as of December 31, 2015
Director awards
Options outstanding as of December 31, 2014
Exercised
Options exercisable and outstanding as of December 31, 2015
The total intrinsic value of options exercised during 2015,
2014 and 2013 was $497 million, $805 million and $643 million,
respectively.
Cash received from the exercise of stock options for 2015,
2014 and 2013 was $618 million, $1.2 billion and $1.6 billion,
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.
Table 19.6 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
2013 resulted from the reload feature.
Weighted-
average
exercise price
Number
Weighted-
average
remaining
contractual
term (in yrs.)
Aggregate
intrinsic
value
(in millions)
97,663,200 $
(2,258,720)
(20,084,720)
75,319,760
391,547
(84,657)
306,890
43.40
238.54
30.63
40.96
32.07
30.95
32.37
2.0 $
1,956
1.5
7
Table 19.6: Weighted-Average Per Share Fair Value of Options
Granted
Year ended December 31,
2015
2014
2013
Per share fair value of options
granted
Expected volatility
Expected dividends
Expected term (in years)
Risk-free interest rate
$
$
—
—%
—
—
—%
—
—
—
—
—
1.58
18.3
0.93
0.5
0.1
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 2015, 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 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.
244
Wells Fargo & Company
Table 19.7 presents 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.
Table 19.7: Common Stock and Unreleased Preferred Stock in the Wells Fargo ESOP Fund
(in millions, except shares)
Allocated shares (common)
Unreleased shares (preferred)
Fair value of unreleased ESOP preferred shares
Allocated shares (common)
Unreleased shares (preferred)
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.
Shares outstanding
December 31,
2015
2014
2013
137,418,176
136,801,782
137,354,139
1,252,386
1,251,287
1,105,664
$
1,252
1,251
1,105
$
2015
201
143
Dividends paid
Year ended December 31,
2014
186
152
2013
159
132
The Nonqualified Deferred Compensation Plan for
Independent Contractors, which became effective
January 1, 2002, allowed participants to defer all or part of their
eligible compensation payable to them by a participating
affiliate. The plan was frozen for new compensation deferrals
effective January 1, 2012. The Parent has fully and
unconditionally guaranteed the deferred compensation
obligations of WF Deferred Compensation Holdings, Inc. under
the plan.
Wells Fargo & Company
245
Note 20: Employee Benefits and Other Expenses
Pension and Postretirement Plans
We sponsor a frozen noncontributory qualified defined benefit
retirement plan called the Wells Fargo & Company Cash Balance
Plan (Cash Balance Plan), which covers eligible employees of
Wells Fargo. The Cash Balance Plan was frozen on July 1, 2009
and no new benefits accrue after that date.
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 freeze
discontinued 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). Lump sum payments did not exceed this threshold
in 2015 and 2014. 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
2015. We do not expect that we will be required to make a
contribution to the Cash Balance Plan in 2016; however, this is
dependent on the finalization of the actuarial valuation in 2016.
Our decision of whether to make a contribution in 2016 will be
based on various factors including the actual investment
performance of plan assets during 2016. Given these
uncertainties, we cannot estimate at this time the amount, if any,
that we will contribute in 2016 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.
In 2015 and 2014, the Society of Actuaries (SOA) published
updated mortality tables. The benefit obligations at
December 31, 2015 and 2014, reflect the SOA's updated
mortality tables, which did not have a material effect on these
obligations.
Table 20.1 presents the changes in the benefit obligation
and the fair value of plan assets, the funded status, and the
amounts recognized on the balance sheet.
Table 20.1: Changes in Benefit Obligation and Fair Value of Plan Assets
(in millions)
Change in benefit obligation:
December 31, 2015
December 31, 2014
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
Benefit obligation at beginning of year
$ 11,125
730
1,100
10,198
669
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss (gain)
Benefits paid
Medicare Part D subsidy
Curtailment
Foreign exchange impact
2
429
—
(196)
(676)
—
—
(11)
—
25
—
(25)
(82)
—
—
(1)
6
42
68
(56)
(139)
9
(25)
(3)
1
465
—
1,161
(692)
—
—
(8)
—
27
—
89
(54)
—
—
(1)
982
7
42
73
136
(148)
9
—
(1)
Benefit obligation at end of year
10,673
647
1,002
11,125
730
1,100
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
Foreign exchange impact
Fair value of plan assets at end of year
9,626
(112)
7
—
—
—
82
—
624
2
4
68
9,409
909
7
—
—
—
54
—
645
26
19
73
(676)
(82)
(139)
(692)
(54)
(148)
—
(9)
8,836
—
—
—
9
—
—
(7)
568
9,626
—
—
—
9
—
624
(476)
Funded status at end of year
$
(1,837)
(647)
(434)
(1,499)
(730)
Amounts recognized on the balance sheet at end of year:
Liabilities
$
(1,837)
(647)
(434)
(1,499)
(730)
(476)
246
Wells Fargo & Company
Table 20.2 provides information for pension plans with
benefit obligations in excess of plan assets.
Table 20.2: Pension Plans with Benefit Obligations in Excess
of Plan Assets
(in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Dec 31,
Dec 31,
2015
2014
$ 11,317
11,314
11,855
11,851
8,832
9,626
Table 20.3 presents the components of net periodic benefit
cost and other comprehensive income.
Table 20.3: Net Periodic Benefit Cost and Other Comprehensive Income
December 31, 2015
December 31, 2014
December 31, 2013
Pension benefits
Pension benefits
Pension benefits
Qualified qualified benefits Qualified
Non-
Other
Non-
qualified
Other
benefits Qualified
Non-
qualified
Other
benefits
—
25
—
18
—
13
—
56
(25)
(18)
—
—
(13)
6
42
1
465
(35)
(629)
91
—
—
—
(72)
881
(91)
—
—
—
(4)
(3)
—
(43)
(37)
(23)
4
18
3
—
2
—
27
—
11
—
2
—
40
89
(11)
—
—
(2)
7
42
(36)
(28)
(2)
—
—
(17)
146
28
—
2
—
—
465
(674)
137
—
124
—
52
—
29
—
15
—
3
—
47
11
47
(36)
(1)
(2)
—
—
19
(1,175)
(137)
—
—
(124)
(17)
(15)
—
—
(3)
(341)
1
—
2
—
452
(56)
790
76
176
(1,436)
(35)
(338)
(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
$
2
429
(644)
108
—
—
—
Net periodic benefit cost
(105)
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 credit
Amortization of prior service credit
Settlement (1)
Total recognized in other
comprehensive income
Total recognized in net periodic benefit
cost and other comprehensive
income
560
(108)
—
—
—
$
347
—
(35)
718
116
159
(1,384)
12
(319)
(1) Qualified settlements in 2013 include $123 million for the Cash Balance Plan.
Table 20.4 provides the amounts recognized in cumulative
OCI (pre tax).
Table 20.4: Benefits Recognized in Cumulative OCI
(in millions)
Net actuarial loss (gain)
Net prior service credit
Total
December 31, 2015
December 31, 2014
Pension benefits
Pension benefits
Qualified
$
3,128
(1)
$
3,127
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
168
—
168
(165)
2,677
—
(2)
(165)
2,675
224
—
224
(147)
(20)
(167)
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 2016 is
$141 million. The net prior service credit for other post
retirement plans was fully recognized in 2015 in conjunction
with a curtailment.
Wells Fargo & Company
247
Note 20: Employee Benefits and Other Expenses (continued)
Plan Assumptions
For additional information on our pension accounting
assumptions, see Note 1 (Summary of Significant Accounting
Policies). Table 20.5 presents the weighted-average discount
rates used to estimate the projected benefit obligation for
pension benefits.
Table 20.5: Discount Rates Used to Estimate Projected Benefit Obligation
Discount rate
4.25%
4.25
4.25
4.00
3.75
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
4.00
December 31, 2015
December 31, 2014
Table 20.6 presents the weighted-average assumptions used
to determine the net periodic benefit cost.
Table 20.6: Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost
December 31, 2015
December 31, 2014
December 31, 2013
Pension benefits
Pension benefits
Pension benefits
Non-
Qualified qualified
Other
benefits Qualified
Non-
qualified
Other
benefits Qualified
Non-
qualified
Other
benefits
Discount rate (1)
Expected return on plan assets
4.00%
7.00
3.60
N/A
4.00
6.00
4.75
7.00
4.16
N/A
4.50
6.00
4.38
7.50
4.08
N/A
3.75
6.00
(1) The discount rate for the 2013 qualified pension benefits and for the 2015, 2014, and 2013 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 an average annual increase of
approximately 9.30%, for health care costs in 2016. This rate is
assumed to trend down 0.40%-0.60% per year until the trend
rate reaches an ultimate rate of 5.00% in 2024. The 2015
periodic benefit cost was determined using an initial annual
trend rate of 7.00%. This rate was assumed to decrease 0.25%
per year until the trend rate reached an ultimate rate of 5.00% in
2023. Increasing the assumed health care trend by one
percentage point in each year would increase the benefit
obligation as of December 31, 2015, by $34 million and the total
of the interest cost and service cost components of the net
periodic benefit cost for 2015 by $2 million. Decreasing the
assumed health care trend by one percentage point in each year
would decrease the benefit obligation as of December 31, 2015,
by $30 million and the total of the interest cost and service cost
components of the net periodic benefit cost for 2015 by
$2 million.
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 Table 20.7. 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.
Table 20.7: Projected Benefit Payments
(in millions)
Qualified
Non-
qualified
Future
benefits
Subsidy
receipts
Pension benefits
Other benefits
Year ended
December 31,
2016
2017
2018
2019
2020
$
762
753
737
740
745
61
60
56
53
52
86
87
87
87
87
2021-2025
3,578
224
410
11
12
12
12
12
61
248
Wells Fargo & Company
Fair Value of Plan Assets
Table 20.8 presents the balances of pension plan assets and
other benefit plan assets measured at fair value. See Note 17
Table 20.8: Pension and Other Benefit Plan Assets
(Fair Values of Assets and Liabilities) for fair value hierarchy
level definitions.
Pension plan assets
Carrying value at year end
Other benefits plan assets
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(in millions)
December 31, 2015
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)
Global stocks (5)
International stocks (6)
Emerging market stocks
Real estate/timber (7)
Hedge funds (8)
Private equity
Other
$
5
109
446
3,253
4
—
51
809
226
207
48
463
—
109
—
—
—
499
276
250
378
125
13
161
287
311
1
160
—
66
Total plan investments
$ 2,368
5,889
Net receivables
Total plan assets
December 31, 2014
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)
Global stocks (5)
International stocks (6)
Emerging market stocks
Real estate/timber (7)
Hedge funds (8)
Private equity
Other
$
31
556
127
1
53
833
252
238
47
457
—
121
—
—
—
224
3,622
329
321
284
375
140
17
155
276
412
1
203
—
23
Total plan investments
$ 2,716
6,382
Payable upon return of securities loaned
Net receivables
Total plan assets
—
16
—
4
—
—
—
—
—
—
—
245
71
148
27
511
—
12
—
5
—
—
—
—
—
—
—
265
84
155
52
573
114
3,715
503
280
301
1,187
351
220
209
750
311
355
231
148
93
119
—
—
—
—
—
—
—
—
22
—
—
—
—
2
21
—
182
—
—
118
31
17
—
33
—
—
—
—
—
8,768
143
402
68
$ 8,836
255
4,190
456
327
337
1,208
392
255
202
733
412
387
287
155
75
139
—
61
—
—
—
—
—
—
25
—
—
—
—
2
21
—
115
—
—
102
47
37
—
53
—
—
—
—
—
9,671
227
375
(53)
8
$ 9,626
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23
23
—
—
—
—
—
—
—
—
—
—
—
—
—
—
22
22
140
—
182
—
—
118
31
17
—
55
—
—
—
—
25
568
—
568
160
—
176
—
—
102
47
37
—
78
—
—
—
—
24
624
—
—
624
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
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.
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.
This category covers a broad range of investment styles, including active, enhanced index and passive approaches, as well as style characteristics of value, core and growth
emphasized strategies. Assets in this category are currently diversified across eight unique investment strategies with no single investment manager strategy representing
more than 2.5% of total plan assets.
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.
This category consists of three unique investment strategies providing exposure to broadly diversified, global equity investments, which generally have an allocation of
40-60% in U.S. domiciled equities and an equivalent allocation range in primarily developed market, non-U.S. equities, with no single strategy representing more than
1.5% of total Plan assets.
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.
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).
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.
Wells Fargo & Company
249
Note 20: Employee Benefits and Other Expenses (continued)
Table 20.9 presents the changes in Level 3 pension plan and
other benefit plan assets measured at fair value.
Table 20.9: Fair Value Level 3 Pension and Other Benefit Plan Assets
(in millions)
Year ended December 31, 2015
Pension plan assets:
Long duration fixed income
High-yield fixed income
Real estate/timber
Hedge funds
Private equity
Other
Other benefits plan assets:
Other
Year ended December 31, 2014
Pension plan assets:
Long duration fixed income
High-yield fixed income
International stocks
Real estate/timber
Hedge funds
Private equity
Other
Other benefits plan assets:
Other
Gains (losses)
Balance
beginning
of year
Realized
Unrealized
(1)
Purchases,
sales
and
settlements
(net)
Transfers
Into/
(Out of)
Level 3
Balance
end of
year
$
$
$
$
$
$
$
$
12
5
265
84
155
52
573
22
22
1
—
1
294
152
158
52
658
22
22
—
—
10
4
19
9
42
—
—
—
—
—
9
1
12
2
24
—
—
—
—
8
(5)
(5)
(7)
(9)
—
—
—
—
—
34
4
(3)
1
36
—
—
1
2
(38)
(21)
(21)
(27)
(104)
1
1
1
3
(1)
(72)
(9)
(12)
(3)
(93)
—
—
3
(3)
—
9
—
—
9
—
—
10
2
—
—
(64)
—
—
(52)
—
—
16
4
245
71
148
27
511
23
23
12
5
—
265
84
155
52
573
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.
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 and in interest-bearing bank accounts.
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
highly liquid government securities such as U.S. Treasuries,
limited partnerships valued at the NAV provided by the fund
sponsor and registered investment companies and collective
investment funds described above.
Domestic, Global, 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, collective
investment funds and limited partnerships 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 and collective investment
funds described above.
Hedge Funds and Private Equity – the fair values of hedge funds
are valued based on the proportionate share of the underlying
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.
250
Wells Fargo & Company
Other Expenses
Table 20.10 presents 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.
Table 20.10: Other Expenses
Year ended December 31,
(in millions)
2015
Outside professional services
$
2,665
Operating losses
Outside data processing
Contract services
Travel and entertainment
1,871
985
978
692
2014
2,689
1,249
1,034
975
904
2013
2,519
821
983
935
885
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 1 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. Matching contributions are 100%
vested. The 401(k) Plan includes an employer discretionary
profit sharing contribution feature to allow us to make a
contribution to eligible employees’ 401(k) Plan accounts. Eligible
employees who complete 1 year of service are eligible for profit
sharing contributions. Profit sharing contributions are vested
after 3 years of service. Total defined contribution retirement
plan expenses were $1.1 billion in both 2015 and 2014 and
$1.2 billion in 2013.
Wells Fargo & Company
251
Note 21: Income Taxes
Table 21.1 presents the components of income tax expense.
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
(Other Comprehensive Income)). These associated adjustments
increased OCI by $1.8 billion in 2015.
We have determined that a valuation reserve is required for
2015 in the amount of $358 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, 2015, we had net operating loss carry
forwards with related deferred tax assets of $528 million. If
these carry forwards are not utilized, they will expire in varying
amounts through 2035.
At December 31, 2015, we had undistributed foreign
earnings of $2.0 billion related to foreign subsidiaries. We
intend to reinvest these earnings indefinitely outside the U.S.
and accordingly have not provided $557 million of income tax
liability on these earnings.
Table 21.3 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.
Table 21.1: Income Tax Expense
(in millions)
Current:
Federal
State and local
Foreign
Year ended December 31,
2015
2014
2013
$ 10,822
7,321
4,601
1,669
139
520
112
736
91
Total current
12,630
7,953
5,428
Deferred:
Federal
State and local
Foreign
(2,047)
2,117
4,457
(235)
17
224
13
522
(2)
Total deferred
(2,265)
2,354
4,977
Total
$ 10,365
10,307
10,405
The tax effects of our temporary differences that gave rise to
significant portions of our deferred tax assets and liabilities are
presented in Table 21.2.
Table 21.2: Net Deferred Tax Liability
(in millions)
Deferred tax assets
December 31,
2015
2014
Allowance for loan losses
$
4,363
4,592
Deferred compensation and employee
benefits
Accrued expenses
PCI loans
Net operating loss and tax credit carry
forwards
Other
4,589
1,460
1,816
528
1,448
4,608
1,213
1,935
631
1,700
Total deferred tax assets
14,204
14,679
Deferred tax assets valuation
allowance
Deferred tax liabilities
Mortgage servicing rights
Leasing
Mark to market, net
Intangible assets
Net unrealized gains on investment
securities
Insurance reserves
Other
(358)
(426)
(5,399)
(3,866)
(5,471)
(1,233)
(1,008)
(2,071)
(2,063)
(5,860)
(4,057)
(7,635)
(1,494)
(2,737)
(2,087)
(1,635)
Total deferred tax liabilities
(21,111)
(25,505)
Net deferred tax liability (1) $
(7,265)
(11,252)
(1)
Included in accrued expenses and other liabilities.
252
Wells Fargo & Company
Table 21.3: Effective Income Tax Expense and Rate
(in millions)
Amount
Rate
Amount
Rate
Amount
2015
2014
2013
Rate
Statutory federal income tax expense and rate
$ 11,641
35.0%
$
11,677
35.0%
$
11,299
35.0%
December 31,
Change in tax rate resulting from:
State and local taxes on income, net of federal income tax
benefit
Tax-exempt interest
Tax credits
Life insurance
Leveraged lease tax expense
Other
1,025
(641)
(1,108)
(186)
140
3.1
(1.9)
(3.3)
(0.6)
0.4
(506)
(1.5)
971
(550)
(1,074)
(179)
158
(696)
2.9
(1.6)
(3.2)
(0.5)
0.5
(2.2)
964
(490)
(967)
(173)
302
(530)
3.0
(1.5)
(3.0)
(0.5)
0.9
(1.7)
Effective income tax expense and rate
$ 10,365
31.2%
$
10,307
30.9%
$
10,405
32.2%
The effective tax rate for 2015 includes net reductions in
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 2011 through 2014 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 prior
IRS examinations for the periods 2003 through 2010, and we are
appealing various issues related to IRS examinations of
Wachovia’s 2006 through 2008 tax years. For the 2003 through
2006 Wells Fargo periods and the 2006 through 2008 Wachovia
periods, 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. 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
$600 million to our gross unrecognized tax benefits.
reserves for uncertain tax positions primarily due to audit
resolutions of prior period matters with U.S. federal and state
taxing authorities. The effective tax rate for 2014 included a net
reduction in the reserve for uncertain tax positions primarily due
to the resolution of prior period matters with state taxing
authorities. 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.
Table 21.4 presents the change in unrecognized tax benefits.
Table 21.4: Change in Unrecognized Tax Benefits
Year ended
December 31,
(in millions)
2015
Balance at beginning of year
$
5,002
Additions:
For tax positions related to the current
year
For tax positions related to prior years
Reductions:
For tax positions related to prior years
Lapse of statute of limitations
Settlements with tax authorities
196
225
(413)
(22)
(182)
2014
5,528
412
324
(213)
(50)
(999)
Balance at end of year
$
4,806
5,002
Of the $4.8 billion of unrecognized tax benefits at
December 31, 2015, approximately $3.0 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. As of December 31, 2015 and 2014, we have
accrued approximately $524 million and $660 million for the
payment of interest and penalties, respectively. In 2015, we
recognized in income tax expense a net tax benefit related to
interest and penalties of $79 million. In 2014, we recognized in
income tax expense a net tax benefit related to interest and
penalties of $142 million.
Wells Fargo & Company
253
Note 22: Earnings Per Common Share
Table 22.1 shows earnings per common share and diluted
earnings per common share and reconciles the numerator and
denominator of both earnings per common share calculations.
See Note 1 (Summary of Significant Accounting Policies) for
discussion of private share repurchases and the Consolidated
Statement of Changes in Equity and Note 19 (Common Stock
and Stock Plans) for information about stock and options
activity and terms and conditions of warrants.
2015
$
22,894
1,424
$
21,470
Year ended December 31,
2014
23,057
1,236
21,821
2013
21,878
989
20,889
5,136.5
5,237.2
5,287.3
$
4.18
4.17
3.95
5,136.5
5,237.2
5,287.3
26.7
32.8
13.8
32.9
41.6
12.7
33.1
44.8
6.0
5,209.8
5,324.4
5,371.2
$
4.12
4.10
3.89
Table 22.1: Earnings Per Common Share Calculations
(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
Table 22.2 presents the outstanding options 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.
Table 22.2: Outstanding Anti-Dilutive Options
(in millions)
Options
Weighted-average shares
Year ended December 31,
2015
5.7
2014
8.0
2013
11.1
254
Wells Fargo & Company
Note 23: Other Comprehensive Income
Table 23.1 provides the components of other comprehensive
income (OCI), reclassifications to net income by income
statement line item, and the related tax effects.
Table 23.1: Summary of Other Comprehensive Income
(in millions)
Investment securities:
Net unrealized gains (losses) arising
during the period
Reclassification of net (gains) losses to
net income:
Before
tax
Tax
effect
2015
Net of
tax
Before
tax
Tax
effect
Year ended December 31,
2014
Net of
tax
Before
tax
Tax
effect
2013
Net of
tax
$ (3,318)
1,237
(2,081)
5,426
(2,111)
3,315
(7,661)
2,981
(4,680)
Interest income on investment
securities (1)
(1)
Net (gains) losses on debt securities
(952)
Net (gains) losses from equity
investments
Other noninterest income
Subtotal reclassifications to net
(571)
(6)
—
356
213
3
(1)
(596)
(37)
(593)
(358)
(901)
(3)
(1)
14
224
340
—
(23)
(369)
—
29
(561)
(314)
(1)
—
—
(11)
118
—
—
18
(196)
—
income
Net change
(1,530)
572
(958)
(1,532)
578
(954)
(285)
107
(178)
(4,848)
1,809
(3,039)
3,894
(1,533)
2,361
(7,946)
3,088
(4,858)
1,549
(584)
965
952
(359)
593
(32)
12
(20)
Derivatives and hedging activities:
Net unrealized gains (losses) arising
during the period
Reclassification of net (gains) losses to
net income:
Interest income on investment
securities
Interest income on loans
Interest expense on long-term debt
Other noninterest income
Salaries expense
Subtotal reclassifications
to net income
(3)
(1,103)
17
—
—
1
416
(6)
—
—
(2)
(1)
(687)
(588)
11
—
—
44
—
—
—
222
(17)
—
—
(1)
—
(366)
(426)
27
—
—
91
35
4
—
156
(34)
(13)
(2)
107
119
—
(270)
57
22
2
(189)
(209)
Net change
460
(173)
287
407
(1,089)
411
(678)
(545)
205
(154)
(340)
253
(296)
(328)
Defined benefit plans adjustments:
Net actuarial gains (losses) arising
during the period
Reclassification of amounts to net
periodic benefit costs (2):
(512)
193
(319)
(1,116)
420
(696)
1,533
(578)
955
Amortization of net actuarial loss
Settlements and other
Subtotal reclassifications to net
periodic benefit costs
Net change
122
(8)
114
(398)
(46)
3
(43)
150
76
(5)
71
74
—
74
(248)
(1,042)
(28)
—
(28)
392
46
—
46
151
125
276
(650)
1,809
(57)
(46)
94
79
(103)
(681)
173
1,128
(137)
(12)
(149)
(60)
(5)
(65)
(44)
(7)
(51)
Foreign currency translation adjustments:
Net unrealized losses arising during the
period
Reclassification of net (gains) losses to
net income:
Net gains from equity investments
Other noninterest income
Subtotal reclassifications
to net income
Net change
(142)
(12)
(154)
(54)
(5)
—
(5)
—
—
—
(5)
—
(5)
—
6
6
—
—
—
(5)
—
6
6
(59)
—
(12)
(12)
(56)
—
5
5
(2)
—
(7)
(7)
(58)
Other comprehensive income (loss)
$ (4,928)
1,774
(3,154)
3,205
(1,300)
1,905
(6,521)
2,524
(3,997)
Less: Other comprehensive income (loss)
from noncontrolling interests, net of tax
Wells Fargo other comprehensive
income (loss), net of tax
67
$ (3,221)
(227)
2,132
267
(4,264)
(1)
(2)
Represents net unrealized gains and losses amortized over the remaining lives of securities that were transferred from the available-for-sale portfolio to the held-to-
maturity portfolio.
These items are included in the computation of net periodic benefit cost, which is recorded in employee benefits expense (see Note 20 (Employee Benefits and Other
Expenses) for additional details).
Wells Fargo & Company
255
Note 23: Other Comprehensive Income (continued)
Table 23.2: Cumulative OCI Balances
(in millions)
Balance, December 31, 2012
Net unrealized gains (losses) arising during the period
Amounts reclassified from accumulated other comprehensive
income
Net change
Less: Other comprehensive income from noncontrolling
interests
Balance, December 31, 2013
Net unrealized gains (losses) arising during the period
Amounts reclassified from accumulated other comprehensive
income
Net change
Less: Other comprehensive loss from noncontrolling interests
Balance, December 31, 2014
Investment
securities
$
7,462
(4,680)
(178)
(4,858)
266
2,338
3,315
(954)
2,361
(227)
4,926
Net unrealized gains (losses) arising during the period
(2,081)
Amounts reclassified from accumulated other
comprehensive income
Net change
Less: Other comprehensive income (loss) from
noncontrolling interests
(958)
(3,039)
74
Balance, December 31, 2015
$
1,813
Derivatives
and
hedging
activities
Defined
benefit
plans
adjustments
Foreign
currency
translation
adjustments
Cumulative
other
comprehensive
income
289
(20)
(189)
(209)
—
80
593
(340)
253
—
333
965
(678)
287
—
620
(2,181)
955
173
1,128
—
(1,053)
(696)
46
(650)
—
(1,703)
(319)
71
(248)
—
(1,951)
80
(51)
(7)
(58)
1
21
(65)
6
(59)
—
(38)
5,650
(3,796)
(201)
(3,997)
267
1,386
3,147
(1,242)
1,905
(227)
3,518
(149)
(1,584)
(5)
(154)
(7)
(185)
(1,570)
(3,154)
67
297
256
Wells Fargo & Company
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, merchant payment processing,
institutional fixed-income sales, interest rate, commodity and
equity risk management, online/electronic products such as the
Commercial Electronic Office® (CEO®) portal, insurance,
corporate trust fiduciary and agency services, and investment
banking services. 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.
Wealth and Investment Management (formerly Wealth,
Brokerage and Retirement) provides a full range of personalized
wealth management, investment and retirement products and
services to clients across U.S. based businesses
including Wells Fargo Advisors, The Private Bank, Abbot
Downing, Wells Fargo Institutional Retirement and Trust, and
Wells Fargo Asset Management. We deliver financial planning,
private banking, credit, investment management and fiduciary
services to high-net worth and ultra-high-net worth individuals
and families. We also serve customers’ brokerage needs, supply
retirement and trust services to institutional clients and provide
investment management capabilities delivered to global
institutional clients through separate accounts and the
Wells Fargo Funds.
Other includes items not assigned to a specific 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 and Investment
Management customers served through Community Banking
distribution channels.
Note 24: Operating Segments
We have three reportable operating segments: Community
Banking; Wholesale Banking; and Wealth and Investment
Management (WIM) (formerly Wealth, Brokerage and
Retirement). We define our operating segments by product type
and customer segment and their results 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.
If the management structure and/or the allocation process
changes, allocations, transfers and assignments may change. A
number of business movements that impact operating segment
reporting were implemented in 2015. We realigned our asset
management business from Wholesale Banking to WIM; our
reinsurance business from WIM to Wholesale Banking; and our
strategic auto investment, business banking, and merchant
payment services businesses from Community Banking to
Wholesale Banking. Results for these operating segments were
revised for prior periods to reflect the impact of these
realignments.
Community Banking offers a complete line of diversified
financial products and services to consumers and small
businesses with annual sales generally up to $5 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.
The Community Banking segment also includes the results
of our Corporate Treasury activities net of allocations in support
of other segments and results of investments in our affiliated
venture capital partnerships.
Wholesale Banking provides financial solutions to businesses
across the United States with annual sales generally in excess of
$5 million and to financial institutions globally. Wholesale
Banking provides a complete line of business banking,
commercial, corporate, capital markets, cash management and
Wells Fargo & Company
257
Note 24: Operating Segments (continued)
Table 24.1: Operating Segments
(income/expense in millions, average balances in billions)
2015
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Other (1)
Consolidated
Company
Net interest income (2)
$
29,242 $
14,350 $
3,478 $
(1,769) $
45,301
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 (loss) from noncontrolling interests
2,427
20,099
26,981
19,933
6,202
13,731
240
27
11,554
14,116
11,761
3,424
8,337
143
(25)
12,299
12,067
3,735
1,420
2,315
(1)
13
(3,196)
(3,190)
(1,788)
(681)
(1,107)
—
2,442
40,756
49,974
33,641
10,365
23,276
382
Net income (loss) (3)
2014
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
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)
2015
Average loans
Average assets
Average deposits
2014
Average loans
Average assets
Average deposits
$
13,491 $
8,194 $
2,316 $
(1,107) $
22,894
$
27,999 $
14,073 $
3,032 $
(1,577) $
43,527
1,796
20,159
26,290
20,072
6,049
14,023
337
(382)
11,325
13,831
11,949
3,540
8,409
210
(50)
12,237
11,993
3,326
1,262
2,064
4
31
(2,901)
(3,077)
(1,432)
(544)
(888)
—
1,395
40,820
49,037
33,915
10,307
23,608
551
13,686 $
8,199 $
2,060 $
(888) $
23,057
27,123 $
14,353 $
2,797 $
(1,473) $
42,800
2,841
20,556
27,090
17,748
5,442
12,306
159
(521)
11,494
13,077
13,291
4,364
8,927
175
(16)
11,533
11,486
2,860
1,082
1,778
12
5
(2,603)
(2,811)
(1,270)
(483)
(787)
—
2,309
40,980
48,842
32,629
10,405
22,224
346
12,147 $
8,752 $
1,766 $
(787) $
21,878
475.9
910.0
654.4
468.8
853.2
614.3
397.3
724.9
438.9
355.6
636.5
404.0
60.1
192.8
172.3
52.1
186.1
163.5
(47.9)
(84.8)
(71.5)
(42.1)
(82.5)
(67.7)
885.4
1,742.9
1,194.1
834.4
1,593.3
1,114.1
$
$
$
$
(1)
Includes 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 and Investment Management customers served through Community Banking distribution channels.
(2)
(3)
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.
Represents segment net income (loss) for Community Banking; Wholesale Banking; and Wealth and Investment Management segments and Wells Fargo net income for the
consolidated company.
258
Wells Fargo & Company
Note 25: Parent-Only Financial Statements
The following tables present Parent-only condensed financial
statements.
Table 25.1: 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
Year ended December 31,
2015
2014
2013
$
13,804
15,077
10,612
542
907
199
576
16,028
325
1
1,784
4
932
3,046
12,982
(870)
9,042
526
772
216
1,032
17,623
357
7
1,540
5
797
2,706
14,917
(926)
7,214
23,057
33
848
240
484
12,217
334
5
1,546
15
1,175
3,075
9,142
(570)
12,166
21,878
Net income
$
22,894
Wells Fargo & Company
259
Note 25: Parent-Only Financial Statements (continued)
Table 25.2: 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:
2015
$
22,894
2014
23,057
52
—
(254)
(3,019)
(3,221)
142
12
(633)
2,611
2,132
Total comprehensive income
$
19,673
25,189
2013
21,878
(248)
39
1,136
(5,191)
(4,264)
17,614
Year ended December 31,
Table 25.3: Parent-Only Balance Sheet
(in millions)
Assets
Cash and cash equivalents due from:
Subsidiary banks
Nonaffiliates
Investment securities issued by:
Subsidiary banks
Nonaffiliates
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
Total liabilities and equity
December 31,
2015
2014
$
36,162
4
14,992
8,201
47,363
35,327
169,081
25,638
6,857
$
343,625
$
—
8,135
117,791
24,701
150,627
192,998
$
343,625
43,843
3
10,001
10,753
18,166
35,783
162,806
24,567
6,225
312,147
2,270
6,984
97,275
21,224
127,753
184,394
312,147
260
Wells Fargo & Company
Table 25.4: Parent-Only Statement of Cash Flows
(in millions)
Cash flows from operating activities:
Year ended December 31,
2015
2014
2013
Net cash provided by operating activities
$
12,337
18,019
8,607
Cash flows from investing activities:
Available-for-sale securities:
Sales proceeds
Prepayments and maturities:
Subsidiary banks
Nonaffiliates
Purchases:
Subsidiary banks
Nonaffiliates
Loans:
Net repayments from (advances to) 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 used by investing activities
Cash flows from financing activities:
5,345
1,196
3,606
7,750
—
(12,750)
(2,709)
460
(29,860)
301
(1,283)
714
25
—
(10,025)
—
12
—
(14)
(6,016)
(2,199)
(11,275)
2,526
(1,096)
470
655
(6,700)
1,472
(1,188)
461
(7,698)
(32,032)
(20,392)
Net increase in short-term borrowings and indebtedness to subsidiaries
2,084
2,314
6,732
Long-term debt:
Proceeds from issuance
Repayment
Preferred stock:
Proceeds from issuance
Cash dividends paid
Common stock:
Proceeds from issuance
Repurchased
Cash dividends paid
Excess tax benefits related to stock option payments
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
31,487
(9,194)
2,972
(1,426)
1,726
(8,697)
(7,400)
453
10
12,015
(7,680)
43,846
$
36,166
22,627
(8,659)
2,775
(1,235)
1,840
(9,414)
(6,908)
453
37
3,830
1,457
42,389
43,846
18,714
(13,096)
3,145
(1,017)
2,224
(5,356)
(5,953)
271
114
5,778
6,687
35,702
42,389
Wells Fargo & Company
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 bank regulatory agencies. The Federal Reserve
establishes capital requirements 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).
Table 26.1 presents regulatory capital information for
Wells Fargo & Company and the Bank using Basel III, which
increased minimum required capital ratios, and introduced a
minimum Common Equity Tier 1 (CET1) ratio. Beginning second
quarter 2015, our capital ratios were calculated in accordance
with the Basel III Standardized and Advanced Approaches.
Accordingly, we must report the lower of our CET1, tier 1 and
total capital ratios calculated under the Standardized Approach
and under the Advanced Approach in the assessment of our
capital adequacy. The information presented for 2015 reflects
the transition to determining risk-weighted assets (RWAs) under
the Basel III Standardized and Advanced Approaches with
Transition Requirements from RWAs determined using general
risk-based capital rules (General Approach) effective in 2014.
The Standardized and General Approaches each apply assigned
Table 26.1: Regulatory Capital Information
risk weights to broad risk categories but many of the risk
categories and/or weights were changed by Basel III for the
Standardized Approach and will generally result in higher risk-
weighted assets than from those prescribed for the General
Approach. Calculation of RWAs under the Advanced Approach
differs by requiring applicable banks to utilize a risk-sensitive
methodology, which relies upon the use of internal credit
models, and includes an operational risk component. The Basel
III revised definition of capital, and changes are being phased-in
effective January 1, 2014, through the end of 2021.
The Bank is an approved seller/servicer of mortgage loans
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, 2015, the Bank met these
requirements. Other subsidiaries, including the Company’s
insurance and broker-dealer subsidiaries, are also subject to
various minimum capital levels, as defined by applicable
industry regulations. The minimum capital levels for these
subsidiaries, and related restrictions, are not significant to our
consolidated operations.
Wells Fargo & Company
Wells Fargo Bank, N.A.
Advanced
Approach
Standardized
Approach
General
Approach
Advanced
Approach
Standardized
Approach
General
Approach
Advanced &
Standardized
Approach
Minimum
capital
ratios (1)
December 31,
(in billions, except ratios)
2015
2015
2014
2015
2015
2014
2015
Regulatory capital:
Common equity tier 1
$
144.2
Tier 1
Total
Assets:
164.6
195.2
144.2
164.6
205.6
137.1
154.7
192.9
126.9
126.9
140.5
126.9
126.9
150.0
119.9
119.9
144.0
Risk-weighted
Adjusted average (2)
$ 1,263.2
1,757.1
1,303.1
1,757.1
1,242.5
1,637.0
1,100.9
1,584.3
1,197.6
1,584.3
1,142.5
1,487.6
Regulatory capital ratios:
Common equity tier 1 capital
Tier 1 capital
Total capital
Tier 1 leverage (2)
11.42%
13.03
15.45 *
9.37
11.07
*
12.63
*
15.77
9.37
11.04
12.45
15.53
9.45
11.53
11.53
12.77
8.01
10.60
*
10.60
*
12.52
*
8.01
10.49
10.49
12.61
8.06
4.50
6.00
8.00
4.00
*Denotes the lowest capital ratio as determined under the Basel III Advanced and Standardized Approaches.
(1)
(2)
As defined by the regulations issued by the Federal Reserve, OCC and FDIC, which apply to Wells Fargo & Company and Wells Fargo Bank, N.A.
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
Wells Fargo & Company
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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three-
year period ended December 31, 2015, 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, 2015, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 24, 2016, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.
San Francisco, California
February 24, 2016
Wells Fargo & Company
263
Quarterly Financial Data
Condensed Consolidated Statement of Income - Quarterly (Unaudited)
2015
Quarter ended
2014
Quarter ended
(in millions, except per share amounts)
Dec 31,
Sep 30,
Jun 30, Mar 31,
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Interest income
Interest expense
Net interest income
Provision for credit losses
$12,643
12,445
12,226
11,963
12,183
11,964
11,793
11,612
1,055
988
956
977
1,003
1,023
1,002
997
11,588
11,457
11,270
10,986
11,180
10,941
10,791
10,615
831
703
300
608
485
368
217
325
Net interest income after provision for credit losses
10,757
10,754
10,970
10,378
10,695
10,573
10,574
10,290
Noninterest income
Service charges on deposit accounts
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains (losses) from trading activities
Net gains on debt securities
Net gains from equity investments
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
1,329
3,511
966
1,040
1,660
427
99
346
423
145
52
1,335
3,570
953
1,099
1,589
376
(26)
147
920
189
266
1,289
3,710
930
1,107
1,705
461
133
181
517
155
(140)
1,215
3,677
871
1,078
1,547
430
408
278
370
132
286
1,241
3,705
925
1,124
1,515
382
179
186
372
127
507
1,311
3,554
875
1,090
1,633
388
168
253
712
137
151
1,283
3,609
847
1,088
1,723
453
382
71
449
129
241
1,215
3,412
784
1,047
1,510
432
432
83
847
133
115
9,998
10,418
10,048
10,292
10,263
10,272
10,275
10,010
4,061
2,457
1,042
640
725
311
258
4,035
2,604
821
459
728
311
245
3,936
2,606
1,106
470
710
312
222
3,851
2,685
1,477
494
723
312
248
3,938
2,582
1,124
581
730
338
231
3,914
2,527
931
457
731
342
229
3,795
2,445
1,170
445
722
349
225
3,728
2,416
1,372
490
742
341
243
Other
3,105
3,196
3,107
2,717
3,123
3,117
3,043
2,616
Total noninterest expense
12,599
12,399
12,469
12,507
12,647
12,248
12,194
11,948
Income before income tax expense
Income tax expense
8,156
2,533
8,773
2,790
8,549
2,763
8,163
2,279
Net income before noncontrolling interests
5,623
5,983
5,786
5,884
Less: Net income from noncontrolling interests
48
187
67
80
8,311
2,519
5,792
83
8,597
2,642
5,955
226
8,655
2,869
5,786
60
8,352
2,277
6,075
182
Wells Fargo net income
$ 5,575
5,796
5,719
5,804
5,709
5,729
5,726
5,893
Less: Preferred stock dividends and other
372
353
356
343
327
321
302
286
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
5,203
5,443
5,363
5,461
5,382
5,408
5,424
5,607
$ 1.02
1.00
0.38
1.06
1.05
0.38
1.04
1.03
0.38
1.06
1.04
0.35
1.04
1.02
0.35
1.04
1.02
0.35
1.02
1.01
0.35
1.07
1.05
0.30
Average common shares outstanding
5,108.5
5,125.8
5,151.9
5,160.4
5,192.5
5,225.9
5,268.4
5,262.8
Diluted average common shares outstanding
5,177.9
5,193.8
5,220.5
5,243.6
5,279.2
5,310.4
5,350.8
5,353.3
Market price per common share (1)
High
Low
Quarter-end
$ 56.34
49.51
54.36
58.77
47.75
51.35
58.26
53.56
56.24
56.29
50.42
54.40
55.95
46.44
54.82
53.80
49.47
51.87
53.05
46.72
52.56
49.97
44.17
49.74
(1) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
264
Wells Fargo & Company
Average Balances, Yields and Rates Paid (Taxable-Equivalent basis) - Quarterly (1)(2) - (Unaudited)
(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:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Federal agency mortgage-backed securities
Other debt securities
Total held-to-maturity securities
Total investment securities
Mortgages held for sale (4)
Loans held for sale (4)
Loans:
Commercial:
Commercial and industrial - U.S.
Commercial and industrial - Non U.S.
Real estate mortgage
Real estate construction
Lease financing
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 (4)
Other
Funding sources
Deposits:
Average
balance
Yields/
rates
2015
Interest
income/
expense
Quarter ended December 31,
Average
balance
Yields/
rates
2014
Interest
income/
expense
$ 274,589
0.28% $
195
268,109
0.28% $
68,833
3.33
573
60,383
3.21
34,617
49,300
102,281
21,502
123,783
52,701
260,401
44,656
2,158
28,185
4,876
79,875
340,276
19,189
363
250,445
47,972
121,844
21,993
12,241
454,495
272,871
53,788
32,795
59,505
38,826
457,785
912,280
5,166
1.58
4.37
2.79
5.51
3.26
3.35
3.27
2.18
6.07
2.42
1.77
2.35
3.05
3.66
4.96
3.25
1.97
3.30
3.27
4.48
3.16
4.04
4.28
11.61
5.74
5.83
4.99
4.08
4.82
137
539
712
297
1,009
444
2,129
246
33
170
22
471
2,600
176
5
2,048
239
1,012
182
136
3,617
2,759
579
960
862
571
5,731
9,348
61
19,506
43,891
109,270
24,711
133,981
44,980
242,358
32,930
902
5,586
6,118
45,536
287,894
19,191
6,968
218,297
43,049
112,277
18,336
12,268
404,227
264,799
60,177
29,477
55,457
35,292
445,202
849,429
4,829
1.55
4.30
2.78
5.89
3.36
3.87
3.48
2.25
4.92
2.07
1.81
2.22
3.28
3.90
1.43
3.32
2.03
3.69
4.33
5.35
3.39
4.16
4.28
11.71
6.08
6.01
5.06
4.27
5.30
188
485
76
472
760
364
1,124
438
2,110
187
11
29
27
254
2,364
187
25
1,825
221
1,044
200
164
3,454
2,754
648
870
849
534
5,655
9,109
64
Total earning assets
$ 1,620,696
3.18% $ 12,958
1,496,803
3.31% $ 12,422
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
$
39,082
640,503
29,654
49,806
107,094
866,139
102,915
190,861
16,453
1,176,368
444,328
0.05% $
0.06
0.54
0.52
0.14
0.11
0.05
1.49
2.14
0.36
5
93
41
64
38
241
12
713
88
1,054
40,498
593,940
35,870
56,119
99,289
825,716
64,676
183,286
15,580
1,089,258
407,545
0.06% $
0.07
0.80
0.39
0.15
0.13
0.12
1.35
2.44
0.37
—
$ 1,620,696
0.26
1,054
1,496,803
0.27
6
99
72
55
37
269
19
620
96
1,004
—
1,004
Net interest margin and net interest income on a taxable-equivalent basis (5)
2.92% $ 11,904
3.04% $ 11,418
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
$
17,804
25,580
123,207
$ 166,591
$ 350,670
65,224
195,025
(444,328)
$ 166,591
$ 1,787,287
16,932
25,705
124,320
166,957
324,080
65,672
184,750
(407,545)
166,957
1,663,760
(1)
Our average prime rate was 3.29% and 3.25% for the quarters ended December 31, 2015 and 2014, respectively. The average three-month London Interbank Offered
(2)
(3)
Rate (LIBOR) was 0.41% and 0.24% for the same quarters, respectively.
Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance
amounts represent amortized cost for the periods presented.
Nonaccrual loans and related income are included in their respective loan categories.
(4)
(5)
Includes taxable-equivalent adjustments of $316 million and $238 million for the quarters ended December 31, 2015 and 2014, respectively, primarily related to tax-
exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.
Wells Fargo & Company
265
Glossary of Acronyms
ABS
ACL
ALCO
ARM
ASC
ASU
AUA
AUM
AVM
BCBS
BHC
CCAR
CD
CDO
CDS
CET1
CFTC
CLO
CLTV
CPP
CRE
DOJ
DPD
ESOP
FAS
FASB
FDIC
Asset-backed securities
Allowance for credit losses
Asset/Liability Management Committee
Adjustable-rate mortgage
Accounting Standards Codification
Accounting Standards Update
Assets under administration
Assets under management
GSE
G-SIB
HAMP
HUD
LCR
LHFS
LIBOR
LIHTC
Government-sponsored entity
Globally systemic important bank
Home Affordability Modification Program
U.S. Department of Housing and Urban Development
Liquidity coverage ratio
Loans held for sale
London Interbank Offered Rate
Low-Income Housing Tax Credit
Automated valuation model
LOCOM
Lower of cost or market value
Basel Committee on Bank Supervision
Bank holding company
Comprehensive Capital Analysis and Review
LTV
MBS
MHA
Loan-to-value
Mortgage-backed security
Making Home Affordable programs
Certificate of deposit
MHFS
Mortgages held for sale
Collateralized debt obligation
Credit default swaps
Common Equity Tier 1
U. S. Commodity Futures Trading Commission
Collateralized loan obligation
Combined loan-to-value
CMBS
Commercial mortgage-backed securities
Capital Purchase Program
Commercial real estate
U. S. Department of Justice
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
PCI Loans
Purchased credit-impaired loans
PTPP
RBC
Pre-tax pre-provision profit
Risk-based capital
Employee Stock Ownership Plan
RMBS
Residential mortgage-backed securities
Statement of Financial Accounting Standards
Financial Accounting Standards Board
ROA
ROE
Wells Fargo net income to average total assets
Wells Fargo net income applicable to common stock
Federal Deposit Insurance Corporation
to average Wells Fargo common stockholders' equity
FFELP
Federal Family Education Loan Program
RWAs
Risk-weighted assets
FHA
FHFA
FHLB
Federal Housing Administration
Federal Housing Finance Agency
Federal Home Loan Bank
SEC
S&P
SPE
Securities and Exchange Commission
Standard & Poor’s Ratings Services
Special purpose entity
FHLMC
Federal Home Loan Mortgage Corporation
TARP
Troubled Asset Relief Program
FICO
FNMA
FRB
GAAP
Fair Isaac Corporation (credit rating)
Federal National Mortgage Association
Board of Governors of the Federal Reserve System
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
266
Wells Fargo & Company
Stock Performance
our core loan portfolios increased $62.8 billion from the prior
year. Our core loan portfolio growth included $11.5 billion from
the GE Capital commercial real estate loan purchase and related
financing transaction announced in first quarter 2015. We grew
our investment securities portfolio by $34.6 billion in 2015 and
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 $11.7 billion,
or 5%, during the year. While we believe our liquidity position
continued to remain strong with increased regulatory
expectations, we have added to our position over the past year.
$450 million from the allowance for credit losses, compared with
a release of $1.6 billion a year ago. We did not release or build
our allowance in the last half of 2015 as the credit improvement
in our residential real estate portfolios was offset by higher
commercial allowance reflecting deterioration in our oil and gas
portfolio. Total loans in the oil and gas portfolio were down 6%
These graphs compare the cumulative total stockholder return and total compound annual growth rate
from a year ago and are now less than 2% of our total loans
(CAGR) for our common stock (NYSE: WFC) for the five- and ten-year periods ended December 31, 2015,
outstanding. Approximately $1.2 billion of the allowance at
with the cumulative total stockholder returns for the same periods for the Keefe, Bruyette and Woods (KBW)
December 31, 2015 was allocated to our oil and gas portfolio;
Total Return Bank Index (KBW Nasdaq Bank Index (BKX)) and the S&P 500 Index.
however the entire allowance is available to absorb credit losses
inherent in the total loan portfolio. If oil prices remain low for a
prolonged period of time, there could be additional performance
deterioration in our oil and gas portfolio resulting in higher
criticized assets, nonperforming loans, allowance levels and
ultimately credit losses. Deteriorated performance can take the
form of increased downgrades, borrower defaults, potentially
higher commitment drawdowns prior to default, and
downgraded borrowers being unable to fully access the capital
markets. Furthermore, our loan exposure in communities where
the employment base has a concentration in the oil and gas
sector may experience some credit challenges.
The cumulative total stockholder returns (including reinvested dividends) in the graphs assume the
The strength of our balance sheet during 2015 positioned us
investment of $100 in Wells Fargo’s common stock, the KBW Nasdaq Bank Index and the S&P 500 Index.
Five Year Performance Graph
$220
$200
$240
for the agreement we announced in third quarter 2015 to
purchase GE Capital's Commercial Distribution Finance and
Vendor Finance businesses as well as a portion of its Corporate
Finance business – an acquisition that will help us serve more
markets and meet more of our customers' financial needs. The
acquisition is expected to include total assets of approximately
$31 billion and is expected to close in two phases. The North
American portion, which represents approximately 90% of total
assets to be acquired, is expected to close late in first quarter
2016. The international portion is expected to close in second
quarter 2016. Also, in January 2016 we closed our purchase of
GE Railcar Services, which included $4.0 billion of operating
and capital leases, comprised of 77,000 railcars and just over
1,000 locomotives that were added to our existing First Union
Rail business. During fourth quarter 2015 we issued long-term
debt to partially fund the anticipated closing of these GE Capital
acquisitions.
$ 40
$ 60
$ 80
$180
$160
$120
$140
$100
Future allowance levels may increase or decrease based on a
variety of factors, including loan growth, portfolio performance
and general economic conditions.
In addition to lower net charge-offs, nonperforming assets
(NPAs) through the end of 2015 have declined for 13 consecutive
quarters and were down $2.7 billion, or 17%, from 2014.
Nonaccrual loans declined $1.5 billion from the prior year while
KBW Nasdaq
foreclosed assets were down $1.2 billion from 2014.
Bank Index
S&P 500
Wells Fargo
(WFC)
2011
2010
$ 20
Deposit growth remained strong with period-end deposits
up $55.0 billion from 2014. This increase reflected solid growth
across both our commercial and consumer businesses. We grew
our primary consumer checking customers by 5.6% and primary
small business and business banking checking customers by
4.8% from a year ago (November 2015 compared with November
2014). Our ability to grow primary customers is important to our
results because these customers have more interactions with us
and are significantly more profitable than non-primary
customers.
$100
$115
2012
$91
100
102
118
100
102
77
Ten Year Performance Graph
$220
$200
$180
$160
$100
$120
$140
Credit Quality
$240
Credit quality remained strong in 2015, demonstrating the
benefit of our diversified loan portfolio. Solid performance in
several of our commercial and consumer loan portfolios was
evidenced by losses remaining near historically low levels,
reflecting our long-term risk focus. Net charge-offs of
$2.9 billion were 0.33% of average loans, down 2 basis points
from a year ago. Net losses in our commercial portfolio were
$387 million, or 9 basis points of average loans. Net consumer
losses declined to 55 basis points in 2015 from 65 basis points in
2014. Our commercial real estate portfolios were in a net
recovery position for each quarter of the last three years,
reflecting our conservative risk discipline and improved market
conditions. Losses on our consumer real estate portfolios
declined $497 million, or 44%, from a year ago. The consumer
2010
loss levels reflected the benefit of the improving housing market
and our continued focus on originating high quality loans.
Approximately 67% of the consumer first mortgage portfolio was
112
originated after 2008, when new underwriting standards were
58
implemented.
$115
$100
$117
$103
$105
$100
$ 60
$ 40
$ 20
$ 80
2007
2008
2009
2005
2006
116
100
122
100
117
77
97
91
48
47
Our provision for credit losses in 2015 was $2.4 billion
compared with $1.4 billion a year ago reflecting a release of
2013
$158
157
141
155
154
181
178
2015
2014
$199
$195
Bank Index
13% S&P 500
5-year
CAGR
9% KBW Nasdaq
15% Wells Fargo
Capital
Our capital levels remained strong in 2015, even as we returned
more capital to our shareholders, with total equity increasing to
$193.9 billion at December 31, 2015, up $8.6 billion from the
prior year. We returned $12.6 billion to shareholders in 2015
($12.5 billion in 2014) through common stock dividends and net
share repurchases and our net payout ratio (which is the ratio of
(i) common stock dividends and share repurchases less
issuances and stock compensation-related items, divided by (ii)
net income applicable to common stock) was 59%. During 2015
we increased our quarterly common stock dividend by 7% to
$0.375 per share. In 2015, our common shares outstanding
declined by 78.2 million shares as we continued to reduce our
common share count through the repurchase of 163.4 million
common shares during the year. We also entered into a
$500 million forward repurchase contract with an unrelated
third party in December 2015 that settled in January 2016 for
9.2 million shares. In addition, we entered into a $750 million
forward repurchase contract with an unrelated third party in
January 2016 that settled in first quarter 2016 for 15.9 million
shares. We expect our share count to continue to decline in 2016
as a result of anticipated net share repurchases.
Wells Fargo
(WFC)
S&P 500
We believe an important measure of our capital strength is
KBW Nasdaq
Bank Index
the Common Equity Tier 1 ratio on a fully phased-in basis, which
increased to 10.77% in 2015 from 10.43% a year ago. Likewise,
our other regulatory capital ratios remained strong. See the
“Capital Management” section in this Report for more
information regarding our capital, including the calculation of
9% Wells Fargo
$182
our regulatory capital amounts.
176
10-year
CAGR
7% S&P 500
$133
$230
$226
2012
2013
2014
2015
203
133
200
2011
$104
114
45
59
82
89
90
(1)% KBW Nasdaq
Bank Index
Wells Fargo & Company
31
267
Wells Fargo & Company
Wells Fargo & Company (NYSE: WFC) is a diversified, community-based financial services company with $1.8 trillion in assets. Founded in 1852
and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance
through 8,700 locations, 13,000 ATMs, the internet (wellsfargo.com) and mobile banking, and has offices in 36 countries to support customers
who conduct business in the global economy. With approximately 265,000 team members, Wells Fargo serves one in three households in the
United States. Wells Fargo & Company was ranked No. 30 on Fortune’s 2015 rankings of America’s largest corporations. Wells Fargo’s vision
is to satisfy our customers’ financial needs and help them succeed financially. Wells Fargo perspectives are also available at Wells Fargo Blogs
and Wells Fargo Stories.
Common stock
Wells Fargo & Company is listed and trades on the
New York Stock Exchange: WFC
5,092,128,810 common shares outstanding (12/31/15)
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 2015 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.
Forward-looking statements
This Annual Report contains forward-
looking statements about our future financial
performance and business. Because forward-
looking statements are based on our current
expectations and assumptions regarding the
future, they are subject to inherent risks and
uncertainties. Do not unduly rely on forward-
looking statements as actual results could
differ materially from expectations. Forward-
looking statements speak only as of the date
made, and we do not undertake to update them
to reflect changes or events that occur after
that date. For information about factors that
could cause actual results to differ materially
from our expectations, refer to the discussion
under “Forward-Looking Statements” and “Risk
Factors” in the Financial Review portion of this
Annual Report.
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
8:00 a.m. Mountain Time
Tuesday, April 26, 2016
Hyatt Regency at Gainey Ranch
7500 East Doubletree Ranch Road
Scottsdale, Arizona 85258
Strong for our customers and communities
Company
10th
Biggest Public Company
in the World 1 (2015) Forbes
7th
Most Respected Company
in the World (2015) Barron's
30th
Biggest Company by Revenue
in the U.S. (2015) Fortune
22nd
Most Admired Company
in the World (2015) Fortune
2015 CEO of the Year
Morningstar Inc.
Best Global and U.S. Bank (2015)
The Banker magazine
Best Bank in the U.S.
(2012 – 2015) Euromoney
#1 in Overall Institutional
Satisfaction among Global
Financial Institutions
(2012 – 2015)
FImetrix Global Stats
1 Based on sales, profits, assets, and market value.
268 | 2015 Annual Report
Best Bank for Payments and
Collections (North America)
(2010 – 2015)
Global Finance magazine
Brand
Most Valuable Bank Brand
in World (2013 – 2015)
Brand Finance®
Innovation leadership
Best Digital Bank
in North America
(World's Best Corporate/
Institutional Digital
Banks, 2015)
Global Finance magazine
North America: Best in Mobile
Banking, Best Investment
Services, Best Website
Design, Best Information
Security Initiatives;
Global: Best in Social Media
(World's Best Corporate/
Institutional Digital Banks
in North America, 2015)
Global Finance magazine
Among Top 50 Employers
by Readers' Choice (2015)
CAREERS & the disABLED
Corporate social
responsibility
#1
Largest workplace employee
giving campaign in the U.S.
for seventh consecutive year,
based on 2015 donations
United Way Worldwide
Perfect Score 100
S&P 500 Climate Disclosure
Leadership Index (2015)
Carbon Disclosure Project
#2 in Overall Mobile
Performance, Ease of Use,
and Quality & Availability
(3Q 2015)
Keynote Competitive Research
Diversity
Top Company
#1 for Lesbian, Gay, Bisexual,
and Transgender (LGBT)
Employees (2015) DiversityInc
7th Top Company
For Veterans (2015) DiversityInc
11th Top Company
For Diversity (2015) DiversityInc
8th Best Company
For Latinas (2015) LATINA Style
Perfect Score – 100
Corporate Equality Index
(2016, 13th year)
Human Rights Campaign
Wells Fargo’s extensive network
Washington
227
Oregon
159
Montana
52
Idaho
98
Wyoming
29
North Dakota
28
South Dakota
56
Nebraska
58
Minnesota
225
Iowa
94
Nevada
130
Utah
147
Colorado
220
Kansas
39
Missouri
45
California
1,390
Alaska
51
Arizona
318
New Mexico
101
Oklahoma
18
Arkansas
27
Mississippi
Texas
814
Louisiana
19
23 Alabama
164
Hawaii
4
Florida
775
Number of domestic
locations by state
Wisconsin
93
Michigan
74
Vt.
5
N.H.
14
New York
233
Maine
7
Massachusetts
48
Illinois
129
Indiana
78
Pennsylvania
378
Ohio
89
Kentucky
15
Tennessee
54
W. Virginia
12
Virginia
366
North Carolina
432
South Carolina
175
Georgia
351
D.C.
47
Rhode Island
6
Connecticut
97
New Jersey
381
Delaware
28
Maryland
142
Around the world:
Argentina
Australia
Bahamas
Bangladesh
Brazil
Canada
Cayman Islands
Chile
China
Colombia
Dominican Republic
Ecuador
France
Germany
Hong Kong
India
Indonesia
Ireland
Israel
Italy
Japan
Korea
Luxembourg
Malaysia
Mexico
Philippines
Singapore
South Africa
Spain
Taiwan
Thailand
Turkey
United Arab Emirates
United Kingdom
Vietnam
*Number of domestic and global locations
Locations*
8,700
ATMs
13,000
Customers
70+ million
wellsfargo.com
More than 26 million
active online customers
Mobile banking
More than 16 million
active mobile customers
Wells Fargo Customer
Connection
440 million
customer contacts
annually
In supporting homeowners
and consumers
#1
Retail mortgage lender (2015)
Inside Mortgage Finance
#1
Home loan originator to minority
and low- to moderate-income
borrowers, and in low- to
moderate-income neighborhoods
(2014) HMDA data
#1
Mortgage servicer (2015)
Inside Mortgage Finance
#2
Overall auto lender
(2015 excluding leases)
AutoCount
#1
Used auto lender
(2015)
AutoCount
#1
Provider of private student
loans among banks (2015)
Company and competitor reports
#2
Provider of student loans
overall (2015) Company and
competitor reports
In helping small
businesses
#1
Small business lender
(U.S., in dollars, 2014)
Community Reinvestment Act
government data
#1
SBA 7(a) lender in dollars
and units (2015) Small Business
Administration federal fiscal
year-end data
In insurance
Best Insurance Broker in the U.S.
(2015) Global Finance magazine
In treasury management
#1
Fastest Wholesale Lockbox
Network in the U.S. (Fall 2015)
Phoenix-Hecht Mail Study
In commercial banking
#1
Most new lead banking
relationships with middle-market
companies (2015)
TNS Choice Awards2
In commercial real estate
#1
In total commercial real estate
originations in the U.S. (2015)
MBA Commercial/Multifamily
Mortgage Origination Rankings
#1
Largest servicing portfolio of
commercial real estate loans
in the U.S. (Year-end 2015)
MBA Commercial/Multifamily
Mortgage Servicer Rankings
#1
Affordable housing lender (2015)
MBA Commercial/Multifamily
Originations Rankings
#1
U.S. Bank Lender of the Year
(2014 – 2015) Real Estate
Capital Awards
In wealth and
investment management
#2 in U.S.
Annuity sales (2014)
Transamerica Roundtable Survey
#3 in U.S.
Full-service retail brokerage
provider (4Q15) Company and
competitor reports
#4 in U.S.
Wealth management provider,
assets under management of
accounts greater than $5 million
(2015) Barron’s
#6 in U.S.
IRA provider (4Q15)
Cerulli Associates
#8 in U.S.
Institutional retirement plan
record keeper, based on
assets as of 12/31/14 (2015)
PLANSPONSOR magazine
#9 internationally
Family wealth provider (2014)
Bloomberg
2 2015 TNS Choice Awards recognize banks and other financial service providers that outperform their competitors in acquiring, retaining, and developing customers.
2015 Annual Report | 269
Our Vision:
We want to satisfy our customers’ financial needs and
help them succeed financially.
Nuestra Visión:
Queremos satisfacer las necesidades financieras de
nuestros clientes y ayudarles a alcanzar el éxito
financiero.
Notre Vision:
Satisfaire les besoins financiers de nos clients et les
aider à réussir financièrement.
© 2016 Wells Fargo & Company. All rights reserved.
Deposit products offered through Wells Fargo Bank, N.A. Member FDIC.
CCM6469 (Rev 00, 1/each)
Together we’ll go far