Washington221Oregon154Idaho98Montana55Colorado216North Dakota34South Dakota65Nebraska59California1340Nevada122Utah135Wyoming34Arizona303New Mexico103Kansas34Oklahoma20Texas819Minnesota216Iowa101Wisconsin94Michigan68Missouri40Illinois115Indiana70Ohio78Kentucky13Tennessee53Arkansas25Louisiana23Mississippi28Alabama159Georgia336Florida764South Carolina178North Carolina398Virginia345W. Virginia10 Pennsylvania359New York198Maine5N.H.10Vt.6New Jersey368Massachusetts40Rhode Island8Connecticut97D.C.41Maryland132Hawaii10Alaska62Delaware26Number of domestic locations by state Contents
2 | Letter from Chair of the Board
6 | Letter from Chief Executive Officer and President
18 | Rebuilding Trust
18 | Finding a forever home
20 | Making your phone a ‘control tower’
22 | School expansion is an ‘odyssey’
24 |
It starts just by listening
26 | Growth at the grocery — and beyond
28 |
Investments are a mother’s gift
30 | Small business, big impact
32 | Planting seeds for the next generation
34 | Operating Committee and Other Corporate Officers
35 | Board of Directors
36 | 2017 Corporate Social Responsibility Performance Highlights
37 | 2017 Financial Report
- Financial review
- Controls and procedures
- Financial statements
- Report of independent registered
public accounting firm
279 | Stock Performance
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Cover: In Florida, customer Alexandra Wilkinson, right, has a conversation
about her finances with Personal Banker Nicole Allegretto. Learn more on
page 24.
2017 Annual Report
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Elizabeth A. Duke
Chair, Board of Directors
Wells Fargo & Company
Dear fellow shareholders,
am honored to serve as chair of
the board of directors of Wells Fargo,
a company with a long history of success
and a unique opportunity to learn from
its challenges and become better,
stronger, and more customer-
focused than ever before.
For that to happen, we must embrace change.
Our CEO, Tim Sloan, has been relentless
in making the kinds of changes that are required
for us to achieve our six shared goals — namely,
for Wells Fargo to be the financial services leader
in customer service and advice, team member
engagement, innovation, risk management,
corporate citizenship, and shareholder value.
Tim writes in his CEO letter (page 6) about
the transformation he is leading, and I would
like to highlight some of the actions the board
of directors has taken to enhance our governance
and oversight of Wells Fargo. Many of these actions
will help us satisfy the requirements of the consent
order that the company entered into with the
Board of Governors of the Federal Reserve
System on Feb. 2, 2018.
The board recognizes that we must continue
to strengthen and enhance our oversight
and risk management practices. Our board
is committed to meeting the expectations
of our regulators and protecting and serving
the interests of our shareholders, customers,
team members, and communities. To support
these efforts, in recent months we have made
significant changes to board composition,
reconstituted several board committees,
amended committee charters, and worked with
Wells Fargo senior management to improve the
reporting and analysis provided to the board.
These actions were informed by rigorous self-
examination. The board’s independent directors
engaged in a comprehensive, independent
investigation of Wells Fargo’s retail banking
sales practices and drew important conclusions.
In addition, the board conducted a thoughtful and
deliberate self-evaluation of its own effectiveness,
facilitated by Mary Jo White, a senior partner
at Debevoise & Plimpton LLP and former chair
of the Securities and Exchange Commission.
Many of the changes we made also reflected
the feedback we received as part of the
company’s long-standing investor engagement
program. Following my election as board
chair, I met with many of our shareholders
to discuss our progress and listen to their
feedback. To help provide insights from
a stakeholder perspective, including insights
on current and emerging issues relevant
to the company, we formed a Stakeholder
Advisory Council. It includes seven members,
all external, representing groups focused
on consumer banking, fair lending, the
environment, human rights, civil rights,
and governance. Tim and I began meeting
with this group in December 2017. The council's
feedback has proven valuable in informing
how we can be responsive to our stakeholders
and assess our progress, and I look forward
to continuing our engagement in the future.
Board composition and capabilities
At our 2017 annual meeting, Wells Fargo
shareholders sent the entire board a clear
message. The board heard that message and,
as part of our response, we took a number of
actions to refresh the board, including electing
four new independent directors and announcing
the retirement of three long-serving directors
who retired at the end of 2017. In total,
we elected six new independent directors —
Celeste Clark, Theodore Craver, Maria Morris,
Karen Peetz, Juan Pujadas, and Ronald Sargent
— and five retired in 2017. As we announced in
February 2018, and in furtherance of our board
succession planning process, three additional
directors are expected to retire by the date of
our 2018 Annual Meeting of Shareholders and
a fourth by the end of 2018. We are taking great
care, as part of our board refreshment process,
to appropriately balance new perspectives
with the experience of existing directors while
undergoing an orderly transition of roles and
responsibilities on the board and its committees.
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Our new directors bring a broad range
of capabilities, including expertise in financial
services, risk management, technology, human
capital management, finance and accounting,
corporate responsibility, and regulatory matters.
Throughout the transition, the board has also
maintained its focus on diversity, and I am proud
that of our six new directors elected in 2017,
four are women or people of color.
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Risk oversight
Understanding that effective risk
management protects and benefits all
stakeholders, the board has made several
important changes so that risks are properly
identified, evaluated, and escalated. These
fall into two main categories: changes in
board committee composition and oversight
responsibilities, and enhancements to
management reporting.
Committee composition
and oversight responsibilities
We reconstituted our Risk Committee
to add new perspectives and expertise.
Karen Peetz, retired president of The Bank
information security, and financial crimes
risk programs under the Risk Committee and
(2) maintain oversight of financial reporting,
the company’s independent auditor, and other
audit-related activities under the Audit and
Examination Committee. We also expanded
the Human Resources Committee’s oversight
responsibilities to include human capital
management, ethics, and culture.
Reporting practices and oversight
Applying key learnings from our investigation
into sales practices, we have made significant
changes to the way management escalates
risk issues and reports them to the board.
The company has focused on examining
business practices across the company
by using third-party experts to conduct
independent reviews of business and
risk practices. In addition, where we identify
an issue, management is conducting a root
cause analysis, holding individuals accountable
when appropriate, changing processes (and in
We have made significant changes
to the way management escalates risk
issues and reports them to the board.
of New York Mellon, was appointed
chair of the Risk Committee; Juan Pujadas,
a retired principal of PwC, joined the committee
in 2017; and Maria Morris, a retired MetLife
executive, joined early in 2018. Wells Fargo
is classified as a Systemically Important
Financial Institution (SIFI), and all three join
me in bringing experience with the regulatory
expectations, especially in risk management,
of SIFIs. Suzanne Vautrinot, a retired major
general in the U.S. Air Force responsible for
its cyber command and network operations,
also joined the Risk Committee, providing
it with additional cyber expertise.
The charters of the Risk Committee and the
Audit and Examination Committee were
amended to (1) consolidate oversight of the
company’s compliance, operational, technology,
some cases, changing business models),
and most important, assessing and
remediating customer harm. The board
has set clear expectations that, as issues
are identified, they will be reported
promptly to the board and our regulators.
At the same time, we enhanced our oversight
of conduct risk, including sales practice risk,
through the company’s Conduct Management
Office. Created to consolidate internal
investigations, EthicsLine and ethics oversight,
complaints oversight, and sales practice
oversight, the Conduct Management Office
reports regularly to the Risk Committee
on its activities and to the Human Resources
Committee on matters related to team members.
In addition, the full board receives updates
at least twice a year from this office.
2017 Annual Report
In appreciation
At the end of 2017, three long-serving
directors — Stephen Sanger, Cynthia Milligan,
and Susan Swenson — retired from the board.
On behalf of the entire board of directors,
I want to thank Steve for his tireless work
as chairman. With a steady determination,
he led us to the necessary changes I have
outlined here. I would also like to recognize
Cynthia and Sue for their many contributions
and service to the board and company.
Cynthia and Sue retired with a combined
44 years on the board, a tribute to Wells Fargo’s
long-standing commitment to gender diversity
on the board and an inspiration to leaders of
the future.
And to you, our shareholders, thank you for
your continued investment in our company.
We recognize the commitment that you,
as investors in Wells Fargo, have made in the
company. We are confident that the optimistic
leadership provided by our CEO, combined
with the operational and cultural changes
we have made and are making at the company
and on the board, will mark 2018 as a positive
inflection point on our quest to rebuild trust
and become a better company. We greatly
value and appreciate your investment.
Sincerely,
Elizabeth A. Duke
Chair, Board of Directors
Wells Fargo & Company
February 15, 2018
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To fulfill its broader charter responsibilities,
the Human Resources Committee receives
reports on matters involving team members,
including reports related to leadership planning,
training and development, compensation and
benefits, culture, ethics, and the company’s code
of ethics and business conduct. The committee
continues to oversee the company’s incentive
compensation risk management program, and its
scope was expanded in 2017 to include a broader
population of team members and incentive plans.
We will continue to make changes in 2018
to further enhance the board’s effectiveness
in carrying out its oversight and governance
of the company, consistent with the Federal
Reserve consent order.
Financial performance
Even as we reorganize for better risk
oversight, we remain focused on the financial
performance of the company. I would characterize
the company’s financial performance in 2017
as solid. We ordinarily would have expected
to see more earnings growth; however, taking
into consideration the reputation challenges
and significant legal and regulatory expenses
resulting from sales practices and other matters,
we consider it positive that we maintained
profitability and a return on equity that ranks
near the top of our peer group. Nevertheless,
we all know that we can do better.
Much of the work underway to improve
risk management and controls will benefit
the customer experience and should lead
to a reduction in overall operating expenses
going forward. We also expect that investments
in innovation will pay off in revenue growth and
expense reduction. Finally, a disciplined process
is underway to consolidate functions across the
enterprise and simplify procedures and systems,
resulting in significant cost savings and improved
effectiveness.
Our capital levels remained strong, and we
were able to return $14.5 billion to shareholders
through common stock dividends and net share
repurchases in 2017, up 16 percent from 2016.
We continue to believe that our diversified
business model, nationwide franchise, and
investment in innovation — along with our
commitment to the six goals I mentioned earlier
— will create long-term value for our investors.
2017 Annual Report
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Timothy J. Sloan
Chief Executive Officer and President
Wells Fargo & Company
his was a year of transformation at Wells Fargo. We achieved
a great deal in 2017 and look forward to building on our momentum
in the months ahead.
Our top priority remains rebuilding the trust of our customers, team members,
communities, regulators, and shareholders. We have made foundational changes
to identify and fix problems so they do not happen again and achieved significant
progress in our commitment to make things right for our customers and build
a better bank. Our transformation is grounded in our vision of satisfying our
customers’ financial needs and helping them succeed financially. While we have
more work to do, I assure you that the Operating Committee and I are fully
committed to building on our accomplishments. In addition, we take very
seriously the consent order we entered into with the Board of Governors of the
Federal Reserve System in February 2018, and we will work diligently,
yet swiftly, to meet the requirements.
In response to feedback from our team, we introduced a streamlined Vision,
Values & Goals of Wells Fargo in late 2017 — replacing what previously
was a 37-page expression of our culture. Today the wallet-sized booklet focuses
exclusively on our guiding principles and goals, clearly expressing the beliefs
that guide every team member as we work together to build the best Wells Fargo
possible:
• Our consistent vision of helping customers succeed financially.
• Our five values, which articulate what’s most important to us: what’s right
for customers, people as a competitive advantage, ethics, diversity and
inclusion, and leadership.
• Our six goals: becoming the financial services leader in customer service
and advice, team member engagement, innovation, risk management,
corporate citizenship, and shareholder value.
Our Operating Committee is committed to ensuring that our Vision, Values
& Goals are embedded in everything we do and in every decision we make,
and more than 260,000 team members bring it all to life.
7
In 2017 we added two new senior leaders to our Operating Committee. In March,
Allen Parker joined Wells Fargo as general counsel, after Jim Strother announced
his retirement. Allen has a distinguished career as one of the country’s leading
practitioners of banking and finance law as a partner, and subsequently managing
partner, at Cravath, Swaine and Moore LLP. We have benefited immensely from his
2017 Annual ReportTo our owners,T
8
experience and advice. In July, Jon Weiss
became head of Wealth and Investment
Management when David Carroll retired.
Jon had been head of Wells Fargo Securities,
and his significant and diverse expertise
in financial services — spanning capital markets,
advisory, and investment banking — will ensure
we continue to deliver market-leading
investment advice and services to our clients.
Another change we have made is to
consolidate leadership of the Community
Bank and Consumer Lending under Mary
Mack. This change will support our consumer
strategy — our approach that seeks to deliver
an outstanding customer experience by
recognizing the distinct needs of each customer
segment and that extends across business lines
and products. In January 2018, Chief Risk Officer
Mike Loughlin announced his intention to retire
after 36 years with the company. Mike is staying
on to assist with the transition to his yet-to-be
named successor. I wish to thank Jim, David,
and Mike for their leadership and tremendous
contributions to Wells Fargo over many years.
I am grateful to the board of directors for their
support and for the strong leadership of Stephen
Sanger and Betsy Duke during the past year.
With their experience and active involvement,
Steve and Betsy have been indispensable as
we worked to rebuild trust and grow stronger.
As Betsy outlines in her letter (page 2), the
board has undergone a significant evolution,
including adding new members, making
changes to the leadership and composition
of the board’s committees, and strengthening
oversight and reporting.
Our actions
The first step toward building a better
Wells Fargo was to take actions to address
our challenges. We have acted to fix what
was wrong, make things right, and ensure
that such problems do not happen again.
On Feb. 2, 2018, we entered into a consent
order with the Board of Governors of
the Federal Reserve related to the board’s
governance oversight and the company’s
compliance and operational risk. Under
the terms of the consent order, the company
will submit plans to the Federal Reserve
within 60 days that detail our completed
and planned actions to further enhance
the board’s governance oversight and the
company’s compliance and operational risk
management program. After Federal Reserve
approval, the company will engage independent
third parties to conduct a review to be completed
no later than Sept. 30, 2018.
Until the third-party review is completed
to the satisfaction of the Federal Reserve,
we are required to hold our total consolidated
assets at Dec. 31, 2017, levels. Fortunately,
our balance sheet provides us with flexibility
to manage within the asset cap and continue
to serve customers.
The consent order is not related to any new
matters but instead to prior issues in which
we have already made significant progress.
The Federal Reserve acknowledged our progress,
and we agree that there is more work to do. As we
do with all regulatory matters, we take the consent
order very seriously, and we are confident in our
ability to meet the requirements while continuing
to serve customers’ financial needs.
Some of the broader changes we have
made across our company following our
sales practices settlement in September 2016
include eliminating product sales goals for
retail bankers who serve customers in branches
and call centers; implementing a new incentive
compensation program focused on customer
experience, stronger oversight and controls,
and team versus individual rewards within the
retail bank; centralizing key enterprise staff
functions like Human Resources and Finance;
and strengthening our risk and compliance
controls as we further our cohesive approach
to managing risk companywide. We also
established a Conduct Management Office
to centralize the way we oversee ethics at
Wells Fargo (including our internal EthicsLine)
as well as how we handle internal investigations,
complaints, and sales practices oversight.
We simplified and streamlined the Community
Bank’s leadership structure so we can continue
to put our focus and resources on what matters:
the unique needs of customers, the branch team
member experience, and our business priorities.
This new structure is more efficient, improves
risk management, and brings Community Bank
leaders closer to customers and front-line
team members.
Other changes in our Community Bank include
an automatic notification to any customer who
opens a new personal or small business checking
2017 Annual Report
account, savings account, or credit card. We have
also implemented a robust “mystery shopper”
program encompassing 15,000–18,000 visits
a year, and our independent internal Community
Banking Risk Management team completed
450 unannounced conduct risk reviews during
2017 to evaluate retail branch sales and service
activities to ensure customers received only the
products and services they requested.
We are committed to making things right
for any customer who was financially harmed
by unacceptable sales practices — regardless
of when they occurred. We reimbursed
customers who incurred fees or financial
harm from potentially unauthorized accounts
identified through an extensive third-party
for mortgage interest rate lock extensions
requested between Sept. 16, 2013, and Feb. 28,
2017, and to refund, with interest, customers
who believe they shouldn’t have paid those
fees. We also changed how we manage the
mortgage interest rate lock extension process
by establishing a centralized review team
in March 2017.
I am pleased and optimistic about the
actions we took in 2017 and am confident we
will be able to resolve the matters included
in the Federal Reserve consent order while
we continue to serve customers, support team
members, and help our local communities.
I can say without reservation that
Wells Fargo today is a better company
than it was a year ago, and I am confident
we will be even better a year from now.
account review. We’ve conducted broad outreach
and worked directly with customers to resolve
issues through our complaints process and
free mediation services. And we are in the
final stages of completing the actions required
by a $142 million class-action settlement to make
things right for customers impacted by improper
sales practices.
As part of our transformation, we committed
to a thorough review of the products we offer
and the internal procedures we use to get things
done. When we uncover anything that may
be questionable, we address it. For example,
we made fundamental changes to our auto
lending business and have begun to remediate
customers who may have been financially
harmed by issues related to Collateral
Protection Insurance policies. These were
policies purchased through a third-party
vendor on their behalf where the bank was
unable to determine whether the customer
maintained insurance covering physical damage
to the vehicles that secured their loans.
Additionally, we are working to reach out
to all home lending customers who paid fees
We still have work to do. We have put the
right leaders in the right roles to drive
that work, and together we are focused
on rebuilding the trust of our stakeholders
and becoming a stronger company.
I can say without reservation that
Wells Fargo today is a better company
than it was a year ago, and I am confident
we will be even better a year from now.
Financial report
Our financial results in 2017 reflected the
strength of our diversified business model
as well as the strides we are making in
transforming our company. Once again,
we delivered solid financial performance
for shareholders. Wells Fargo generated
$22.2 billion in net income, or $4.10
of diluted earnings per common share,
in 2017, an increase of 1 percent and
3 percent, respectively, from 2016.
Revenue grew modestly from $88.3 billion
in 2016 to $88.4 billion in 2017, as 4 percent
growth in net interest income was
predominately offset by a decrease
in noninterest income.
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2017 Annual Report
Our performance benefited from a healthy
economy and our disciplined credit risk
management. Credit quality remained
strong, and our loan portfolio continued
to be the largest of all U.S. banks, with
$956.8 billion in outstanding loans.
Net charge-offs of 0.31 percent of average
loans remained at historic lows. Average
deposits grew by 4 percent to a record
$1.3 trillion.
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Client assets in Wealth and Investment
Management reached a record $1.9 trillion.
Debit card purchase volume increased
6 percent over 2016, and balances in our
consumer general purpose credit card
portfolio grew 6 percent. We also set a record
for new financings in Wells Fargo Capital
Finance in 2017, illustrating the benefit of
the GE Capital acquisition and our effective
collaboration across our Wholesale Banking
businesses.
We continue to enjoy strong liquidity and
capital levels. We ended 2017 with total equity
of $208.1 billion, Common Equity Tier 1 capital
of $154.0 billion, and a Common Equity Tier 1
capital ratio (fully phased-in) of 11.98 percent1,
which is well above our regulatory minimum of
9 percent and our internal target of 10 percent.
As we transform into a better, stronger
Wells Fargo, we are pursuing a $4 billion
expense-reduction target by driving cost
savings and developing more effective
processes. This work, led by Chief Financial
Officer John Shrewsberry, affects nearly every
area of the company. We expect to achieve
these savings through a range of initiatives,
including centralization and optimization
of similar work in staff and business groups,
rigorous control of professional services
and third-party expenses, consolidation of
corporate properties, and a reduction in travel.
The first $2 billion target by the end of 2018
is being reinvested into our business to fund
improvements in a range of programs, including
those that are transforming and modernizing
compliance, technology, risk management,
cybersecurity, and data; the second $2 billion
target by the end of 2019 is expected to drop
to our bottom line.
Data modernization is a significant element in
driving efficiency at Wells Fargo. It encompasses
reducing the number of internal platforms
and databases we manage, consolidating single-
customer data from multiple businesses into
one place, and improving fraud detection based
on aggregated information. In addition to
making us more streamlined and effective,
data modernization also can increase the speed
with which we bring innovative new products
and services to market. In the end, we believe that
using data and technology to help our customers
better manage their finances will enable us
to grow and build more long-term relationships.
Our transformation
To focus our transformation efforts, we have
established the six long-term goals mentioned
earlier that our entire company can rally around.
We believe these can make Wells Fargo over time
not just a leader but the financial services leader
in customer service and advice, team member
engagement, innovation, risk management,
corporate citizenship, and shareholder value.
We have good news to report in each
of these areas.
Customer service and advice
Whether we are working with an individual,
a family, a small business, a growing company,
a public institution, or a global firm, we want
to know and understand our customers and
their financial goals. Then, to help them
be financially successful, we want to provide
best-in-class service and guidance that will
help them reach their goals.
Our diversified business model enables
us to advise and serve our customers at every
step of their financial lives. Take Pam and Larry
Hall of St. Paul, Minnesota, who three decades
ago started a company called Logistics Planning
Services (LPS), which facilitates the shipping
of goods between different points. Pam was
a checking account customer, and she turned
to our Business Banking Group, which took care
of LPS as it grew. Over the years, the Halls turned
to Wells Fargo for advice, financing, and
services that helped their business succeed.
The Halls decided to sell their business last
spring, and now they have transitioned from
being Business Banking customers to working
with Wealth Management as they move to
the next phase of their lives. The Halls’ story
illustrates how we are at our best when we work
1 For more information on our regulatory capital and related ratios, please see the “Financial Review — Capital Management” section in this Report.
2017 Annual Report
Our Performance
$ in millions, except per share amounts
2017
2016
% 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)
Return on average tangible common equity (ROTCE)1
Efficiency ratio2
Total revenue
Pre-tax pre-provision profit3
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 deposits4
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
Tangible common equity1
Capital ratios5:
Total equity to assets
Risk-based capital6:
Common Equity Tier 1
Tier 1 capital
Total capital
Tier 1 leverage
Common shares outstanding
Book value per common share7
Tangible book value per common share1,7
Team members (active, full-time equivalent)
$
22,183
20,554
4.10
1.15%
11.35
13.55
66.2
88,389
29,905
1.540
4,964.6
5,017.3
$
$
956,129
1,933,005
1,304,622
758,271
2.87%
$
416,420
956,770
11,004
26,587
1,951,757
1,335,991
183,134
206,936
208,079
153,730
10.66%
12.28
14.14
17.46
9.35
4,891.6
37.44
31.43
262,700
$
21,938
20,373
3.99
1.16
11.49
13.85
59.3
88,267
35,890
1.515
5,052.8
5,108.3
949,960
1,885,441
1,250,566
732,620
2.86
407,947
967,604
11,419
26,693
1,930,115
1,306,079
176,469
199,581
200,497
146,737
10.39
11.13
12.82
16.04
8.95
5,016.1
35.18
29.25
269,100
1
1
3
(1)
(1)
(2)
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(17)
2
(2)
(2)
1
3
4
4
-
2
(1)
(4)
-
1
2
4
4
4
5
3
10
10
9
4
(2)
6
7
(2)
1 Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, and goodwill and certain identifiable
intangible assets (including goodwill and intangible assets associated with certain of our nonmarketable equity investments and held-for-sale assets, but excluding mortgage
servicing rights), net of applicable deferred taxes. The methodology of determining tangible common equity may differ among companies. Management believes that return
on average tangible common equity and tangible book value per common share, which utilize tangible common equity, are useful financial measures because they enable
investors and others to assess the Company’s use of equity. For additional information, including a corresponding reconciliation to GAAP financial measures, see the
“Financial Review – Capital Management – Tangible Common Equity” section in this Report.
2 The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
3 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.
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5 See the “Financial Review – Capital Management” section and Note 27 (Regulatory and Agency Capital Requirements) in this Report for additional information.
6 The risk-based capital ratios were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III with Transition Requirements.
The risk-based capital ratios were all lower under the Standardized Approach for 2017. The total capital ratio was lower under the Advanced Approach and the other ratios
were lower under the Standardized Approach for 2016.
7 Book value per common share is common stockholders’ equity divided by common shares outstanding. Tangible book value per common share is tangible common equity
divided by common shares outstanding.
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together, focus on our customers’ specific needs,
and build long-term relationships to support
them as they grow. This kind of relationship
banking is a hallmark of our company.
A key element of rebuilding trust for
customers and team members in our
Community Bank is Change for the Better,
a new framework that seeks to reshape and
improve the Wells Fargo experience. Change
for the Better includes new systems, processes,
and tools introduced in phases. We have already
devoted more than 300,000 hours of training
to implementing the first phase of change.
Among many other improvements, Change
for the Better empowers team members to
have more meaningful conversations with
customers about their financial goals
(page 24) and to solve problems for them
on the spot. We also are increasing the digital
offerings in our branches so both bankers and
customers can benefit from speed, convenience,
and aggregated financial information. Change
for the Better’s first phase of improvements
launched in September 2017, and we have
received positive feedback from customers
and team members about the experience
we are providing.
We also have made a number of customer-
friendly changes to help customers better
manage their accounts. For example, in March
we introduced automatic zero balance alerts,
and we now send more than 18 million real-time
alerts a month, enabling our customers to make
a deposit or transfer so they don’t overdraw their
account. In November, we introduced Overdraft
RewindSM, which in its first two months helped
more than 350,000 direct-deposit customers
avoid overdraft charges by including direct
deposits received by 9 a.m. the next day in
a re-evaluation of the prior day’s transactions
which resulted in a fee.
We continue to expand our offerings for
small business customers. Wells Fargo
is training and hiring team members:
More than 11,000 of our branch bankers have
completed our Business Advocate Program
training, and we are expanding our teams
that serve small businesses with $2 million
to $5 million in annual revenue. Through
Wells Fargo Works for Small Business®,
we are delivering a wide range of financial
resources, guidance, and services that will
help small businesses take the next step
toward their goals. Today, wellsfargoworks.com
includes a Business Plan Tool, giving business
owners a way to create and update a business
plan, a Business Credit Center to make it easier
to find credit options and increase understanding
of how credit decisions are made, and a new
Marketing Center to help address the marketing
needs of small business owners.
Our Wholesale Banking team, under the
leadership of Perry Pelos, is one of the largest
sources of financing to help maintain and grow
the country’s essential infrastructure. Through
lending and underwriting bonds, we provide
funding sources for roads, bridges, airports,
ports, water and sewer systems, not-for-profit
hospitals, affordable housing, higher education,
and K-12 schools nationwide. As an example,
in December 2017 we served as lead underwriter
for a $929 million financing for Miami-Dade
County to improve its water and sewer system
with infrastructure that is critical to sanitary
sewer and clean water efforts.
In every line of business, we are taking a hard
look at the advice and service we are providing
and asking ourselves, “How can we do better?”
Whether it’s through additional training, more
readily available data, or an entirely new
customer service model, we are focused
on how we can help our customers every day.
Team member engagement
Team members are our most valuable resource
and a key competitive advantage for Wells Fargo.
We cannot transform into a better, stronger
Wells Fargo without their talent and dedication.
We work hard to create an atmosphere for
our team members in which everyone feels
respected and empowered to speak up, and
we seek to nurture a diverse and inclusive
workplace. How our work gets done is as
important as getting the work done. Promoting
|an atmosphere of engaged team members not
only makes Wells Fargo a great place to work,
it results in great customer service.
In 2017, we asked for ideas and feedback
from our team members — a lot. We conducted
surveys, assessments, and focus groups on
everything from company culture to the benefits
we offer to how our team members feel about
Wells Fargo overall. We’ve listened as team
members asked questions in town hall meetings
and through our internal channels so we can
2017 Annual Report
understand themes and trends. Our teams have
sifted through tens of thousands of comments
and survey feedback so we can better understand
what’s important to team members and where we
may not be fully living up to their expectations.
The information we get from our team
members is key to understanding where we
need to strengthen our culture so we are all
living Wells Fargo’s values every day. Under the
leadership of Chief Administrative Officer Hope
Hardison, we are driving for a consistent culture
across the company, and we aim to communicate
more effectively so team members are clear
on what we expect of them. This is especially
important in a time of transformation.
We are making investments in our team
members. At the beginning of 2017, we raised
the minimum wage base range for U.S.-based
entry-level team members to $13.50 an hour,
benefiting about 36,000 team members.
Following the passage of the federal Tax Cuts
and benefits that include affordable health care
options, work-life balance programs, 401(k)
matching contributions, a discretionary profit-
sharing plan, and family leave. Team member
turnover is at its lowest level since 2013.
Diversity and inclusion is a longtime
value at Wells Fargo, and we seek to foster
that in many ways. We offer leadership
development programs that serve team
members with diverse abilities and Latino,
Asian-Pacific, LGBTQ, Black/African
American, and Veteran team members,
as well as other recruiting, training,
and development initiatives. We have
10 robust Team Member Networks through
which team members with a shared affinity
or background can connect and build
their skills. In September, I was proud
to join other business leaders in signing
We use innovative technologies to create
new kinds of lasting value for consumers
and businesses.
and Jobs Act in December 2017, we announced
plans to increase the minimum pay rate again,
to $15 an hour, in March 2018. This will benefit
approximately 70,000 team members, including
those already earning $15 an hour or close
to that amount, who will also receive a pay
increase. In November, we announced an
award of restricted share rights equivalent
to 50 shares of Wells Fargo stock to eligible full-
time employees, and the equivalent of 30 shares
to eligible part-time employees, with a two-year
vesting period. Approximately 250,000 team
members will receive this benefit in the first
quarter of 2018. In the past year, we have added
two company holidays to our paid time off
program, plus two “personal holidays” that team
members may use to take time off to celebrate
days that are of religious, family, cultural,
patriotic, community, or diversity significance.
We continue to offer a compensation package
that includes competitive salaries, training and
development options, leadership opportunities,
an open letter supporting the Deferred
Action for Childhood Arrivals program and
calling on Congress to pass the bipartisan
Development, Relief, and Education for Alien
Minors Act or similar legislation to provide
young people raised in the U.S. a permanent
solution.
Innovation
Wells Fargo is a longtime leader in providing
innovation to customers, and our pace of
innovation increased in 2017. Today, under
the leadership of Avid Modjtabai, we use
innovative technologies to create new kinds
of lasting value for consumers and businesses
— and increased efficiency for our own
internal operations. The year marked many
successful technology rollouts, including
card-free access for our 13,000 ATMs;
Near-Field Communication, or NFC,
at more than 50 percent of our ATMs
to authenticate account holders for
card-free access using a mobile wallet;
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2017 Annual Report
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Zelle®2, a fast, person-to-person payment
option embedded in our mobile and online
banking experiences; and new transaction-
level receipt imaging on mobile devices
for commercial customers.
These offerings are, in many cases, the first
of their kind. And our customers are using
them! For example, since March 2017, our
customers have conducted more than
5 million card-free ATM transactions.
And since June 2017, our customers
have used Zelle® to transfer $10 billion
in person-to-person payments.
We are enhancing our branch experience,
allowing customers to authenticate at the teller
line using a mobile app on an NFC-enabled
mobile phone. By knowing who our customers
experience for current Wells Fargo customers.
It uses third-party-hosted technology that
enables a customer to submit a credit
application electronically and to append
account documentation from Wells Fargo
or other lenders. When a customer logs into
the Online Mortgage Application, they won’t
be asked to provide certain information that
we already have in our database.
We also plan to introduce GreenhouseSM
by Wells Fargo, a new, low-cost mobile banking
experience with tools geared toward those
who may find budgeting a challenge, are new
to banking (such as students), or have several
income sources (such as freelancers). Greenhouse
is a combination of two accounts that work
In 2017, our team members volunteered
a record 2 million hours and contributed
$85 million to 40,000 nonprofits.
are, bankers can have meaningful conversations
focused on our customers’ needs. In November,
we launched Intuitive InvestorSM digital
Wells Fargo Advisors3 accounts for the next
generation of investors. This offering combines
innovative investing technology with phone-
based advice, giving customers affordable
access to personalized investment portfolios.
Conveniently integrated with Wells Fargo’s
online banking services, Intuitive Investor
provides features like automated account
rebalancing as well as investment insights
and strategy from the Wells Fargo
Investment Institute4.
We expect to introduce more exciting
innovations in 2018. In the first quarter
of this year, we plan to nationally launch
our Online Mortgage Application, which
combines the power of Wells Fargo data
with a digital interface to create a “know me”
together: one for weekly spending, tied to
a debit card, and one dedicated to saving
and paying bills. Among its features are
spending trends, personalized insights based
on an artificial intelligence engine, and reminders
to help consumers keep their spending on track
to reach their financial goals. The experience
is intuitive, personalized, and aligned to each
applicant’s individual situation.
Control Tower, an innovative customer
experience, is also expected to launch in 2018
(page 20). With this digital banking feature,
our customers will be able to view and manage
the places where their Wells Fargo card and
account information is stored, including
personal finance websites, digital wallets,
retail sites, and other third parties.
Another important area of innovation
is how we are improving information security
to protect our customers — from consumer
Investment and insurance products: NOT FDIC-Insured/NO Bank Guarantee/MAY Lose Value
2Zelle and the Zelle-related marks and logos are property of Early Warning Services, LLC.
3Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC,
Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.
4Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A.,
a bank affiliate of Wells Fargo & Company.
2017 Annual Report
and commercial biometric options to leveraging
artificial intelligence to help strengthen our risk
management and fraud detection capabilities.
I am excited about the new kinds of value we
are creating. The true value of innovation is when
technology provides our customers more control
and transparency to help them succeed financially.
Risk management
Managing risk is complex and challenging,
and we have strengthened our risk framework
substantially over the past year. With greater
oversight of risk, we have created more
consistency and have a better enterprise view
of how we are managing risk. As we refine and
build upon this work, we are expanding our
efforts in 2018 with a focus on compliance and
operational risk management, consistent with
the Federal Reserve consent order. We want to
ensure we have a fully integrated, cohesive, and
companywide approach to risk management.
Our Audit Services function, led by Chief
Auditor David Julian and reporting to the
board of directors, continues to provide
independent perspective, influence,
and challenge on our governance,
internal controls, and risk management.
The Conduct Management Office increases
our oversight across the company. It seeks
to ensure that all Wells Fargo team members
and customers are protected and that we listen
when they suggest the company might have
fallen short.
We are building a strong, industry-leading
compliance program within the Corporate Risk
organization and have welcomed Mike Roemer,
who has 27 years of financial services industry
experience, as our new chief compliance officer.
The enhancement of our compliance program
will positively affect many other areas. We also
welcomed Mark D’Arcy as chief operational risk
officer and Sarah Dahlgren to the newly created
role of head of regulatory relations. More than
2,000 external team members have been hired
to risk roles to strengthen our capabilities
during the past two years.
In 2017, we worked hard to strengthen our
“raise your hand” culture. Team members
know that they are expected to be risk managers
in their own areas and report anything that
doesn’t seem right. An example is Lead Teller
Ciarra Wagner of Omaha, Nebraska, who was
suspicious when an older man — a noncustomer —
wanted to make a large cash deposit into
an acquaintance’s account at Wells Fargo.
Wagner alerted the branch service manager,
who spoke with the man and learned that he
feared he was the victim of a “lottery jackpot”
scam. The man asked for Wells Fargo’s help
in contacting the police, and weeks later,
he returned to thank the team for saving
him from a painful loss — and to inquire
about moving his accounts to Wells Fargo!
I appreciate that our team cared, spotted
a questionable situation, and helped resolve
it. Our “raise your hand” culture also encourages
team members to be vocal when they have ideas
to make things better or identify areas that
can be improved at Wells Fargo.
Corporate citizenship
We want to make every community in which
we live and do business better — through the
products and services we offer, the way
we operate, our support of diversity and
inclusion, and our many forms of philanthropy.
We continue to be one of the largest corporate
cash donors in the U.S., contributing
$286.5 million to more than 14,500
nonprofits in 2017.
Following the passage of the federal Tax Cuts
and Jobs Act last year, we expect to increase our
annual philanthropic donations by 40 percent
in 2018, with a longer-term goal of investing
2 percent of our after-tax profits for corporate
philanthropy beginning in 2019.
In tandem with our corporate philanthropy,
our work to improve communities is special
because it is led by team members who devote
their time and resources to causes they care
about. At Wells Fargo, we are all corporate
citizens, and our team members are how
we make “better” happen wherever the
Wells Fargo name appears.
In 2017, our team members volunteered
a record 2 million hours and contributed
$85 million to 40,000 nonprofits during
our annual Community Support Campaign,
recognized by United Way Worldwide as the
largest workplace-giving campaign in the
U.S. for the ninth consecutive year. And 91,000
team members — or about one-third of our
company — participated in volunteer groups,
including Volunteer Chapters, Green Teams,
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2017 Annual Report
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and Team Member Networks. As an
example of this work, our team members
taught money management skills to 227,000
children, veterans, seniors, and other
people in their communities through the
Wells Fargo Hands on Banking® program.
Following devastating hurricanes, wildfires,
and other disasters, Wells Fargo donated
more than $10.6 million to the American
Red Cross and other local nonprofits
to support recovery and rebuilding efforts,
including $6.5 million to the WE Care fund,
which provides financial grants to our team
members who face disaster-related expenses
or hardships. Our team members and board
of directors personally contributed an
additional $1.27 million to the WE Care
fund. This was in addition to hundreds
of hours of volunteer support for activities
like blood drives, beach cleanups, fostering
displaced pets, and other rebuilding efforts.
As a company, we focus and organize our
corporate citizenship activities around three
priorities: advancing diversity and social
inclusion, creating economic opportunity
in underserved communities, and accelerating
the transition to a lower-carbon economy and
healthier planet.
One of the most critical issues facing
our world today is the lack of employment
and opportunities for income mobility
in economically disadvantaged areas.
In fall 2017, students at Harris-Stowe
State University in St. Louis began using
the Wells Fargo Finance Education Center,
an investment lab and mock trading floor
that offers real-world experience in finance
and banking. Our $250,000 gift to build
and outfit the lab is part of a long-standing
relationship between Wells Fargo Advisors
and Harris-Stowe, the only historically
black college in St. Louis. The finance
lab is a promising way to both build
a diverse workforce and increase high-
paying career opportunities for students
of color. Wells Fargo Advisors team members
serve as guest lecturers at the Wells Fargo
Finance Education Center and mentor
Harris-Stowe students.
To advance economic recovery and
revitalization on a much broader scale,
we are expanding our support for small
businesses and low- and moderate-income
homebuyers. This includes a commitment
to provide $100 million in capital, technical
assistance, education, and other resources
over the next three years to support the
growth of diverse small businesses through
the Wells Fargo Works for Small Business®:
Diverse Community Capital program. We also
plan to double our investment in Wells Fargo’s
NeighborhoodLIFT® program to $75 million
in 2018.
In 2017, we announced a 10-year commitment
to create at least 250,000 African American
homeowners. It includes $60 billion in home
loans and $15 million for homebuyer education
and counseling initiatives. In our first year, we
have helped more than 23,000 African American
families become homeowners and invested
$1.8 million to support homebuyer education and
counseling. We marked the second year of our
10-year, $125 billion lending commitment to help
increase Hispanic homeownership through our
support of the National Association of Hispanic
Real Estate Professionals’ Hispanic Wealth
Project. From 2016 through 2017, we helped
more than 87,000 families become homeowners
and provided about $2.8 million in funding for
homebuyer education and counseling programs.
Like many of our customers, shareholders,
and team members, we are concerned about
climate change and other environmental
challenges affecting our planet. We’ve launched
the “Greener Every Day” campaign to educate
and inspire our team members to join our
environmental efforts by making simple
changes in their behavior each day at home,
work, and in the community. Our goal is for
team members to make a total of 250,000
commitments to improve sustainability
by 2020.
In 2017, we achieved a significant milestone by
powering 100 percent of our global electricity
needs with renewable energy. As one of the
largest financers of renewable energy, energy
efficiency, and clean technology in the U.S.,
we are committed to supporting new growth
in the sector through product innovation
and collaboration with public and private
organizations to help speed the path to
market for early-stage companies focused
on sustainability.
2017 Annual Report
I am very proud of the many ways we support
members of the military, veterans, and their
families — both as customers and as members
of the Wells Fargo team. Since 2012, we have
donated more than $100 million to support
military service members, veterans, and their
families through financial education, career
transition, and housing initiatives. For the fourth
year in a row, we sponsored a No Barriers Warriors
to Summits team in 2017. This program assembles
about a dozen veterans with disabilities and helps
them overcome barriers and unleash their potential
through a wilderness-based curriculum and
experiences in challenging environments.
Within our offices, we continue to expand
the Veterans Employment Transition program,
which is focused on identifying and hiring veterans
who are moving into the private workforce for
internships with Wells Fargo Securities and other
lines of business. And in 2017, we launched an
ApprenticeshipUSA program, which allows eligible
veterans to use GI Bill education benefits to earn
a salary while acquiring high-value job skills.
I am deeply moved by the commitment our team
members bring to bettering our communities,
and I am pleased that we are able to support their
work to help others.
Shareholder value
Our goal to create long-term shareholder value
is the last on our list because each of the other
five goals contributes to it. We recognize that you,
our investors, have placed your trust in Wells Fargo,
and we are focused on managing the company
to achieve long-term value through a diversified
business model, strong risk discipline, efficient
execution, a solid balance sheet, and a world-class
team. While the asset cap under the Federal Reserve
consent order remains in place, I believe we will be
able to continue to serve our customers, and the
financial impact will be manageable.
Our financial performance in 2017 was solid,
but we can and should do better. In 2017,
our return on assets was 1.15 percent, and
our return on equity was 11.35 percent.
Our capital and liquidity are strong, which is
important to long-term shareholder value creation
and provides flexibility in managing the company.
We returned $14.5 billion to our shareholders
through common stock dividends and net share
repurchases in 2017, up 16 percent from 2016.
Our quarterly common stock dividend increased
to 39 cents per share, and our net payout ratio5
in 2017 was 72 percent. For the fourth straight
year, we reduced our average number of diluted
common shares outstanding, which were down
91 million shares from 2016.
We’re on track with our expense initiatives, and
we remain committed to our target of $4 billion
in expense reductions by the end of 2019.
Our day-to-day efforts to transform Wells Fargo
are the foundation of creating long-term success.
I am optimistic that the investments we are making
will allow us to serve our customers better and result
in growth over the long term. We are committed to
living up to our potential for you, our shareholders.
In closing
I want to express my appreciation to our
board of directors for the knowledge, experience,
and leadership they have shown during the past
year. Special recognition is due to Steve Sanger,
Cynthia Milligan, and Susan Swenson, who
retired from the board at the end of 2017.
Their contributions and service have helped
our company immeasurably over the years.
During the past year, I have been asked
many times, “Tim, why are you so optimistic?”
My answer is, “How can I not be?” Wells Fargo
is a strong company with a rich, 166-year history.
We have overcome challenges many times
during our history. We have a solid foundation,
exceptional businesses, and an outstanding
team. Our more than 260,000 team members
are dedicated, talented, and committed — and,
without a doubt, they are our most important
resource. We are working every day to rebuild
trust with our stakeholders, and I am confident
that we will achieve our six goals. Thank you
for placing your trust in Wells Fargo and for your
support. Our commitment to you is unwavering
as we continue our transformation into a better,
stronger company.
17
Timothy J. Sloan
Chief Executive Officer and President
Wells Fargo & Company
February 15, 2018
5Net payout ratio 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.
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Once homeless, an Army veteran gets a fresh
start in a house newly renovated to meet his
needs over the long term.
T
he day Walter Moody met his new home, it was love at first sight.
From the front door to the open floor plan to the small yard out back, the
redesigned, ranchstyle house in the Raleigh neighborhood of Memphis, Tennessee,
clearly charmed Moody. “When I first walked in here, I’ll be honest with you: I didn’t believe
it,” said the 55yearold U.S. Army veteran. “Now I plan to be here till the day I die.”
Moody received his mortgagefree home courtesy of Wells Fargo and United
Housing Inc. as part of a nationwide home renovation competition called Home
Today, Home Tomorrow. Inspired by the Home Matters movement and cosponsored
by AARP, the AARP Foundation, and the Wells Fargo Housing Foundation, the contest
challenged architects to use universal design in the renovation of existing houses.
The idea: to allow homeowners of many income levels to “age in place” and stay
in their homes throughout all stages of their lives.
Home Matters’ concept includes stairfree entrances, wide hallways,
and barrierfree showers — all aimed at improving the owner’s mental,
emotional, and physical wellbeing.
“Wells Fargo has been on board with the idea since the inception of the
Home Matters movement,” said Martin Sundquist, head of the company’s
housing foundation, which worked with United Housing to provide the
home. “We believe this is yet another success in our work with nonprofits
to create stronger communities. We are proud to join United Housing and
others to help make Mr. Moody’s dream of homeownership a reality. I hope
this collaboration inspires additional efforts to create more affordable and
sustainable housing across the country.”
Moody, who struggled with homelessness and unemployment for several years after
his Army service, said a Catholic Charities program in Memphis helped him find a job
and a new lease on life. It also worked with him as he applied for a renovated home through
Home Today, Home Tomorrow.
Now he’s happy to welcome his mother, Mary Moody, 77, for visits. Her own disabilities
had made it difficult for her to navigate his previous apartment. “Now, when I see my
mom walk in my house and able to get around, I know we can enjoy happy moments,”
he said. “It’s going to be a real blessing. I’m happy.”
Left: Walter Moody at home in Memphis, Tennessee.
Right: Moody entertains friends in his backyard.
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2017 Annual Report A new Wells Fargo technology called Control Tower
is designed to help customers manage their financial
connections from one spot.
B en Soccorsy saw eyes light up in the research lab as customers got a first look
at a new digital banking technology being developed by Wells Fargo. It was the
kind of moment his San Francisco team lives for — when those who will eventually
use your new invention actually “get it.”
The moment came when the focus group participants, after seeing several demos and
prototypes, realized Wells Fargo was onto something really good: a smartphone and
online feature that gives customers control over their bank cards and accounts in new
and different ways.
“Once they understood what this feature is and what it could do for them, it was a real
moment of excitement,” said Soccorsy, head of the digital payments product team for
Wells Fargo Virtual Channels. “Getting that kind of validation was a key part of our
development journey — and we’re just scratching the surface of this concept’s potential.”
The technology, dubbed Control Tower, is designed to help customers
securely manage their financial connections from one location
inside the Wells Fargo mobile banking app and website. For example,
customers who misplace their debit cards won’t have to click from
website to website to update their payment method for things
like online shopping, streaming video, and personal finance sites.
Control Tower is designed to help them manage those from one place.
Wells Fargo expects to launch the feature in 2018. Customers will
be able to see the places their Wells Fargo cards and accounts are
connected — from personal finance apps and websites to digital
wallets, retail merchant sites, and third parties.
“As our customers have discovered the convenience of online and mobile
financial services, their digital lives have become more complex,” said Jim Smith,
head of Wells Fargo Virtual Channels. “Currently, there isn’t one spot within a mobile
banking app that lets customers control where their account information is connected.
This new experience puts the customer in control and simplifies what too often is
a fragmented digital experience. You’ll be able to view, organize, and manage your
mobile wallets, recurring payments, devices, and other services that are electronically
connected to your Wells Fargo cards and accounts.”
Soccorsy concluded, “One of the most exciting aspects of the financial services industry
today is the use of technology to build stronger relationships with customers. Ultimately,
Wells Fargo wants to simplify the way people connect to our services — whether at a branch,
online, or through mobile, social media, or other channels. And we are thrilled about
Control Tower, which we believe will be the first digital experience of its kind in the industry.”
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Right: Soccorsy with his development team.
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A mom with a dream is forging ahead with plans
to expand her inclusive preschool — aided by
financial resources from Wells Fargo.
P
rabha Sanjay had a big idea a decade ago and went all out to make it happen:
open an inclusive preschool combining language immersion with Montessori
teaching methods that focus on “the whole child.” And she wasn’t about to let
financing hurdles block her path.
A former stayathome mom, she went back to college for an early childhood education
degree when her kids went to middle school, then took a job at a preschool in Foster City,
California. Next, she opened Odyssey Preschool as an inhome day care facility. After less
than a year, wordofmouth resulted in a waiting list of families eager for her services.
“When I was ready to expand into a commercial building space, many banks wouldn’t
even talk with my husband and me because of a loan rate modification on our home
mortgage,” she said. “But when we met with Paveli Roy, a business relationship
manager at Wells Fargo, she saw the potential.”
The first step, they determined, was to apply for a business secured
credit card to pay for daytoday business needs — and help strengthen
her credit profile. Then they worked to refine her business plan, providing
a path forward for her company’s success and helping build the case for
financing the business loan, despite her credit issues.
“When you meet with someone who is so passionate about what she does,
that rubs off on you,” the business relationship manager said. “I knew we
could find a way to keep her small business journey moving forward.”
She was approved for a $100,000 loan and moved Odyssey Preschool
in 2009 to a building that could accommodate more students. Today,
Odyssey Preschool cares for 130 children ages 18 months to 6 years and employs
20 teachers from China, India, Spain, and the U.S.
Soon, Odyssey Preschool will open a second location — in Palo Alto, California —
that is expected to support more than 50 additional students.
“Being an immigrant myself,” concluded the business owner, a native of Bangalore, India,
“I realized there was a need to improve inclusion in preschools. Kids are like sponges,
absorbing everything around them, which is why the environment they learn in is so
important. And with a shortage of highquality toddler care, it’s extremely rewarding
to know that we have stepped in to meet the community’s need.”
Left: Prabha Sanjay with some of the preschoolers in her care.
Right: Prabha Sanjay at her preschool in Foster City, California.
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are helping customers achieve their dreams —
such as saving up for the trip of a lifetime.
A lexandra Wilkinson’s lifelong dream was to ride down the Grand Canal in Venice,
Italy, in a gondola. She wasn’t sure how to make it happen — until she had a conversation
with Nicole Allegretto, a Wells Fargo personal banker in Palm Harbor, Florida.
Allegretto said, “What I try to do with all my customers is, first, listen to discover what’s
important to them. In Alex’s case, it was clear that the answer was travel. And the more
I heard, the more I wanted to help.”
As the two chatted, they discussed Wilkinson’s travel dream and
considered several options before deciding to establish a small savings
account as her “travel fund.” Wilkinson, the owner of a social media
management firm, supplemented her income and added that money
to the fund.
“The most rewarding part was going to the branch every week and
putting money in,” Wilkinson said. “Every time I came in, Nicole was
a huge cheerleader. The encouragement helped me have discipline,
and it paid off.”
Several months later, “Alex walked to my desk with the biggest smile
on her face, a bounce in her step, and a receipt for the airline tickets she’d just purchased,”
Allegretto said. “I knew she had worked harder than ever to land new accounts so she could
contribute to her travel fund. She also decided to rent out her home awhile and use the income
to help the fund grow. And she discovered a work exchange program in which you agree
to provide child care, cooking, and other services in exchange for room and board. This
allowed her to cut the number of hotel stays she needed — making her travel money last
even longer.”
In the end, Wilkinson surpassed her savings goal and spent 53 days in Europe, visiting
19 locations in three countries — and, of course, riding the gondola in Venice. She said,
“Sitting in that gondola, I started to cry a bit. It had been my dream and was something
I’d waited my whole life to do!”
According to Allegretto, changes that Wells Fargo has instituted in bank branches are making
meaningful customer conversations easier. Streamlined processes, she said, give team members
more time to listen, empowering them to solve problems, reduce wait times, and improve overall
customer service.
“If not for the way Wells Fargo is supporting the development of customer relationships,”
Allegretto said, “I might not have been a small part of helping Alex achieve her dream.”
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Left: Alexandra Wilkinson in St. Petersburg, Florida.
Right: Wilkinson with Wells Fargo’s Nicole Allegretto.
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Once a single shop in Manhattan, Goya Foods today
is a worldwide manufacturer and distributor — and
has remained a Wells Fargo customer for 40 years.
I n 1936, Prudencio and Carolina Unanue opened a shop on Duane Street
in Manhattan offering local Hispanic families authentic Spanish olives, olive oil,
and sardines. Immigrants from Spain via Puerto Rico, the Unanues soon saw a need
for all kinds of highquality, freshtasting, Latin foods — and a much wider market.
The company they started, Goya Foods, is now run by grandson Bob Unanue and is
currently “the largest Hispanicowned food company in the United States and the premier
source for authentic Latin cuisine,” he said. It employs more than 4,000 people worldwide
and operates 26 corporate, manufacturing, and production facilities in the U.S., Puerto Rico,
the Dominican Republic, and Spain. Consumers worldwide see the Goya name on more
than 2,500 products sold at grocery stores and elsewhere.
“But we are not just a food company,” said Bob Unanue, Goya Foods president
and CEO. “We have become a part of families and tables across the world.
We have a tremendous sense of responsibility to our society ‘family,’ and
as we have grown, our commitment grows even stronger.” In fact, Unanue
refers to Goya Foods employees, communities, customers, suppliers, and
business partners as “la gran familia Goya,” or “the great Goya family.”
For the past 40 years, Wells Fargo has been a part of that family. “Wells Fargo
has supported our growth and expansion with financing and treasury services
to support our evolving business requirements and opportunities,” Unanue
said. “Our bankers have always been proactive in offering and delivering
services to support Goya’s needs. They have demonstrated an interest in understanding
our business and delivering highquality service.”
Toby Babeuf, regional vice president for Wells Fargo in Summit, New Jersey, said,
“When you visit Goya, you’re humbled by the magnitude of its international operations
and familyoriented management style.”
Wells Fargo’s service proved especially helpful as Goya Foods constructed a new
headquarters recently in Jersey City, New Jersey, and expanded its manufacturing and
distribution centers in Texas, California, and Georgia. And looking ahead, Unanue said,
Goya Foods will continue to look at new and evolving distribution channels and growth
through acquisition, joint ventures, and alliances.
Unanue concluded, “The story of Goya is as much about the importance of family and
values as it is about achieving the American dream and helping to cultivate the Latin
culture in the United States. Our commitment to the community is a core value and
something we value in companies like Wells Fargo that we do business with. We look
forward to our continued collaboration for many years to come.”
Left: Goya Foods products are a mainstay ingredient in Latin cuisine.
Right: A meal prepared with Goya Foods products.
27
28
2017 Annual Report Careful planning helped provide for a son
after tragedy took his mom’s life.
R on and Tricia Kephart of Laurie, Missouri, were devastated a decade ago when they
got the phone call no parents want to receive.
Their daughter, Rhonda Swanigan, had been killed in an accident while riding
as a passenger in someone else’s car. The loss thrust them into an unfamiliar world of court
hearings, legal settlements, and financial concerns as they stepped in to become legal
guardians of their daughter’s 8yearold son, Bryce Kephart.
Fortunately, “Rhonda had made some good preparations,” said
Tricia Kephart. Specifically, Swanigan had life insurance. With the
proceeds from that and a subsequent legal settlement, the Kepharts
headed to see Patrick Rowland, a branch manager at Wells Fargo
Advisors.
“We knew Bryce needed professional advice regarding his financial
assets for when Grandmother and Grandpa aren’t there one day,”
Ron Kephart said.
They used the Envision® investment planning process to help
develop a strategy for Bryce’s assets. Rowland helped them navigate
the interactive tool, which adjusts to market moves and changing conditions
so customers can see the potential impact on their finances now and in the future.
As Bryce grew, his grandparents taught him about money so he’d be ready at age 18
to take the reins of the account as its legal owner. He is now a freshman at Missouri
State University.
Rowland said, “The Kepharts had done a great job both raising Bryce and talking
to him about money and preparing for the future. Ultimately, Bryce and I developed
a plan that sought to protect and grow his assets to help him meet his goal of going
to college — and perhaps, one day, starting his own business.”
Tricia Kephart concluded, “I tell Bryce all the time about his portfolio, ‘This is love money.
This is your mother. You need to remember that.’ And he has. We’re very proud of him!”
Left: Bryce Kephart on campus at Missouri State University.
Right: Kephart with grandparents Ron and Tricia Kephart.
Investment and insurance products: NOT FDIC-Insured/NO Bank Guarantee/MAY Lose Value
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker dealer and non-
bank affiliate of Wells Fargo & Company. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
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With the help of Wells Fargo and a local nonprofit,
a firsttime restaurant owner brings fresh and
healthy eating options to her reservation.
Reservation in Washington state?
W here can you get a salad or fresh fruit smoothie on the Colville Indian
Only a year ago, you couldn’t. But now that local entrepreneur Theresa
Desautel has opened the Red Willow Café at the Colville Tribal Government Center
in Nespelem, Washington, those healthy options are readily available.
The road to restaurateur was a bit of a winding one for Desautel, who grew up on the
reservation but left to follow a career with a construction company in Spokane, Washington.
She returned as an engineer working on the tribal government center. When the building
was almost complete, she said, she walked through its empty restaurant and kitchen
space and thought, “I could totally pull this off. I think I could do this!”
After winning the contract to open a restaurant, she turned to the
Northwest Native Development Fund for help. The nonprofit organization
is a Community Development Financial Institution, or CDFI, that lends to
underserved Native American businesses and communities in Washington.
“I didn’t have enough cash for the initial food order, equipment, and payroll,”
she said, “and they helped me adjust my business plan and provided the
assistance I needed until I got the loan. I couldn’t have done it without them.”
Wells Fargo supports the fund (and 55 other CDFIs nationwide) as part of the
Wells Fargo Works for Small Business®: Diverse Community Capital program.
Since 2015, Wells Fargo has awarded more than $55 million to CDFIs to help launch new
businesses and grow existing ones — all with the goals of creating jobs, building wealth,
and strengthening communities.
Connie Smith, manager of the Diverse Community Capital program, said, “We want
to build the capacity of CDFIs like the Northwest Native Development Fund so they can
provide more capital and technical assistance to the diverse small business owners they
know best, and in the most culturally appropriate ways. As those businesses grow and build
their credit, they can then become eligible for financing from more traditional sources.”
In addition to Desautel’s café, other recipients of Northwest Native Development Fund
assistance include a day care center, a construction company that clears roads in the
winter and fights wildfires the rest of the year, and a manufacturer of sweetgrass
shampoos and conditioners.
Desautel concluded, “Like any small business owner, there are definitely some days when
I think, ‘What did I get myself into?’ But I like owning my own business. I am the deciding
factor in my own destiny. It’s all up to me.”
Left: Theresa Desautel on the Colville Indian Reservation.
Right: Desautel at work in the Red Willow Café.
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2017 Annual Report
The Hmong American Farmers Association helps preserve
the “enduring spirit” of immigrant farmers by providing
early guidance and investing for success.
H mong refugees immigrating from Laos and Vietnam in the turbulent 1970s often
turned to farming as their livelihood after arriving in the U.S. Although resources
to ease their transition were hard to come by, many prospered.
Now, some 40 years later, nonprofit organizations like the Hmong American Farmers Association
in St. Paul, Minnesota, are helping newcomers and working to create a generational investment
for future farmers.
“Farming is at the heart of Hmong culture,” said MayKao Fredericks,
a Wells Fargo Community Relations consultant who grew up in
a Hmong farming family in Spokane, Washington. “But they need
help in the U.S. That’s where the Hmong American Farmers
Association comes in. It provides land tenure, exposure to markets
other than farmers markets, and educational and financial support.”
The association subleases its land to farmers and uses some plots
for research and demonstrations to provide continuing education.
More than 50 families and 250 individuals have benefited since the
association started in 2011.
Wells Fargo supports the group through charitable giving designed to support minority
owned small businesses. “Wells Fargo was an early investor in the Hmong American Farmers
Association,” said Pakou Hang, executive director, “and that served as the foundation for all the
successes that came after.”
Hang described how the association helps: “A smallscale, new farmer working alone may not
be able to purchase a large tract of land with cold storage and an irrigation system, or acquire
a $75,000 tractor, or secure a contract with a university to sell 10,000 pounds of potatoes.
But as part of a land or equipment cooperative, that is suddenly possible — and at a smaller
risk and greater learning to the farmer. Moreover, it’s not just the farmer that benefits, but the
entire community.”
Example: The association has a food hub that sells fresh fruits, vegetables, and flowers
to 177 schools and 45 institutions, retailers, and restaurants.
“In essence,” said Hang, “we are helping people create their own luck. That is the enduring
spirit of the Hmong farmer, and it is the enduring spirit of the immigrants who built America.”
Wells Fargo’s Fredericks concluded, “I know the Hmong American Farmers Association
is a changemaker for families like mine, who place agriculture, business acumen, and
hard work at the forefront. It is improving the quality of life for Hmong farming families.”
Left: Janssen Hang, a farmer in St. Paul, Minnesota, with Pakou Hang, executive director
of the Hmong American Farmers Association, or HAFA.
Right: Janssen Hang with Wells Fargo’s MayKao Fredericks and HAFA’s Pakou Hang.
Learn more about everyone featured in this year's Annual Report at wellsfargo.com/stories
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Operating Committee and Other Corporate Officers
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Wells Fargo Operating Committee (left to right):
C. Allen Parker, Hope A. Hardison, David M. Julian, Perry G. Pelos, Jonathan G. Weiss,
Timothy J. Sloan, Michael J. Loughlin, Mary T. Mack, John R. Shrewsberry, and Avid Modjtabai
Timothy J. Sloan
Chief Executive Officer
and President *
Anthony R. Augliera
Corporate Secretary
Neal A. Blinde
Treasurer
John M. Campbell
Head of Investor Relations
Jon R. Campbell
Head of Corporate Responsibility
& Community Relations
Hope A. Hardison
Chief Administrative Officer *
David M. Julian
Chief Auditor
Richard D. Levy
Controller *
Michael J. Loughlin
Chief Risk Officer *
Mary T. Mack
Head of Community Banking
and Consumer Lending *
Avid Modjtabai
Head of Payments, Virtual
Solutions and Innovation *
David Moskowitz
Head of Government Relations
& Public Policy
C. Allen Parker
General Counsel *
Perry G. Pelos
Head of Wholesale Banking *
James H. Rowe
Head of Stakeholder Relations
John R. Shrewsberry
Chief Financial Officer *
Oscar Suris
Head of Corporate
Communications
Jonathan G. Weiss
Head of Wealth and
Investment Management *
Board of Directors
John D. Baker II�1, 2, 3
Executive Chairman and CEO
FRP Holdings, Inc.
(Real estate management)
John S. Chen�6
Executive Chairman and CEO
BlackBerry Limited
(Wireless communications)
Celeste A. Clark�2
Principal, Abraham Clark Consulting,
LLC, and Retired Senior Vice President,
Global Public Policy and External Relations
and Chief Sustainability Officer
Kellogg Company
(Food manufacturing)
Theodore F. Craver, Jr.�1
Retired Chairman, President, and CEO
Edison International
(Energy)
Lloyd H. Dean�2, 5, 6
President and CEO
Dignity Health
(Healthcare)
Elizabeth A. Duke�3, 4, 5, 7
Chair
Wells Fargo & Company
Former member of the Federal
Reserve Board of Governors
(U.S. regulatory agency)
Enrique Hernandez, Jr.�2, 4, 7
Chairman, President, and CEO
InterCon Security Systems, Inc.
(Security services)
Donald M. James�4, 5, 6
Retired Chairman
Vulcan Materials Company
(Construction materials)
Maria R. Morris�7
Retired Executive Vice President and Head
of Global Employee Benefits business
MetLife, Inc.
(Health and life insurance)
Karen B. Peetz�4, 6, 7
Retired President
The Bank of New York Mellon Corporation
(Banking and financial services)
Federico F. Peña�1, 2, 5
Senior Advisor
Colorado Impact Fund
(Private equity)
Former U.S. Secretary of Energy and
Former U.S. Secretary of Transportation
Juan A. Pujadas�3, 4, 7
Retired Principal
PricewaterhouseCoopers LLP,
and Former Vice Chairman,
Global Advisory Services,
PwC International
(Professional services)
James H. Quigley�1, 3, 7
CEO Emeritus and Retired Partner
Deloitte
(Audit, tax, financial advisory)
Ronald L. Sargent �1, 5, 6
Retired Chairman and CEO
Staples, Inc.
(Office supply retailer)
Timothy J. Sloan
CEO and President
Wells Fargo & Company
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Suzanne M. Vautrinot�2, 3, 7
President
Kilovolt Consulting, Inc.
(Cyber and technology consulting)
Major General and Commander
United States Air Force (retired)
2017 Corporate Social Responsibility
Performance Highlights
We are committed to delivering value to our shareholders and becoming a leader in corporate
citizenship by advancing diversity and social inclusion, creating economic opportunity, and
promoting environmental responsibility. Read more about our priorities, goals, and progress
at wellsfargo.com/about/corporateresponsibility.
Investing in
team members
Raised minimum wage to $15 per hour
(effective March 2018) and added four new
paid holidays for U.S. team members.
Supporting
communities
Invested $286.5 million and volunteered
2+ million hours in nonprofits in 2017. Created
15,800+ homeowners in 57 communities
through LIFT programs since 2012.
Advancing
diversity and
social inclusion
Accelerating
clean technology
Awarded $4.6 million through diverse
scholarship programs, increasing access to
education and employment opportunities.
Hired 1,400 military veterans.
Donated $6 million to advance clean
tech and innovation. Financed more than
$12 billion in renewable energy and other
sustainable businesses.
Empowering
diverse businesses
Reducing our
operational
impact
Provided $55 million in grants and
capital to grow diverse small businesses
since 2015. Spent more than $1 billion
with diverse suppliers (4th year).
Met 100% of our electricity needs
with renewable energy. Achieved
LEED® certification for 25% of total
square footage in buildings.*
Data for January 1, 2017December 31, 2017, unless otherwise noted.
*As of 3Q 2017.
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Wells Fargo & Company 2017 Financial Report
Financial Review
Overview
Earnings Performance
Balance Sheet Analysis
Off-Balance Sheet Arrangements
Risk Management
Capital Management
Regulatory Matters
159
160
168
185
187
198
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
201
10
Intangible Assets
Critical Accounting Policies
203
11
Deposits
Current Accounting Developments
204
12
Short-Term Borrowings
Forward-Looking Statements
205
13
Long-Term Debt
Risk Factors
207
14
Commitments
Guarantees, Pledged Assets and Collateral, and Other
212
15
Legal Actions
Controls and Procedures
216
16
Derivatives
Disclosure Controls and Procedures
226
17
Fair Values of Assets and Liabilities
Internal Control Over Financial Reporting
248
18
Preferred Stock
Management’s Report on Internal Control over
Financial Reporting
Report of Independent Registered Public
Accounting Firm
251
19
Common Stock and Stock Plans
255
20
Revenue from Contracts with Customers
257
21
Employee Benefits and Other Expenses
Financial Statements
263
22
Income Taxes
Consolidated Statement of Income
266
23
Earnings Per Common Share
Consolidated Statement of Comprehensive
Income
Consolidated Balance Sheet
Consolidated Statement of Changes in
Equity
267
24
Other Comprehensive Income
269
25
Operating Segments
271
26
Parent-Only Financial Statements
Consolidated Statement of Cash Flows
274
27
Regulatory and Agency Capital Requirements
Notes to Financial Statements
Summary of Significant Accounting Policies
Business Combinations
Cash, Loan and Dividend Restrictions
1
2
3
275
276
278
Report of Independent Registered
Public Accounting Firm
Quarterly Financial Data
Glossary of Acronyms
38
42
61
63
65
104
110
114
118
120
121
137
137
137
138
139
140
141
142
146
147
157
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Wells Fargo & Company
37
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, 2017
(2017 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 $2.0 trillion in assets. Founded
in 1852 and headquartered in San Francisco, we provide
banking, investments, mortgage, and consumer and commercial
finance through more than 8,300 locations, 13,000 ATMs,
digital (online, mobile and social), and contact centers (phone,
email and correspondence), and we have offices in 42 countries
and territories to support customers who conduct business in the
global economy. With approximately 263,000 active, full-time
equivalent team members, we serve one in three households in
the United States and ranked No. 25 on Fortune’s 2017 rankings
of America’s largest corporations. We ranked third in assets and
in the market value of our common stock among all U.S. banks
at December 31, 2017.
We use our Vision, Values and Goals to guide us toward
growth and success. Our vision is to satisfy our customers’
financial needs and help them succeed financially. We aspire to
create deep and enduring relationships with our customers by
providing them with an exceptional experience and by
understanding their needs and delivering the most relevant
products, services, advice, and guidance.
We have five primary values, which are based on our vision
and guide the actions we take. First, we place customers at the
center of everything we do. We want to exceed customer
expectations and build relationships that last a lifetime. Second,
we value and support our people as a competitive advantage and
strive to attract, develop, motivate, and retain the best team
members. Third, we strive for the highest ethical standards of
integrity, transparency, and principled performance. Fourth, we
value and promote diversity and inclusion in all aspects of
business and at all levels. Fifth, we look to each of our team
members to be a leader in establishing, sharing, and
communicating our vision for our customers, communities, team
members, and shareholders. 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
that appropriate controls are in place to reduce risks to our
customers, maintain and increase our competitive market
position, and protect Wells Fargo’s long-term safety, soundness,
and reputation.
In keeping with our primary values and risk management
priorities, we have six long-term goals for the Company, which
entail becoming the financial services leader in the following
areas:
•
•
•
Customer service and advice – provide exceptional service
and guidance to our customers to help them succeed
financially.
Team member engagement – be a company where people
feel included, valued, and supported; everyone is respected;
and we work as a team.
Innovation – create lasting value for our customers and
increased efficiency for our operations through innovative
thinking, industry-leading technology, and a willingness to
test and learn.
• Risk management – set the global standard in
•
•
managing all forms of risk.
Corporate citizenship – make a positive contribution to
communities through philanthropy, advancing diversity and
inclusion, creating economic opportunity, and promoting
environmental sustainability.
Shareholder value – deliver long-term value for
shareholders.
Over the past year and a half, our Board of Directors
(Board) has taken, and continues to take, actions to enhance
Board oversight and governance. These actions, many of which
reflected results from the Board’s 2017 self-assessment, which
was facilitated by a third party, and the feedback we received
from our shareholders and other stakeholders, included:
•
Separating the roles of Chairman of the Board and Chief
Executive Officer.
Amending Wells Fargo’s By-Laws to require that the
Chairman be an independent director.
Electing Elizabeth A. “Betsy” Duke as our new independent
Board Chair, effective January 1, 2018.
Electing six new independent directors, including directors
with financial services, risk management, regulatory,
technology, human capital management, social
responsibility, and other relevant experience, with five
directors retiring in 2017.
•
•
•
• Making changes to the leadership and composition of key
Board committees, including appointing new chairs of the
Board’s Risk Committee and Governance and Nominating
Committee.
Amending Board committee charters and working with
management to improve reporting to the Board in order to
enhance the Board's risk oversight.
•
38
Wells Fargo & Company
As previously announced, the Board’s refreshment process
will continue with director retirements in 2018. As has been our
practice, we will continue our engagement efforts with our
shareholders and other stakeholders while the Board maintains
its focus on enhancing oversight and governance.
Federal Reserve Board Consent Order Regarding
Governance Oversight and Compliance and
Operational Risk Management
On February 2, 2018, the Company entered into a consent order
with the Board of Governors of the Federal Reserve System
(FRB), which requires the Company to submit to the FRB within
60 days of the date of the consent order plans to further enhance
the Board’s governance oversight and the Company’s compliance
and operational risk management. The consent order also
requires third-party reviews related to the adoption and
implementation of such plans by September 30, 2018. Until
these third-party reviews are complete and the plans are
approved and implemented to the satisfaction of the FRB, the
Company’s total consolidated assets will be limited to the level as
of December 31, 2017. Compliance with this asset cap will be
measured on a two-quarter daily average basis to allow for
management of temporary fluctuations. Once the asset cap
limitation is removed, a second third-party review must be
conducted to assess the efficacy and sustainability of the
improvements.
The Company may be subject to further actions, including
the imposition of consent orders or similar regulatory
agreements or civil money penalties, by other federal regulators
regarding similar issues, including the Company’s risk
management policies and procedures.
Sales Practices Matters
As we have previously reported, in September 2016 we
announced settlements with the Consumer Financial Protection
Bureau (CFPB), the Office of the Comptroller of the Currency
(OCC), and the Office of the Los Angeles City Attorney, and
entered into consent orders with the CFPB and the OCC, in
connection with allegations that some of our retail customers
received products and services they did not request. As a result,
it remains our top priority to rebuild trust through a
comprehensive action plan that includes making things right for
our customers, team members, and other stakeholders, and
building a better Company for the future.
The job of rebuilding trust in Wells Fargo is a long-term
effort – one requiring our commitment and perseverance. We
have in place a specific action plan focused on reaching out to
stakeholders who may have been affected by improper retail
banking sales practices, including our communities, our
customers, our regulators, our team members, and our
investors.
Our priority of rebuilding trust has included numerous
actions focused on identifying potential financial harm and
customer remediation. The Board and management are
conducting company-wide reviews of sales practices issues.
These reviews are ongoing. In August 2017, a third-party
consulting firm completed an expanded data-driven review of
retail banking accounts opened from January 2009 to
September 2016 to identify financial harm stemming from
potentially unauthorized accounts. We are providing
customer remediation based on the expanded account
analysis.
For additional information regarding sales practices
matters, including related legal matters, see the “Risk Factors”
section and Note 15 (Legal Actions) to Financial Statements in
this Report.
Additional Efforts to Rebuild Trust
Our priority of rebuilding trust has also included an effort to
identify other areas or instances where customers may have
experienced financial harm. We are working with our regulatory
agencies in this effort. As part of this effort, we are focused on
the following key areas:
• Automobile Lending Business Practices concerning
the origination, servicing, and/or collection of consumer
automobile loans, including related insurance products.
For example:
In July 2017, the Company announced a plan to
remediate customers who may have been financially
harmed due to issues related to automobile collateral
protection insurance (CPI) policies purchased
through a third-party vendor on their behalf. The
practice of placing CPI was discontinued by the
Company on September 30, 2016. Commencing in
August 2017, the Company began sending refund
checks and/or letters to affected customers through
which they may claim or otherwise receive
remediation compensation for policies placed
between October 15, 2005, and September 30, 2016.
The Company currently estimates that it will provide
approximately $145 million in cash remediation and
$37 million in account adjustments under the plan.
The amount of remediation may be affected as the
Company continues to work with its regulators on
the remediation plan.
The Company has identified certain issues related to
the unused portion of guaranteed automobile
protection waiver or insurance agreements between
the dealer and, by assignment, the lender, which may
result in refunds to customers in certain states.
• Mortgage Interest Rate Lock Extensions In October
2017, the Company announced plans to reach out to all
home lending customers who paid fees for mortgage rate
lock extensions requested from September 16, 2013,
through February 28, 2017, and to provide refunds, with
interest, to customers who believe they should not have paid
those fees. The plan to issue refunds follows an internal
review that determined a rate lock extension policy
implemented in September 2013 was, at times, not
consistently applied, resulting in some borrowers being
charged fees in cases where the Company was primarily
responsible for the delays that made the extensions
necessary. Effective March 1, 2017, the Company changed
how it manages the mortgage rate lock extension process by
establishing a centralized review team that reviews all rate
lock extension requests for consistent application of the
policy. Although a total of approximately $98 million in rate
lock extension fees was assessed on approximately 110,000
accounts during the period in question, the Company
believes that the amount ultimately refunded likely will be
lower because a substantial number of those fees were
appropriately charged under its policy, not all of the fees
assessed were actually paid, and some fees already have
been refunded.
• Add-on Products Practices related to certain consumer
“add-on” products, including identity theft and debt
protection products that were subject to an OCC consent
order entered into in June 2015. Based on our ongoing
review of “add-on” products across the Company, we
Wells Fargo & Company
39
Overview (continued)
expect remediation will be required.
• Consumer Deposit Account Freezing/Closing
•
Procedures regarding the freezing (and, in many cases,
closing) of consumer deposit accounts after the Company
detected suspected fraudulent activity (by third-parties
or account holders) that affected those accounts.
• Review of Certain Activities Within Wealth and
Investment Management A review of certain
activities within Wealth and Investment Management
(WIM) being conducted by the Board, in response to
inquiries from federal government agencies, is assessing
whether there have been inappropriate referrals or
recommendations, including with respect to rollovers for
401(k) plan participants, certain alternative investments,
or referrals of brokerage customers to the Company’s
investment and fiduciary services business. The review is
in its preliminary stages.
Fiduciary and Custody Account Fee Calculations
The Company is reviewing fee calculations within certain
fiduciary and custody accounts in its investment and
fiduciary services business, which is part of the wealth
management business in WIM. The Company has
determined that there have been instances of incorrect
fees being applied to certain assets and accounts,
resulting in overcharges. These issues include the
incorrect set-up and maintenance in the system of record
of the values associated with certain assets. Systems,
operations, and account-level reviews are underway to
determine the extent of any assets and accounts affected,
and root cause analyses are being performed with the
assistance of third parties. The review is in its
preliminary stages and is focused initially on assets that
are not publicly traded.
Foreign Exchange Business The Company is
reviewing policies, practices, and procedures in its
foreign exchange (FX) business. The Company is also
responding to inquiries from government agencies in
connection with their reviews of certain aspects of our
FX business.
•
To the extent issues are identified, we will continue to
assess any customer harm and provide remediation as
appropriate. This effort to identify other instances in which
customers may have experienced harm is ongoing, and it is
possible that we may identify other areas of potential concern.
For more information, including related legal and regulatory
risk, see the “Risk Factors” section and Note 15 (Legal Actions)
to Financial Statements in this Report.
Financial Performance
In 2017, we generated $22.2 billion of net income and diluted
earnings per common share (EPS) of $4.10, compared with
$21.9 billion of net income and EPS of $3.99 for 2016. We grew
average loans and deposits compared with 2016, 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 2017 continued to
demonstrate the benefit of our diversified business model and
our ability to perform well in a challenging environment.
Noteworthy financial performance items for 2017 (compared
with 2016) included:
•
revenue of $88.4 billion, up from $88.3 billion, which
included net interest income of $49.6 billion, up
$1.8 billion, or 4%;
•
•
•
•
•
•
a $3.4 billion after-tax benefit, or $0.67 per share, to net
income in 2017 from the impact of the Tax Cuts & Jobs Act
(Tax Act) passed in December 2017. The impact included a
tax benefit from the re-measurement of net deferred income
tax liabilities, partially offset by the tax cost of a deemed
repatriation of undistributed foreign earnings and the
impact of adjustments related to leveraged leases, low
income housing investments, and tax-advantaged renewable
energy investments.
total loans of $956.8 billion, down 1%;
deposit growth, with total deposits of $1.3 trillion, up
$29.9 billion, or 2%;
strong credit performance as our net charge-off ratio was
31 basis points of average loans down from 37 basis points;
nonaccrual loans of $8.0 billion, down $2.3 billion, or 23%;
and
returning $14.5 billion in capital to our shareholders
through increased common stock dividends and additional
net share repurchases.
Table 1 presents a six year summary of selected financial
data and Table 2 presents selected ratios and per common share
data.
Balance Sheet and Liquidity
Our balance sheet grew 1% in 2017 to $2.0 trillion, as we
increased our liquidity position, held more capital and continued
to experience solid credit quality. Cash and other short-term
investments increased $9.2 billion from December 31, 2016,
reflecting lower loan balances and growth in deposits.
Investment securities grew $8.5 billion, or 2%, from
December 31, 2016. Our loan portfolio declined $10.8 billion
from December 31, 2016. Growth in commercial and industrial
and real estate 1-4 family first mortgage loans was more than
offset by declines in commercial real estate mortgage, real estate
1-4 family junior lien mortgage and automobile loans.
Deposits at December 31, 2017, were up $29.9 billion, or
2%, from 2016. This increase reflected growth across our
commercial, consumer and small business banking deposits. Our
average deposit cost increased 12 basis points from a year ago
driven by an increase in commercial and wealth and investment
management deposit rates.
Credit Quality
Credit quality remained solid in 2017, driven by continued
strong performance in the commercial and consumer real estate
portfolios. Performance in several of our commercial and
consumer loan portfolios remained near historically low loss
levels and reflected our long-term risk focus. Net charge-offs of
$2.9 billion were 0.31% of average loans, compared with
$3.5 billion and 0.37%, respectively, from a year ago. Net losses
in our commercial portfolio were $446 million, or 9 basis points
of average loans, in 2017, compared with $1.1 billion, or 22 basis
points, in 2016. Our commercial real estate portfolios were in a
net recovery position for each quarter of the last five years,
reflecting our conservative risk discipline and improved market
conditions.
Net consumer losses increased to 55 basis points in 2017
from 53 basis points in 2016. Losses on our consumer real estate
portfolios declined $343 million to a net recovery position from
a year ago. The consumer loss levels reflected increased losses in
our credit card, automobile, and other revolving and installment
loan portfolios, partially offset by the benefit of the improving
housing market and our continued focus on originating high
quality loans. As of December 31, 2017, approximately 79% of
40
Wells Fargo & Company
our real estate 1-4 family first lien mortgage portfolio was
originated after 2008, when new underwriting standards were
implemented.
The allowance for credit losses of $12.0 billion at
December 31, 2017, was down $580 million compared with the
prior year. Our provision for credit losses in 2017 was
$2.5 billion compared with $3.8 billion a year ago reflecting a
release of $400 million in the allowance for credit losses,
compared with a build of $250 million in 2016. The build in
2016 was primarily due to deterioration in the oil and gas
portfolio, while the release in 2017 was due to strong underlying
credit performance.
Nonperforming assets (NPAs) at the end of 2017 were down
$2.7 billion, or 24%, from the end of 2016. Nonaccrual loans
declined $2.3 billion from the prior year end while foreclosed
assets were down $336 million from 2016.
Capital
Our capital levels remained strong in 2017 with total equity
increasing to $208.1 billion at December 31, 2017, up
$7.6 billion from the prior year. We returned $14.5 billion to
shareholders in 2017 ($12.5 billion in 2016) through common
stock dividends and net share repurchases, and our net payout
Table 1: Six-Year Summary of Selected Financial Data
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 70%. During 2017 we increased our quarterly common stock
dividend from $0.38 to $0.39 per share. Our common shares
outstanding declined by 124.5 million shares as we continued to
reduce our common share count through the repurchase of
196.5 million common shares during the year. We entered into a
$1 billion forward repurchase contract with an unrelated third
party in January 2018 that settled in February 2018 for
15.7 million shares. We also entered into a $600 million forward
repurchase contract with an unrelated third party in February
2018 that is expected to settle in second quarter 2018 for
approximately 11 million shares. We expect our share count to
continue to decline in 2018 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
was 11.98% as of December 31, 2017, compared with 10.77% 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.
Noninterest expense
58,484
52,377
49,974
(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
2017
2016
2015
2014
2013
2012
%
Change
2017/
2016
Five-year
compound
growth
rate
$ 49,557
38,832
88,389
2,528
47,754
40,513
88,267
3,770
45,301
40,756
86,057
2,442
43,527
40,820
84,347
1,395
49,037
42,800
40,980
83,780
2,309
48,842
43,230
42,856
86,086
7,217
50,398
4%
(4)
—
(33)
12
22,460
22,045
23,276
23,608
22,224
19,368
2
3
(2)
1
(19)
3
3
277
107
382
551
346
471
159
(10)
Wells Fargo net income
22,183
21,938
22,894
23,057
21,878
18,897
Earnings per common share
Diluted earnings per common share
4.14
4.10
4.03
3.99
4.18
4.12
4.17
4.10
3.95
3.89
3.40
3.36
Dividends declared per common
share
Balance sheet (at year end)
1.540
1.515
1.475
1.350
1.150
0.880
1
3
3
2
Investment securities
$ 416,420
407,947
347,555
312,925
264,353
235,199
2%
Loans
956,770
967,604
916,559
862,551
822,286
798,351
Allowance for loan losses
Goodwill
Assets
Deposits
11,004
26,587
11,419
26,693
11,545
25,529
12,319
25,705
14,502
25,637
17,060
25,637
1,951,757
1,930,115
1,787,632
1,687,155
1,523,502
1,421,746
1,335,991
1,306,079
1,223,312
1,168,310
1,079,177
1,002,835
(1)
(4)
—
1
2
Long-term debt
225,020
255,077
199,536
183,943
152,998
127,379
(12)
Wells Fargo stockholders’ equity
206,936
199,581
192,998
184,394
170,142
157,554
Noncontrolling interests
1,143
916
893
868
866
1,357
Total equity
208,079
200,497
193,891
185,262
171,008
158,911
4
25
4
3
4
4
12
12
4
(8)
1
7
6
12
6
(3)
6
Wells Fargo & Company
41
Overview (continued)
Table 2: Ratios and Per Common Share Data
Profitability ratios
Wells Fargo net income to average assets (ROA)
1.15%
1.16
1.31
Year ended December 31,
2017
2016
2015
Wells Fargo net income applicable to common stock to average Wells Fargo common
stockholders’ equity (ROE)
Return on average tangible common equity (ROTCE) (1)
Efficiency ratio (2)
Capital ratios (3)
At year end:
Wells Fargo common stockholders’ equity to assets
Total equity to assets
Risk-based capital (4):
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 (5)
Book value (6)
Market price (7)
High
Low
Year end
11.35
13.55
66.2
9.38
10.66
12.28
14.14
17.46
9.35
9.37
10.64
37.6
$
37.44
62.24
49.28
60.67
11.49
13.85
59.3
9.14
10.39
11.13
12.82
16.04
8.95
9.40
10.64
38.0
35.18
58.02
43.55
55.11
12.60
15.17
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
(1) Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, and goodwill and certain identifiable
intangible assets (including goodwill and intangible assets associated with certain of our nonmarketable equity investments but excluding mortgage servicing rights), net of
applicable deferred taxes. The methodology of determining tangible common equity may differ among companies. Management believes that return on average tangible
common equity, which utilizes tangible common equity, is a useful financial measure because it enables investors and others to assess the Company's use of equity. For
additional information, including a corresponding reconciliation to GAAP financial measures, see the “Capital Management – Tangible Common Equity” section in this Report.
(2) The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(3) See the “Capital Management” section and Note 27 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(4) The risk-based capital ratios presented at December 31, 2017, 2016, and 2015 were calculated under the lower of Standardized or Advanced Approach determined
pursuant to Basel III with Transition Requirements. The risk-based capital ratios were all lower under the Standardized Approach at December 31, 2017. The total capital
ratio was lower under the Advanced Approach and the other ratios were lower under the Standardized Approach at both December 31, 2016 and 2015.
(5) Dividend payout ratio is dividends declared per common share as a percentage of diluted earnings per common share.
(6) Book value per common share is common stockholders’ equity divided by common shares outstanding.
(7) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
noninterest income. In 2017, net interest income of $49.6 billion
represented 56% of revenue, compared with $47.8 billion (54%)
in 2016 and $45.3 billion (53%) in 2015. Table 3 presents the
components of revenue and noninterest expense as a percentage
of revenue for year-over-year results.
See later in this section for discussions of net interest
income, noninterest income and noninterest expense.
Earnings Performance
Wells Fargo net income for 2017 was $22.2 billion ($4.10 diluted
earnings per common share), compared with $21.9 billion
($3.99 diluted per share) for 2016 and $22.9 billion
($4.12 diluted per share) for 2015. Our financial performance in
2017 benefited from a $1.8 billion increase in net interest
income, a $1.2 billion decrease in our provision for credit losses,
and a $5.2 billion decrease in income tax expense (of which
$3.7 billion resulted from the net benefit of adjustments due to
the Tax Act), partially offset by a $1.7 billion decrease in
noninterest income and a $6.1 billion increase in noninterest
expense.
Revenue, the sum of net interest income and noninterest
income, was $88.4 billion in 2017, compared with $88.3 billion
in 2016 and $86.1 billion in 2015. The increase in revenue for
2017 compared with 2016 was predominantly due to an increase
in net interest income, reflecting increases in interest income
from loans, trading assets and investment securities, partially
offset by higher long-term debt and deposit interest expense.
Our diversified sources of revenue generated by our businesses
continued to be balanced between net interest income and
42
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 (on a taxable-equivalent basis)
Deposits
Short-term borrowings
Long-term debt
Other interest expense
Total interest expense (on a taxable-equivalent basis)
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 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
Operating losses
Outside professional services
Other (2)
Total noninterest expense
Revenue (A) + (B)
2017
% of
revenue
2016
% of
revenue
2015
% of
revenue
Year ended December 31,
$
2,982
3% $
2,553
3% $
11,768
786
12
41,551
3,134
60,233
3,013
761
5,157
424
9,355
50,878
(1,321)
49,557
5,111
14,495
3,960
3,557
4,350
1,049
1,053
479
1,268
1,907
1,603
38,832
17,363
10,442
5,566
2,237
2,849
1,152
1,287
5,492
3,813
8,283
13
1
—
47
4
68
3
1
6
—
11
57
(1)
56
6
16
4
4
5
1
1
1
1
2
2
44
20
12
6
3
3
1
1
6
4
9
10,316
11%
784
9
39,630
1,614
54,906
1,395
333
3,830
354
5,912
48,994
(1,240)
47,754
5,372
14,243
3,936
3,727
6,096
1,268
834
942
879
1,927
1,289
1
—
45
2
62
2
—
5
—
7
55
(1)
54
6
16
5
4
7
2
1
1
1
2
1
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
2%
12
1
—
43
1
59
1
—
4
—
5
54
(1)
53
6
16
4
5
7
2
1
1
3
1
1
40,513
46
40,756
47
16,552
10,247
5,094
2,154
2,855
1,192
1,168
1,608
3,138
8,369
19
12
6
2
3
1
1
2
4
9
15,883
10,352
4,446
2,063
2,886
1,246
973
1,871
2,665
7,589
19
12
5
2
3
1
1
2
3
10
58
58,484
66
52,377
59
49,974
$
88,389
$
88,267
$
86,057
(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
43
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 on 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 fees and collection of interest on nonaccrual loans, can vary
from period to period. Net interest income and net interest
margin growth has been challenged during the prolonged low
interest rate environment as higher yielding loans and securities
have run off and have been replaced with lower yielding assets.
Net interest income on a taxable-equivalent basis was
$50.9 billion in 2017, compared with $49.0 billion in 2016, and
$46.4 billion in 2015. The net interest margin was 2.87% in
2017, up 1 basis point from 2.86% in 2016, and down 9 basis
points from 2.95% in 2015. The increase in net interest income
for 2017, compared with 2016, was driven by growth in earning
assets and the benefit of higher interest rates, partially offset by
growth and repricing of long-term debt. Deposit interest expense
was also higher, largely due to an increase in Wholesale and
Wealth and Investment Management (WIM) deposit pricing
resulting from higher interest rates.
The slight increase in net interest margin in 2017, compared
with 2016, was due to repricing benefits of earning assets from
higher interest rates exceeding the repricing costs of deposits
and market based funding sources.
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 $62.2 billion in 2017 from
a year ago, as average loans increased $6.2 billion, average
investment securities increased $50.4 billion, and average
trading assets increased $13.3 billion in 2017, compared with a
year ago. In addition, average federal funds sold and other short-
term investments decreased $11.2 billion in 2017, 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 increased to $1.30 trillion in 2017, compared with
$1.25 trillion in 2016, and represented 136% of average loans
compared with 132% a year ago. Average deposits were 74% of
average earning assets in 2017, compared with 73% a year ago.
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 2017, are
analyzed in Table 6.
44
Wells Fargo & Company
Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earning 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
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 (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
276,561
101,716
15,966
52,658
145,310
11,839
49,193
274,966
44,705
6,268
78,330
2,194
131,497
406,463
20,780
147
272,034
57,198
129,990
24,813
19,128
503,163
277,751
42,780
35,600
57,900
38,935
452,966
956,129
11,445
2017
% of
earning
assets
Average
balance
16%
$
287,718
6
1
3
8
1
3
16
3
—
4
—
7
23
1
—
15
3
8
1
1
28
16
3
2
3
2
26
54
—
88,400
29,418
52,959
110,637
18,725
53,433
265,172
44,675
2,893
39,330
4,043
90,941
356,113
22,412
218
268,182
51,601
127,232
23,197
17,950
488,162
276,712
49,735
34,178
61,566
39,607
461,798
949,960
6,262
2016
% of
earning
assets
17%
5
2
3
7
1
3
16
3
—
2
—
5
21
1
—
16
3
8
1
1
29
16
3
2
4
2
27
56
—
$
1,773,241
100%
$
1,711,083
100%
$
49,474
682,053
22,190
61,625
123,816
939,158
98,922
246,195
21,872
1,306,147
467,094
3%
$
39
1
3
7
53
6
14
1
74
26
42,379
663,557
25,912
55,846
103,206
890,900
115,187
239,471
16,702
1,262,260
448,823
2%
39
2
3
6
52
7
14
1
74
26
$
1,773,241
100%
$
1,711,083
100%
$
$
$
$
$
18,622
26,629
114,513
159,764
365,464
55,740
205,654
(467,094)
159,764
1,933,005
18,617
26,700
129,041
174,358
359,666
62,825
200,690
(448,823)
174,358
1,885,441
Wells Fargo & Company
45
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
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 and other 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
2017
Interest
income/
expense
Average
balance
Yields/
rates
2016
Interest
income/
expense
$
276,561
1.05% $
101,716
2.93
15,966
52,658
145,310
11,839
49,193
274,966
44,705
6,268
78,330
2,194
131,497
406,463
20,780
147
272,034
57,198
129,990
24,813
19,128
503,163
277,751
42,780
35,600
57,900
38,935
452,966
956,129
11,445
1.49
3.95
2.60
5.33
3.73
3.12
2.19
5.32
2.34
2.50
2.43
2.90
3.78
8.38
3.75
2.86
3.74
4.10
3.74
3.66
4.03
4.82
12.23
5.34
6.18
5.11
4.35
2.06
2,897
2,982
239
2,082
3,782
631
1,834
8,568
979
334
1,832
55
3,200
11,768
786
12
10,196
1,639
4,859
1,017
715
18,426
11,206
2,062
4,355
3,094
2,408
23,125
41,551
237
287,718
88,400
29,418
52,959
110,637
18,725
53,433
265,172
44,675
2,893
39,330
4,043
90,941
356,113
22,412
218
268,182
51,601
127,232
23,197
17,950
488,162
276,712
49,735
34,178
61,566
39,607
461,798
949,960
6,262
0.51% $
2.89
1,457
2,553
1.56
4.20
2.50
5.49
3.44
3.14
2.19
5.32
2.00
2.01
2.20
2.90
3.50
4.01
3.45
2.36
3.44
3.55
5.10
3.39
4.01
4.39
11.62
5.62
5.93
4.99
4.17
2.51
457
2,225
2,764
1,029
1,841
8,316
979
154
786
81
2,000
10,316
784
9
9,243
1,219
4,371
824
916
16,573
11,096
2,183
3,970
3,458
2,350
23,057
39,630
157
Total earning assets
$ 1,773,241
3.40% $
60,233
1,711,083
3.21% $
54,906
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
$
49,474
682,053
22,190
61,625
123,816
939,158
98,922
246,195
21,872
1,306,147
467,094
$ 1,773,241
$
18,622
26,629
114,513
$
159,764
$
365,464
55,740
205,654
(467,094)
$
159,764
$ 1,933,005
0.49% $
0.14
0.30
1.43
0.68
0.32
0.77
2.09
1.94
0.72
—
0.53
242
983
67
880
841
3,013
761
5,157
424
9,355
—
9,355
42,379
663,557
25,912
55,846
103,206
890,900
115,187
239,471
16,702
1,262,260
448,823
1,711,083
0.14% $
0.07
0.35
0.91
0.28
0.16
0.29
1.60
2.12
0.47
—
0.35
60
449
91
508
287
1,395
333
3,830
354
5,912
—
5,912
2.87% $
50,878
2.86% $
48,994
18,617
26,700
129,041
174,358
359,666
62,825
200,690
(448,823)
174,358
1,885,441
(1) Our average prime rate was 4.10% for the year ended December 31, 2017, 3.51% for the year ended December 31, 2016, 3.26% for the year ended December 31, 2015,
and 3.25% for the years ended December 31, 2014, and 2013 . The average three-month London Interbank Offered Rate (LIBOR) was 1.26%, 0.74%, 0.32%, 0.23%, and
0.27% for the same years, respectively.
(2) Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
46
Wells Fargo & Company
Average
balance
Yields/
rates
$
266,832
0.28% $
66,679
3.01
32,093
47,404
100,218
22,490
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
3.42
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
2015
Interest
income/
expense
738
2,010
505
2,007
2,733
1,289
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
Average
balance
Yields/
rates
241,282
55,140
10,400
43,138
114,076
26,475
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
1.64
4.29
2.84
6.03
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
2014
Interest
income/
expense
673
1,712
171
1,852
3,235
1,597
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
Average
balance
Yields/
rates
154,902
44,745
6,750
39,922
107,148
30,717
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
0.32% $
3.14
1.66
4.38
2.83
6.47
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
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
$
1,572,071
3.20%
$
50,373
1,429,667
3.39%
$
48,457
1,282,363
3.73%
$
47,892
$
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
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
$
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
2.95% $
46,397
3.11% $
44,429
3.40% $
43,592
16,361
25,687
121,634
163,682
303,127
56,985
180,288
(376,718)
163,682
1,593,349
16,272
25,637
121,711
163,620
280,229
58,178
164,994
(339,781)
163,620
1,445,983
(3)
(4)
(5)
The average balance amounts represent amortized cost for the periods presented.
Nonaccrual loans and related income are included in their respective loan categories.
Includes taxable-equivalent adjustments of $1.3 billion, $1.2 billion, $1.1 billion, $902 million and $792 million for the years ended December 31, 2017, 2016, 2015, 2014
and 2013, respectively, predominantly 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
47
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 in 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
2017 over 2016
Year ended December 31,
2016 over 2015
Increase (decrease) in interest income:
Federal funds sold, securities purchased under resale agreements and
other short-term investments
Trading assets
Investment securities:
Available-for-sale securities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt and equity securities
Total available-for-sale securities
Held-to-maturity securities:
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 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 in interest expense
Increase (decrease) in net interest income on a taxable-equivalent
basis
$
(59)
393
1,499
36
1,440
429
(198)
(13)
902
(369)
533
(154)
168
—
180
893
(43)
1,030
(59)
(4)
135
142
97
59
57
490
48
(323)
170
(198)
(40)
(343)
147
112
1,728
11
14
(12)
57
68
138
(53)
111
102
298
(20)
(130)
116
(29)
87
147
84
—
—
153
17
170
61
7
818
278
391
134
(258)
(218)
(143)
1,018
(398)
620
(7)
252
—
180
1,046
(26)
1,200
2
3
953
420
488
193
(201)
1,363
1,853
62
202
215
(166)
98
411
1,774
(32)
3,599
171
520
(12)
315
486
1,480
481
1,216
(32)
3,145
110
(121)
385
(364)
58
68
1,921
80
5,327
182
534
(24)
372
554
1,618
428
1,327
70
3,443
62
626
(42)
232
272
(208)
64
130
384
11
43
353
(34)
373
28
(13)
1,018
114
352
79
286
1,849
335
(285)
331
215
126
722
2,571
56
4,087
2
22
(33)
20
(5)
6
25
833
3
867
657
(83)
(6)
(14)
(241)
(52)
(293)
10
(303)
—
(2)
(56)
14
(44)
(29)
3
389
228
35
(4)
53
701
(241)
77
(25)
(131)
15
(305)
396
(151)
446
38
60
(77)
256
149
426
244
405
(6)
1,069
719
543
(48)
218
31
(260)
(229)
140
81
11
41
297
(20)
329
(1)
(10)
1,407
342
387
75
339
2,550
94
(208)
306
84
141
417
2,967
(95)
4,533
40
82
(110)
276
144
432
269
1,238
(3)
1,936
$
1,430
454
1,884
3,220
(623)
2,597
48
Wells Fargo & Company
Noninterest Income
Table 7: Noninterest Income
(in millions)
2017
Service charges on deposit accounts
$ 5,111
2016
5,372
2015
5,168
Year ended December 31,
Trust and investment fees:
Brokerage advisory, commissions and
other fees
Trust and investment management
Investment banking
9,358
3,372
1,765
9,216
3,336
1,691
9,435
3,394
1,639
Total trust and investment fees
14,495
14,243
14,468
Card fees
Other fees:
Charges and fees on loans
Cash network fees
Commercial real estate
brokerage commissions
Letters of credit fees
Wire transfer and other remittance fees
All other fees (1)(2)(3)
Total other fees
Mortgage banking:
Servicing income, net
Net gains on mortgage loan
origination/sales activities
Total mortgage banking
Insurance
Net gains from trading activities
Net gains on debt securities
Net gains from equity investments
Lease income
Life insurance investment income
All other (3)
3,960
3,936
3,720
1,263
506
1,241
537
462
305
448
573
494
321
401
733
3,557
3,727
1,228
522
618
353
370
1,233
4,324
1,427
1,765
2,441
2,923
4,350
1,049
1,053
479
1,268
1,907
594
1,009
4,331
6,096
1,268
834
942
879
1,927
587
702
4,060
6,501
1,694
614
952
2,230
621
579
(115)
Total
$ 38,832
40,513
40,756
(1) Wire transfer and other remittance fees, reflected in all other fees prior to
2016, have been separately disclosed.
(2) All other fees have been revised to include merchant processing fees for the
years ended 2016 and 2015.
(3) Effective fourth quarter 2015, the Company's proportionate share of its
merchant services joint venture earnings is included in All other income.
Noninterest income of $38.8 billion represented 44% of revenue
for 2017, compared with $40.5 billion, or 46%, for 2016 and
$40.8 billion, or 47%, for 2015. The decline in noninterest
income in 2017 compared with 2016 was predominantly driven
by lower mortgage banking, impairments on low income housing
credits and tax-advantaged renewable energy investments as a
result of the Tax Act, and lower service charges on deposit
accounts. These decreases in noninterest income were partially
offset by growth in trust and investment fees, deferred
compensation plan investment results (offset in employee
benefits expense), and the net impact of our insurance services
business divestiture in November 2017 and a gain from the sale
of a Pick-a-Pay PCI loan portfolio. The decline in noninterest
income in 2016 compared with 2015 was largely driven by lower
net gains from equity investments, mortgage banking, and
insurance income due to the divestiture of our crop insurance
business, partially offset by growth in lease income related to the
GE Capital business acquisitions and gains from the sale of our
crop insurance and health benefit services businesses. For more
information on our performance obligations and the nature of
services performed for certain of our revenues discussed below,
see Note 20 (Revenue from Contracts with Customers) to
Financial Statements in this Report.
Service charges on deposit accounts were $5.1 billion in
2017, down from $5.4 billion in 2016 due to lower consumer and
business checking account service charges, lower overdraft fees
driven by customer-friendly initiatives including the Overdraft
Rewind launched in November 2017, and a higher earnings
credit rate applied to commercial accounts due to increased
interest rates. Service charges on deposit accounts increased
$204 million in 2016 from 2015 due to higher overdraft fee
revenue driven by growth in transaction volume, account growth
and higher fees from commercial products and re-pricing.
Brokerage advisory, commissions and other fees increased
to $9.4 billion in 2017, from $9.2 billion in 2016, which
decreased $219 million compared with 2015. The increase in
these fees for 2017 was due to higher asset-based fees, partially
offset by lower transactional commission revenue. The decrease
in 2016 was predominantly due to lower transactional
commission revenue. Retail brokerage client assets totaled
$1.65 trillion at December 31, 2017, compared with $1.49 trillion
and $1.39 trillion at December 31, 2016 and 2015, respectively,
with all retail brokerage services provided by our 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.
Trust and investment management fee income is primarily
from client assets under management (AUM), for which fees are
based on a tiered scale relative to market value of the assets, and
client assets under administration (AUA), for which fees are
generally based on the extent of services to administer the assets.
Trust and investment management fees of $3.4 billion in 2017
were relatively stable compared with 2016. Trust and investment
management fees of $3.3 billion in 2016 decreased $58 million
compared with 2015, due to a shift of assets into lower yielding
products. Our AUM totaled $690.3 billion at December 31, 2017,
compared with $652.2 billion and $653.4 billion at
December 31, 2016 and 2015, 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. Our AUA totaled
$1.7 trillion at December 31, 2017, compared with $1.6 trillion
and $1.4 trillion at December 31, 2016 and 2015, respectively.
Investment banking fees of $1.8 billion in 2017 increased
from $1.7 billion in 2016 due to higher equity and debt
originations, partially offset by lower advisory fees. Investment
banking fees in 2016 increased $52 million compared with 2015
due to higher loan syndications and advisory fees, partially offset
by lower equity originations.
Card fees were $4.0 billion in 2017, compared with
$3.9 billion in 2016 and $3.7 billion in 2015. Card fees increased
in 2017 and 2016 predominantly due to increased purchase
activity.
Other fees of $3.6 billion in 2017 decreased compared with
2016 predominantly driven by lower all other fees. Other fees in
2016 decreased compared with 2015 predominantly driven by
lower commercial real estate brokerage commissions and all
other fees. All other fees were $573 million in 2017, compared
with $733 million in 2016 and $1.2 billion in 2015. The decrease
in all other fees in 2017 compared with 2016 was driven by lower
fees from discontinued products and the impact of the sale of our
global fund services business in fourth quarter 2016. The
decrease in all other fees in 2016 compared with 2015 was
predominantly due to the deconsolidation of our merchant
services joint venture in fourth quarter 2015, which resulted in a
proportionate share of that income now being reflected in all
other income.
Mortgage banking income, consisting of net servicing
income and net gains on loan origination/sales activities, totaled
Wells Fargo & Company
49
Earnings Performance (continued)
$4.4 billion in 2017, compared with $6.1 billion in 2016 and
$6.5 billion in 2015.
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 during
the period. Net servicing income of $1.4 billion for 2017 included
a $287 million net MSR valuation gain ($126 million decrease in
the fair value of the MSRs and a $413 million hedge gain). Net
servicing income of $1.8 billion for 2016 included a $826 million
net MSR valuation gain ($565 million increase in the fair value
of the MSRs and a $261 million hedge gain), and 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 MSRs
and a $671 million hedge gain). The decrease in net MSR
valuation gains in 2017, compared with 2016, was largely
attributable to lower hedge gains in 2017 and MSR valuation
adjustments in first quarter 2016 that reflected a reduction in
forecasted prepayments due to updated economic, customer
data attributes and mortgage market rate inputs. The decrease in
net MSR valuation gains in 2016, compared with 2015,
was predominantly attributable to lower hedge gains, partially
offset by more favorable MSR valuation adjustments in 2016 for
servicing and foreclosure costs, net of prepayment and other
updates. The decline in net servicing income from 2015 to 2016
was also attributable to a reduction in net servicing fees due to a
reduction in the portfolio of loans serviced for others as well as
an increase in unreimbursed direct servicing costs.
Our portfolio of loans serviced for others was $1.70 trillion
at December 31, 2017, $1.68 trillion at December 31, 2016, and
$1.78 trillion at December 31, 2015. At December 31, 2017, the
ratio of combined residential and commercial MSRs to related
loans serviced for others was 0.88%, compared with 0.85% at
December 31, 2016, and 0.77% at December 31, 2015. 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/sales activities was
$2.9 billion in 2017, compared with $4.3 billion in 2016 and
$4.1 billion in 2015. The decrease in 2017 compared with 2016
was largely driven by decreased origination volumes and
margins. The increase in 2016 from 2015 was predominantly
driven by increased origination volumes, partially offset by lower
margins. Mortgage loan originations were $212 billion in 2017,
compared with $249 billion for 2016 and $213 billion for 2015.
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 Mortgage Production Data
Year ended December 31,
2017
2016
2015
Net gains on mortgage
loan origination/sales
activities (in millions):
Residential
Commercial
Residential pipeline
and unsold/
repurchased loan
management (1)
(A)
$ 2,140
3,168
2,861
358
400
362
425
763
837
Total
$ 2,923
4,331
4,060
Residential real estate
originations (in
billions):
Held-for-sale
(B)
$ 160
52
$ 212
186
63
249
155
58
213
Held-for-investment
Total
Production margin on
residential held-for
sale mortgage
originations
(A)/(B)
1.34%
1.71
1.84
(1) Predominantly includes the results of sales of modified Government National
Mortgage Association (GNMA) loans, interest rate management activities and
changes in estimate to the liability for mortgage loan repurchase losses.
The production margin was 1.34% for 2017, compared with
1.71% for 2016 and 1.84% for 2015. The decrease in the
production margin in both 2017 and 2016 was due to a shift in
origination channel mix from retail to correspondent. Mortgage
applications were $278 billion in 2017, compared with
$347 billion in 2016 and $311 billion in 2015. The 1-4 family first
mortgage unclosed pipeline was $23 billion at December 31,
2017, compared with $30 billion at December 31, 2016, and
$29 billion at December 31, 2015. 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 2017, we released
a net $39 million from the repurchase liability, compared with a
net release of $103 million for 2016 and $159 million for 2015.
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.
50
Wells Fargo & Company
Insurance income was $1.0 billion in 2017 compared with
All other income was $1.0 billion for 2017 compared with
$1.3 billion in 2016 and $1.7 billion in 2015. The decrease in
2017 and 2016 was driven by the divestiture of our crop
insurance business in first quarter 2016. The decrease in 2017
was also affected by the divestiture of our insurance services
business in fourth quarter 2017.
Net gains from trading activities, which reflect unrealized
changes in fair value of our trading positions and realized gains
and losses, were $1.1 billion in 2017, $834 million in 2016 and
$614 million in 2015. The increases in 2017 and 2016, compared
with 2016 and 2015, respectively, were predominantly driven by
higher deferred compensation gains (offset in employee benefits
expense). The increase in 2016 also reflected higher customer
accommodation trading activity within our capital markets
business driven by higher fixed income trading gains. 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 $1.7 billion
for 2017 and $1.8 billion and $3.2 billion for 2016 and 2015,
respectively, after other-than-temporary impairment (OTTI)
write-downs of $606 million, $642 million and $559 million,
respectively, for the same periods. The decrease in net gains on
debt and equity securities in 2017 compared with 2016 was
driven by lower net gains on debt securities, partially offset by
higher net gains from equity investments from non-marketable
equity investments. The decrease in net gains on debt and equity
securities in 2016 compared with 2015 reflected lower net gains
from equity investments as our portfolio benefited from strong
public and private equity markets in 2015.
Lease income of $1.9 billion in 2017 was stable compared
with 2016. Lease income increased $1.3 billion in 2016
compared with 2015, largely driven by the GE Capital business
acquisitions.
$702 million in 2016 and $(115) million in 2015. 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 and renewable
energy 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
increase in other income in 2017 compared with 2016 was driven
by a $848 million pre-tax gain from the sale of our insurance
services business in fourth quarter 2017 and a $309 million pre
tax gain from the sale of a Pick-a-Pay PCI loan portfolio in
second quarter 2017, as well as the impact of the adoption of
Accounting Standards Update (ASU) 2017-12 – Derivatives and
Hedging in fourth quarter 2017, partially offset by a gain from
the sale of our crop insurance business in first quarter 2016 and
a gain from the sale of our health benefit services business in
second quarter 2016. All other income in 2017 also included
$284 million of impairments on low income housing
investments and $130 million of impairments on tax-advantaged
renewable energy investments in each case due to the Tax Act.
The increase in other income in 2016 compared with 2015 was
driven by a $374 million pre-tax gain from the sale of our crop
insurance business in first quarter 2016, a $290 million gain
from the sale of our health benefit services business in second
quarter 2016, and our proportionate share of earnings from a
merchant services joint venture that was deconsolidated in 2015,
partially offset by 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.
Wells Fargo & Company
51
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
Operating losses
Outside professional services
Contract services
Operating leases
Outside data processing
Travel and entertainment
Advertising and promotion
Postage, stationery and supplies
Telecommunications
Foreclosed assets
Insurance
All other
Total
Year ended December 31,
2017
2016
2015
$ 17,363
16,552
15,883
10,442
10,247
10,352
5,566
2,237
2,849
1,152
1,287
5,492
3,813
1,369
1,351
891
687
614
544
364
251
100
5,094
2,154
2,855
1,192
1,168
1,608
3,138
1,203
1,329
888
704
595
622
383
202
179
4,446
2,063
2,886
1,246
973
1,871
2,665
978
278
985
692
606
702
439
381
448
2,112
2,264
2,080
$ 58,484
52,377
49,974
Noninterest expense was $58.5 billion in 2017, up 12% from
$52.4 billion in 2016, which was up 5% from $50.0 billion in
2015. The increase in 2017, compared with 2016, was
predominantly driven by higher operating losses, personnel
expenses, and outside professional and contract services,
partially offset by lower insurance and postage, stationery and
supplies. The increase in 2016, compared with 2015, was driven
by higher personnel expenses, operating lease expense, outside
professional services and contract services, and FDIC and other
deposit assessments, partially offset by lower insurance,
operating losses, foreclosed assets expense, and outside data
processing.
Personnel expenses, which include salaries, commissions,
incentive compensation and employee benefits, were up
$1.5 billion, or 5% in 2017, compared with 2016, due to annual
salary increases, higher deferred compensation costs (offset in
trading revenue), and higher employee benefits. Personnel
expenses were up $1.2 billion, or 4% in 2016, compared with
2015, due to annual salary increases, staffing growth driven by
the GE Capital business acquisitions and investments in
technology and risk management, higher deferred compensation
expense (offset in trading revenue) and increased employee
benefits.
FDIC and other deposit assessments were up 10% in 2017,
compared with 2016, due to an increase in deposit assessments
as a result of a temporary surcharge which became effective on
July 1, 2016. The FDIC expects the surcharge to end in third
quarter 2018. FDIC and other deposit assessments were up 20%
in 2016, compared with 2015, primarily due to the
aforementioned temporary surcharge. See the “Regulation and
Supervision” section in our 2017 Form 10-K for additional
information.
Operating losses were up $3.9 billion in 2017, compared
with 2016, predominantly due to higher litigation accruals for a
variety of matters, including mortgage-related regulatory
investigations, sales practices, and other consumer-related
matters. Litigation accruals in 2017 included $3.7 billion that
were non tax-deductible. Operating losses were down
$263 million, or 14%, in 2016 compared with 2015,
predominantly due to lower litigation accruals for various legal
matters.
Outside professional services expense was up 22% and
contract services expense was up 14% in 2017, compared with
2016. Both increases were driven by higher project and
technology spending on regulatory and compliance related
initiatives, as well as higher legal expense related to sales
practice matters. Outside professional services expense was up
18% and contract services expense was up 23% in 2016,
compared with 2015, driven by investments in our products,
technology and service delivery, as well as costs to meet
heightened regulatory expectations and cybersecurity risk.
Operating lease expense of $1.4 billion in 2017 was
relatively stable, compared with 2016, and was up $1.1 billion in
2016, compared with 2015, driven by higher depreciation
expense on the leased assets acquired from GE Capital.
Outside data processing expense was relatively stable
compared with 2016 and was down 10% in 2016, compared with
2015. The decrease in 2016, compared with 2015, was due to
lower card-related processing expense and the deconsolidation
of our merchant services joint venture in fourth quarter 2015,
partially offset by increased data processing expense related to
the GE Capital business acquisitions.
Postage, stationery and supplies expense was down 13% in
2017, compared with 2016, due to lower mail services and
supplies expense. Postage, stationery and supplies expense was
down 11% in 2016, compared with 2015, driven by lower
postage and mail services expense.
Telecommunications expense was down 5% in 2017,
compared with 2016, and down 13% in 2016, compared with
2015, in each case driven by lower telephone and data rates.
Foreclosed assets expense was up 24% in 2017, compared
with 2016, due to lower gains on sales of foreclosed properties,
partially offset by lower operating expenses. Foreclosed assets
expense was down 47% in 2016, compared with 2015, driven by
lower operating expense and write-downs, partially offset by
lower gains on sales of foreclosed properties.
Insurance expense was down 44% in 2017, compared with
2016, predominantly driven by the sale of our crop insurance
business in first quarter 2016. Insurance expense was down 60%
in 2016, compared with 2015, due to the sale of our crop
insurance business in first quarter 2016 and the sale of our
Warranty Solutions business in third quarter 2015.
All other noninterest expense was down 7% in 2017,
compared with 2016, due to lower insurance premium payments
and higher gains on the sale of a corporate property, partially
offset by higher charitable donations expense. All other
noninterest expense was up 9% in 2016, compared with 2015,
driven by higher insurance premium payments. All other
noninterest expense in 2017 included a $199 million
contribution to the Wells Fargo Foundation, compared with a
$107 million contribution in 2016.
Our full year 2017 efficiency ratio was 66.2%, compared
with 59.3% in 2016 and 58.1% in 2015.
52
Wells Fargo & Company
Income Tax Expense
The 2017 annual effective income tax rate was 18.1%, compared
with 31.5% in 2016 and 31.2% in 2015. The effective income tax
rate for 2017 reflected the estimated impact of the Tax Act,
including a benefit of $3.89 billion resulting from the re-
measurement of the Company's estimated net deferred tax
liability as of December 31, 2017, partially offset by $173 million
of tax expense relating to the estimated tax impact of the deemed
repatriation of the Company's previously undistributed foreign
earnings. The benefit of the Tax Act on the effective income tax
rate in 2017 was partially offset by $1.3 billion relating to the tax
effect of discrete non tax-deductible items (predominantly
litigation accruals). For 2017, we were able to make reasonable
estimates and record provisional amounts related to the impacts
of the Tax Act. We will complete these calculations during 2018
as we finalize our tax filings for 2017 and finalize our analysis of
the Tax Act and applicable interpretive guidance issued by
federal and state tax authorities. The effective income tax rate for
2016 reflected a net benefit from the reduction to the reserve for
uncertain tax positions resulting from settlements with tax
authorities and a net increase in tax benefits related to tax credit
investments. The effective income 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. See Note 22 (Income Taxes) to Financial
Statements in this Report for additional information about our
income taxes.
Table 9: Operating Segment Results – Highlights
Operating Segment Results
We are organized for management reporting purposes into three
operating segments: Community Banking; Wholesale Banking;
and WIM. 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).
Commencing in second quarter 2016, operating segment results
reflect a shift in expenses between the personnel and other
expense categories as a result of the movement of support staff
from the Wholesale Banking and WIM segments into a
consolidated organization within the Community Banking
segment. Since then, personnel expenses associated with the
transferred support staff have been allocated from Community
Banking back to the Wholesale Banking and WIM segments
through other expense. Table 9 and the following discussion
present our results by operating segment. For additional
description of our operating segments, including additional
financial information and the underlying management
accounting process, see Note 25 (Operating Segments) to
Financial Statements in this Report.
(in millions, except average balances which are in billions)
2017
Revenue
Provision (reversal of provision) for credit losses
Net income (loss)
Average loans
Average deposits
2016
Revenue
Provision (reversal of provision) for credit losses
Net income (loss)
Average loans
Average deposits
2015
Revenue
Provision (reversal of provision) for credit losses
Net income (loss)
Average loans
Average deposits
Community
Banking
Wholesale
Wealth and
Investment
Banking Management
Other (1)
Consolidated
Company
Year ended December 31,
$
48,707
28,173
16,926
(5,417)
88,389
2,555
12,071
(19)
(5)
(3)
2,528
8,699
2,674
(1,261)
22,183
$
476.7
729.3
464.6
464.5
71.9
189.0
(57.1)
(78.2)
956.1
1,304.6
$
48,866
28,542
15,946
(5,087)
2,691
12,435
486.9
701.2
$
1,073
8,235
449.3
438.6
(5)
2,426
67.3
187.8
11
(1,158)
(53.5)
(77.0)
$
49,341
25,904
15,777
(4,965)
2,427
13,491
475.9
654.4
$
27
8,194
397.3
438.9
(25)
2,316
60.1
172.3
13
(1,107)
(47.9)
(71.5)
88,267
3,770
21,938
950.0
1,250.6
86,057
2,442
22,894
885.4
1,194.1
(1)
Includes the elimination of certain items that are included in more than one business segment, most of which represents products and services for WIM customers served
through Community Banking distribution channels.
Wells Fargo & Company
53
Earnings Performance (continued)
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 automobile, student, mortgage, home equity
and small business lending, as well as referrals to Wholesale
Banking and WIM business partners. The Community Banking
segment also includes the results of our Corporate Treasury
activities net of allocations (including funds transfer pricing,
Table 9a: Community Banking
capital, liquidity and certain corporate expenses) in support of
other segments and results of investments in our affiliated
venture capital partnerships. We announced on November 28,
2017, that we will exit the personal insurance business, and we
have begun winding down activities and ceased offering personal
insurance products, effective February 1, 2018. Table 9a provides
additional financial information for Community Banking.
(in millions, except average balances which are in billions)
2017
2016 % Change
2015 % Change
Year ended December 31,
Net interest income
Noninterest income:
Service charges on deposit accounts
Trust and investment fees:
$ 30,365
29,833
2 % $ 29,242
2 %
2,905
3,136
(7)
3,014
4
Brokerage advisory, commissions and other fees (1)
1,831
1,854
(1)
2,044
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 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)
889
(60)
2,660
3,613
1,497
3,895
98
59
709
1,144
1,762
849
(141)
2,562
3,592
1,494
5,624
6
(17)
928
673
1,035
18,342
19,033
48,707
48,866
2,555
2,691
20,345
18,655
2,157
2,107
446
715
1,863
5,312
(467)
32,478
13,674
1,327
276
2,035
2,070
500
649
1,169
1,451
893
27,422
18,753
6,182
136
5
57
4
1
—
(31)
NM
447
(24)
70
70
(4)
—
(5)
9
6
2
(11)
10
59
266
NM
18
(27)
(79)
103
855
(123)
2,776
3,381
1,446
6,056
96
(146)
556
1,714
1,206
20,099
49,341
2,427
17,574
1,914
2,104
573
549
1,012
1,503
1,752
26,981
19,933
6,202
240
(9)
(1)
(15)
(8)
6
3
(7)
(94)
88
67
(61)
(14)
(5)
(1)
11
6
6
(2)
(13)
18
16
(3)
(49)
2
(6)
—
(43)
Net income
Average loans
Average deposits
$ 12,071
12,435
(3)% $ 13,491
$ 476.7
729.3
486.9
701.2
(2)% $
475.9
4
654.4
(8)%
2 %
7
NM - Not meaningful
(1) Represents income on products and services for WIM customers served through Community Banking distribution channels and is eliminated in consolidation.
(2)
(3) Predominantly represents gains resulting from venture capital investments.
(4) Reflects results attributable to noncontrolling interests predominantly associated with the Company’s consolidated venture capital investments.
Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.
54
Wells Fargo & Company
Noninterest expense increased $5.1 billion in 2017, or 18%,
from 2016, which increased $441 million, or 2%, from 2015. The
increase in 2017 was due to higher litigation accruals (including
$3.7 billion that were non tax-deductible), personnel expense
driven by increased health insurance expense, deferred
compensation plan expense (offset in trading revenue) and
staffing, as well as higher project-related, equipment, and FDIC
expense. These increases in noninterest expense were partially
offset by lower foreclosed assets expense driven by improvement
in the residential real estate portfolio, lower telephone and
supplies expenses, travel and entertainment, and other expense.
The increase in noninterest expense in 2016 was due to higher
personnel expense driven by increased deferred compensation
plan expense (offset in trading revenue) and increased staffing,
as well as higher project-related, equipment, and FDIC expense.
These increases in noninterest expense were partially offset by
lower foreclosed assets expense driven by improvement in the
residential real estate portfolio, lower telephone and supplies
expenses, data processing costs, and other expense.
The provision for credit losses in 2017 decreased
$136 million from 2016 due to credit improvement in the
consumer lending portfolio, primarily consumer real estate. The
provision for credit losses in 2016 increased $264 million from
2015 due to an increase in losses in the credit card, automobile
and other consumer portfolios.
Community Banking reported net income of $12.1 billion in
2017, down $364 million, or 3%, from $12.4 billion in 2016,
which was down $1.1 billion, or 8%, in 2015. Income tax expense
in 2017 reflected the estimated net benefit from the impact of the
Tax Act to the Company, partially offset by the impact of discrete
non tax-deductible items, predominantly litigation accruals.
Revenue was $48.7 billion in 2017, a decrease of $159 million, or
0.3%, compared with $48.9 billion in 2016, which was down
$475 million, or 1%, compared with 2015. The decrease in
revenue for 2017 was due to lower mortgage banking revenue
driven by lower mortgage loan originations and a decrease in
servicing income, lower service charges on deposit accounts, and
lower gains on debt securities. The decrease in revenue in 2017
was partially offset by higher net interest income, gains on equity
investments, deferred compensation plan investment results
(offset in employee benefits expense), and other income
(including higher net hedge ineffectiveness income and a gain on
the sale of a mortgage loan portfolio). The decrease in revenue
for 2016 was due to lower gains on equity investments, and
lower mortgage banking revenue driven by a decrease in
servicing income, partially offset by higher net gains on
mortgage loan originations driven by higher origination
volumes. Additionally, revenue in 2016 reflected lower trust and
investment fees driven by a decrease in brokerage transactional
revenue, and lower other income (including lower net hedge
ineffectiveness income and a gain on the sale of our Warranty
Solutions business in 2015). The decrease in revenue in 2016 was
partially offset by higher net interest income, gains on debt
securities, revenue from debit and credit card volumes, higher
deferred compensation plan investment results (offset in
employee benefits expense), and an increase in deposit service
charges driven by higher overdraft fees and account growth.
Average deposits increased $28.1 billion in 2017, or 4% from
2016, which increased $46.8 billion, or 7%, from 2015. Primary
consumer checking customers (customers who actively use their
checking account with transactions such as debit card purchases,
online bill payments, and direct deposit) as of November 2017
were up 0.2% from November 2016.
Wells Fargo & Company
55
Earnings Performance (continued)
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, Commercial Real Estate, Corporate Banking,
Financial Institutions Group, Government and Institutional
Banking, Middle Market Banking, Principal Investments,
Treasury Management, Wells Fargo Commercial Capital, and
Wells Fargo Securities. Table 9b provides additional financial
information for Wholesale Banking.
Table 9b: Wholesale Banking
(in millions, except average balances which are in billions)
2017
2016 % Change
2015 % Change
Year ended December 31,
$ 16,967
16,052
6% $ 14,350
12%
2,205
2,235
(1)
2,153
(18)
11
—
(1)
1
(8)
(4)
(28)
3
NM
(41)
(17)
(10)
(1)
NM
(6)
(24)
(7)
6
12
7
(37)
15
4
1
(12)
46
285
407
1,762
2,454
337
2,872
447
1,598
719
396
511
67
11,554
25,904
27
6,936
97
452
347
352
837
152
4,943
14,116
11,761
3,424
143
6% $
8,194
3% $
397.3
6
438.9
4
29
16
4
9
1
(22)
6
(21)
(6)
(97)
(61)
NM
8
10
NM
1
(26)
2
12
22
28
(22)
32
14
(4)
(8)
NM
1%
13%
—
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
303
524
1,827
2,654
345
2,054
458
913
700
(232)
117
1,992
368
473
1,833
2,674
342
2,226
475
1,262
677
13
199
2,387
11,206
12,490
28,173
28,542
Provision (reversal of provision) for credit losses
(19)
1,073
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 (loss) from noncontrolling interest
Net income
Average loans
Average deposits
NM - Not meaningful
6,639
7,035
55
429
414
480
1,146
74
7,518
16,755
11,437
72
461
390
429
1,075
118
6,546
16,126
11,343
2,753
3,136
(15)
(28)
$ 8,699
$ 464.6
464.5
8,235
449.3
438.6
56
Wells Fargo & Company
Noninterest expense of $16.8 billion in 2017 increased
$629 million, or 4%, compared with 2016, which increased
$2.0 billion, or 14%, compared with 2015. The increase in 2017
was predominantly due to increased project and technology
spending on compliance and regulatory requirements. The
increase in 2016 was due to higher personnel and operating lease
expense related to the GE Capital business acquisitions as well as
higher expenses related to growth initiatives, compliance and
regulatory requirements. The provision for credit losses in 2017
decreased $1.1 billion from 2016, predominantly due to lower
losses in the oil and gas portfolio. The provision for credit losses
in 2016 increased $1.0 billion from 2015, primarily due to
increased losses in the oil and gas portfolio.
Wealth and Investment Management 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. Table 9c provides additional financial
information for WIM.
Wholesale Banking reported net income of $8.7 billion in
2017, up $464 million from 2016, which was up $41 million from
2015. The increase in net income in 2017 was due to higher net
interest income and lower loan loss provision, partially offset by
lower noninterest income and higher noninterest expense. The
increase in 2016 compared with 2015 was due to increased
revenue and lower minority interest expense, partially offset by
higher loan loss provision and noninterest expense. Revenue in
2017 of $28.2 billion decreased $369 million, or 1%, from 2016,
which increased $2.6 billion, or 10%, from 2015. Net interest
income of $17.0 billion in 2017 increased $915 million, or 6%,
from 2016, which increased $1.7 billion, or 12%, from 2015. The
increase in net interest income in 2017 was due to loan and other
earning asset growth as well as the impact of higher interest
rates, partially offset by an adjustment related to leveraged
leases resulting from the Tax Act that reduced net interest
income by $183 million. The increase in net interest income in
2016 was due to strong loan and other earning asset growth.
Average loans of $464.6 billion in 2017 increased
$15.3 billion, or 3%, from 2016, which increased $52.0 billion, or
13%, from 2015. Loan growth in 2017 and 2016 was broad based
across many Wholesale Banking businesses and included the
impact of the GE Capital business acquisitions in 2016. Average
deposits of $464.5 billion in 2017 increased $25.9 billion, or 6%,
compared with $438.6 billion in 2016, which was relatively flat
compared with 2015.
Noninterest income of $11.2 billion in 2017 decreased
$1.3 billion, or 10%, from 2016, which increased $936 million, or
8%, from 2015. The decrease in 2017 was driven by the gains on
the sale of our crop insurance and health benefit services
businesses in 2016, impairments to low income housing and
renewable energy investments as a result of the Tax Act, lower
insurance income driven by the 2016 sale of our crop insurance
business, and lower gains on debt securities and equity
investments. These declines were partially offset by a gain on the
sale of our insurance services business in 2017. The increase in
2016, compared with 2015, was driven by increased lease income
from the GE Capital business acquisitions, gains on the sale of
our crop insurance and health benefit services businesses,
increased trust and investment banking revenue driven by
syndicated loan, advisory, and debt origination fees, and higher
service charges on deposit accounts (which represented treasury
management fees for providing cash management payable and
receivable services), partially offset by lower gains on debt
securities and equity investments, lower insurance income due
to the divestiture of our crop insurance business, and lower
other fees related to a decline in commercial real estate
brokerage fees and the deconsolidation of our merchant services
joint venture in fourth quarter 2015, which also lowered 2016
minority interest expense.
Wells Fargo & Company
57
Earnings Performance (continued)
Table 9c: Wealth and Investment Management
(in millions, except average balances which are in billions)
2017
2016 % Change
2015 % Change
Year ended December 31,
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
Net income (loss) from noncontrolling interest
Net income
Average loans
Average deposits
$ 4,493
3,913
15% $
3,478
13%
17
19
(11)
19
—
9,072
2,877
8,870
2,891
2
—
(2)
(1)
(100)
9,154
3,017
—
12,171
5
17
(7)
—
41
—
5
48
12,299
15,777
(25)
7,820
57
447
326
123
846
229
2,219
12,067
3,735
1,420
2
—
—
(11)
NM
69
100
—
12
3
6
—
3
(46)
(2)
(3)
2
(10)
130
16
5
10
10
(3)
(4)
NM
(3)
20
6
(29)
NM
324
NM
40
19
(2)
1
80
—
(9)
(1)
(7)
24
9
(78)
3
—
4
3
—
(1)
NM
(1)
2,426
67.3
187.8
10% $
2,316
7% $
60.1
1
172.3
5%
12%
9
11,947
11,760
6
18
(10)
88
294
2
7
64
6
18
(9)
—
174
1
7
57
12,433
12,033
16,926
15,946
(5)
(5)
8,126
7,852
52
442
302
152
925
50
2,284
12,059
3,892
1,467
28
431
292
155
834
115
2,650
12,631
4,300
1,610
16
$ 2,674
$
71.9
189.0
NM - Not meaningful
(1)
Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.
benefits expense). Noninterest expense of $12.6 billion in 2017
increased 5% from $12.1 billion in 2016 due to higher project
and technology spending on compliance and regulatory
requirements, higher broker commissions, and higher deferred
compensation plan expense (offset in trading revenue).
Noninterest expense in 2016 was flat compared with 2015, as a
decline in operating losses reflecting lower litigation expense for
various legal matters was offset by higher outside professional
services expense, other expense, and personnel expense. The
provision for credit losses was flat in 2017 compared with 2016.
The provision for credit losses increased $20 million in 2016,
due to lower net recoveries.
WIM reported net income of $2.7 billion in 2017, up
$248 million, or 10%, from 2016, which was up $110 million, or
5%, from 2015. Revenue of $16.9 billion in 2017 increased
$980 million from 2016, which was up $169 million from 2015.
The increase in revenue for 2017 was due to growth in net
interest income and asset-based fees. The increase in revenue for
2016 was due to growth in net interest income, partially offset by
lower noninterest income. Net interest income increased 15% in
2017 and 13% in 2016, in each case due to growth in other
earning assets and loan balances. Average loan balances of
$71.9 billion in 2017 increased $4.6 billion from $67.3 billion in
2016, which was up 12% from 2015. Average deposits of
$189.0 billion in 2017 increased 1% from $187.8 billion in 2016,
which increased 9% from 2015. Noninterest income in 2017
increased 3% from 2016, due to higher asset-based fees and
gains on deferred compensation plan investments (offset in
employee benefits expense), partially offset by lower transaction
revenue. Noninterest income in 2016 decreased 2% from 2015
due to lower transaction revenue from reduced client activity,
and lower asset-based fees, partially offset by higher gains on
deferred compensation plan investments (offset in employee
58
Wells Fargo & Company
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 a majority of
our retail brokerage client assets are in accounts that earn
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
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 majority 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, 2017, 2016 and 2015.
Year ended December 31,
2017
$
1,651.3
542.8
33%
2016
1,486.1
463.8
31
2015
1,386.9
419.9
30
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
as well as asset inflows and outflows. For the years ended
December 31, 2017, 2016 and 2015, 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, 2017, 2016
and 2015.
Table 9e: Retail Brokerage Advisory Account Client Assets
(in billions)
December 31, 2017
Client directed (4)
Financial advisor directed (5)
Separate accounts (6)
Mutual fund advisory (7)
Total advisory client assets
December 31, 2016
Client directed (4)
Financial advisor directed (5)
Separate accounts (6)
Mutual fund advisory (7)
Total advisory client assets
December 31, 2015
Client directed (4)
Financial advisor directed (5)
Separate accounts (6)
Mutual fund advisory (7)
Total advisory client assets
Balance, beginning
of period
Inflows (1)
Outflows (2)
Market impact (3)
Year ended
Balance, end
of period
$
159.1
115.7
125.7
63.3
463.8
154.7
91.9
110.4
62.9
419.9
159.8
85.4
110.7
66.9
422.8
37.1
30.6
26.1
13.1
106.9
36.0
28.6
26.0
8.7
99.3
38.7
20.7
21.6
10.4
91.4
(39.2)
(24.5)
(23.5)
(11.1)
(98.3)
(37.5)
(18.7)
(21.9)
(11.6)
(89.7)
(37.3)
(17.5)
(20.5)
(12.2)
(87.5)
13.9
25.2
20.8
10.5
70.4
5.9
13.9
11.2
3.3
34.3
(6.5)
3.3
(1.4)
(2.2)
(6.8)
170.9
147.0
149.1
75.8
542.8
159.1
115.7
125.7
63.3
463.8
154.7
91.9
110.4
62.9
419.9
(1)
Inflows include new advisory account assets, contributions, dividends and interest.
(2) Outflows include closed advisory account assets, withdrawals and client management fees.
(3) Market impact reflects gains and losses on portfolio investments.
(4)
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.
(5) Professionally managed portfolios with fees earned based on respective strategies and as a percentage of certain client assets.
(6) 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.
(7) 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.
Wells Fargo & Company
59
Earnings Performance (continued)
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,
2017, 2016 and 2015.
(in billions)
December 31, 2017
Assets managed by WFAM (4):
Balance, beginning
of period
Inflows (1)
Outflows (2)
Market impact (3)
Year ended
Balance, end of
period
Money market funds (5)
$
Other assets managed
Assets managed by Wealth and Retirement (6)
Total assets under management
December 31, 2016
Assets managed by WFAM (4):
Money market funds (5)
Other assets managed
Assets managed by Wealth and Retirement (6)
Total assets under management
December 31, 2015
Assets managed by WFAM (4):
Money market funds (5)
Other assets managed
Assets managed by Wealth and Retirement (6)
Total assets under management
102.6
379.6
168.5
650.7
123.6
366.1
162.1
651.8
123.1
372.6
165.3
661.0
5.6
116.0
41.1
162.7
—
114.0
37.0
151.0
0.5
93.5
36.2
—
(130.9)
(39.4)
(170.3)
(21.0)
(125.0)
(35.9)
(181.9)
—
(97.0)
(34.1)
130.2
(131.1)
—
31.0
16.0
47.0
—
24.5
5.3
29.8
—
(3.0)
(5.3)
(8.3)
108.2
395.7
186.2
690.1
102.6
379.6
168.5
650.7
123.6
366.1
162.1
651.8
(1)
Inflows include new managed account assets, contributions, dividends and interest.
(2) Outflows include closed managed account assets, withdrawals and client management fees.
(3) Market impact reflects gains and losses on portfolio investments.
(4) Assets managed by WFAM 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.
(5) Money Market funds 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 $5.5 billion, $6.9 billion and $8.2 billion as of December 31, 2017, 2016 and 2015, respectively, of client assets invested in proprietary funds managed by WFAM.
(6)
60
Wells Fargo & Company
Balance Sheet Analysis
At December 31, 2017, our assets totaled $2.0 trillion, up
$21.6 billion from December 31, 2016. Asset growth was
predominantly due to trading assets, which increased
$17.9 billion, and investment securities, which increased
$8.5 billion. An increase of $29.9 billion in deposits, and total
equity growth of $7.6 billion from December 31, 2016, were the
predominant sources that funded our asset growth for 2017.
Equity growth benefited from a $12.2 billion increase in retained
earnings, net of dividends paid.
Investment Securities
Table 10: Investment Securities – Summary
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 27 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report.
(in millions)
Available-for-sale securities:
Debt securities
Marketable equity securities
December 31, 2017
December 31, 2016
Amortized
Net
unrealized
Cost gain (loss)
Fair
value
Amortized
Cost
Net
unrealized
gain (loss)
Fair
value
$ 275,096
1,311
276,407
309,447
(2,294)
307,153
532
146
678
706
505
1,211
Total available-for-sale securities
Held-to-maturity debt securities
275,628
139,335
1,457
277,085
(350)
138,985
Total investment securities (1)
$ 414,963
1,107
416,070
310,153
99,583
409,736
(1,789)
308,364
(428)
99,155
(2,217)
407,519
(1) Available-for-sale securities are carried on the balance sheet at fair value. Held-to-maturity securities are carried on the balance sheet at amortized cost.
Table 10 presents a summary of our investment securities
portfolio, which increased $8.5 billion from December 31, 2016,
predominantly due to net purchases of federal agency mortgage-
backed securities.
The total net unrealized gains on available-for-sale
securities were $1.5 billion at December 31, 2017, up from net
unrealized losses of $1.8 billion at December 31, 2016, primarily
due to tighter credit spreads and the transfer of available-for
sale securities to held-to-maturity.
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 securities
portfolio can be used to meet funding needs that arise in the
normal course of business or due to market stress. Changes in
our interest rate risk profile may occur due to changes in overall
economic or market conditions, which could influence loan
origination demand, prepayment speeds, or deposit balances
and mix. In response, the available-for-sale securities portfolio
can be rebalanced to meet the Company’s interest rate risk
management objectives. In addition to meeting liquidity and
interest rate risk management objectives, the available-for-sale
securities portfolio may provide yield enhancement over other
short-term assets. See the “Risk Management – Asset/Liability
Management” section in this Report for more information on
liquidity and interest rate risk. The held-to-maturity securities
portfolio consists 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
automobile loans and leases and cash, and collateralized loan
obligations where our intent is to hold these securities to
maturity and collect the contractual cash flows. The held-to
maturity securities 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 $606 million in OTTI write-downs
recognized in earnings in 2017, $262 million related to debt
securities, $5 million related to marketable equity securities,
which are included in available-for-sale securities, and
$339 million related to nonmarketable equity investments,
which are included in other assets. For a discussion of our OTTI
accounting policies and underlying considerations and analysis,
see Note 1 (Summary of Significant Accounting Policies) and
Note 5 (Investment Securities) to Financial Statements in this
Report.
At December 31, 2017, investment securities included
$57.6 billion of municipal bonds, of which 95.7% were rated “A-”
or better based largely on external and, in some cases, internal
ratings. Additionally, some of the securities in our total
municipal bond portfolio are guaranteed against loss by bond
insurers. These guaranteed bonds are predominantly investment
grade and were generally underwritten in accordance with our
own investment standards prior to the determination to
purchase, without relying on the bond insurer’s guarantee in
making the investment decision. 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 6.3 years at December 31, 2017. The
expected remaining maturity is shorter than the remaining
contractual maturity for the 61.3% of this portfolio that is MBS
because borrowers generally have the right to prepay obligations
Wells Fargo & Company
61
Balance Sheet Analysis (continued)
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.
The weighted-average expected maturity of debt securities
held-to-maturity was 5.9 years at December 31, 2017. See Note 5
(Investment Securities) to Financial Statements in this Report
for a summary of investment securities by security type.
Table 11: Mortgage-Backed Securities Available for Sale
(in billions)
At December 31, 2017
Fair
value
Net
unrealized
gain (loss)
Expected
remaining
maturity
(in years)
Actual
169.4
—
Assuming a 200 basis point:
Increase in interest rates
Decrease in interest rates
150.8
180.4
(18.6)
11.0
5.9
8.2
3.5
Loan Portfolios
Table 12 provides a summary of total outstanding loans by
portfolio segment. Total loans decreased $10.8 billion from
December 31, 2016, reflecting paydowns, a continued decline in
junior lien mortgage loans, and an expected decline in
automobile loans as the effect of tighter underwriting standards
implemented in 2016 resulted in lower origination volume.
Table 12: Loan Portfolios
(in millions)
Commercial
Consumer
Total loans
Change from prior year
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
December 31, 2017
December 31, 2016
$
$
503,388
453,382
956,770
(10,834)
506,536
461,068
967,604
51,045
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, 2017
December 31, 2016
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
$ 105,327
201,530
26,268
333,125
105,421
199,211
26,208
330,840
Real estate mortgage
Real estate construction
20,069
64,384
42,146
126,599
22,713
68,928
40,850
132,491
9,555
13,276
1,448
24,279
9,576
13,102
1,238
23,916
Total selected loans
$ 134,951
279,190
69,862
484,003
137,710
281,241
68,296
487,247
Distribution of loans to changes in interest
rates:
Loans at fixed interest rates
$ 18,587
30,049
26,748
75,384
19,389
29,748
26,859
75,996
Loans at floating/variable interest rates
116,364
249,141
43,114
408,619
118,321
251,493
41,437
411,251
Total selected loans
$ 134,951
279,190
69,862
484,003
137,710
281,241
68,296
487,247
62
Wells Fargo & Company
Deposits
Deposits were $1.3 trillion at December 31, 2017, up
$29.9 billion from December 31, 2016, reflecting growth in
commercial, consumer and small business banking deposits.
Table 14 provides additional information regarding deposits.
Information regarding the impact of deposits on net interest
income and a comparison of average deposit balances is
provided in “Earnings Performance – Net Interest Income” and
Table 5 earlier in this Report.
Table 14: Deposits
($ 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,
2017
% of
total
deposits
Dec 31,
2016
% of
total
deposits
% Change
$
373,722
28% $
375,967
29%
51,928
690,168
20,415
71,715
128,043
4
52
2
4
10
49,403
687,846
23,968
52,649
116,246
4
52
2
4
9
$
1,335,991
100% $ 1,306,079
100%
(1)
5
—
(15)
36
10
2
(1)
Includes Eurodollar sweep balances of $80.1 billion and $74.8 billion at December 31, 2017 and 2016, respectively.
Equity
Total equity was $208.1 billion at December 31, 2017, compared
with $200.5 billion at December 31, 2016. The increase was
largely driven by a $12.2 billion increase in retained earnings
from earnings net of dividends paid, and a $1.0 billion increase
in cumulative other comprehensive income, partially offset by a
net increase in treasury stock.
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 is
expected to 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 may enter into commitments to purchase securities
under resale agreements. For more information, see Note 4
(Federal Funds Sold, Securities Purchased under Resale
Agreements and Other Short-Term Investments) to Financial
Statements in this Report. We also may enter into commitments
to purchase debt and equity securities to provide capital for
customers' funding, liquidity or other future needs. For more
information, see Note 14 (Guarantees, Pledged Assets and
Collateral, and Other Commitments) to Financial Statements in
this Report.
Transactions with Unconsolidated Entities
In the normal course of business, we enter into various types of
on- and off-balance sheet transactions with special purpose
entities (SPEs), which are corporations, trusts, limited liability
companies or partnerships that are established for a limited
purpose. Generally, SPEs are formed in connection with
securitization transactions and are considered variable interest
entities (VIEs). 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 and other types of arrangements. For more
information on guarantees and certain contingent arrangements,
see Note 14 (Guarantees, Pledged Assets and Collateral, and
Other Commitments) to Financial Statements in this Report.
Derivatives
We 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
volume 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.
Wells Fargo & Company
63
Off-Balance Sheet Arrangements (continued)
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, 2017, 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 21
(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
$ 106,089
13
39,826
7
22
14
5,803
1,172
20
2,132
863
11,988
47,730
8,640
2,056
—
296
662
5,002
46,222
6,231
1,381
—
—
128
December 31, 2017
Indeterminate
maturity
Total
1,207,397
1,335,991
—
—
—
3,505
—
—
225,020
44,548
6,585
3,525
2,428
1,696
More
than
5 years
5,515
91,242
23,874
1,976
—
—
43
Total contractual obligations
$ 155,905
71,372
58,964
122,650
1,210,902
1,619,793
Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
(1)
(2) Balances are presented net of unamortized debt discounts and premiums and purchase accounting adjustments.
(3) Represents the future interest obligations related to interest-bearing time deposits and long-term debt in the normal course of business including a net reduction of
(4)
$9.7 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, 2017, 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 $194 million and $2.2 billion, respectively. Our unfunded
equity commitments include certain investments subject to the Volcker Rule, which we expect to divest in the near future. For additional information regarding the Volcker
Rule, see the “Regulatory Matters” 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.
(5) 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 22 (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, 2017,
2016 and 2015. 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 21 (Employee Benefits and
Other Expenses) to Financial Statements in this Report.
64
Wells Fargo & Company
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 significant risks that we manage
are conduct risk, operational risk, compliance risk, credit risk,
and asset/liability management related risks, which include
interest rate risk, market risk, liquidity risk, and funding related
risks. We operate under a Board-level approved risk framework
which outlines our company-wide approach to risk management
and oversight, and describes the structures and practices
employed to manage current and emerging risks inherent to
Wells Fargo.
Risk Framework
Our risk framework consists of three lines of defense – (1)
Wells Fargo’s lines of business and certain other enterprise
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 & Examination Committee. 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
establishing a comprehensive and effective risk framework and
enterprise risk inventory; and (c) to maintain and continually
promote a strong culture, which emphasizes each team
member’s responsibility and authority as a risk manager. Key
elements of our risk program include:
•
Cultivating a strong culture, with key risk management
components emphasizing each team member’s ownership of
risk 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 a
company-wide statement of risk appetite (or, risk
tolerance) which serves to guide business and risk leaders
as they manage risk on a daily basis. The company-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 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.
• Maintaining an enterprise risk inventory and
promoting a standardized and systematic process to identify
risks across the Company to guide business decisions and
capital planning efforts.
• Designing risk frameworks, programs, policies,
•
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 an independent and
comprehensive perspective on the Company’s current and
emerging risks, (c) independently opining on the strategy
and performance of the Company’s risk taking activities,
(d) credibly challenging the intended business and risk
management actions of Wells Fargo’s first-line of defense,
and (e) 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.
The Board and the management-level Operating Committee
(composed of direct reports to the CEO and President, including
the Chief Risk Officer and Chief Auditor who report to the CEO
administratively, and to their respective Board committees
functionally) 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 and Management-level Committee Structure
Wells Fargo’s Board and management-level governance
committee structure is designed to ensure that key risks are
considered and, if necessary, decided upon at the appropriate
level of the Company and by the appropriate mix of executives.
Accordingly, the structure is composed of defined escalation and
reporting paths from first-line of defense groups to second-line
of defense independent risk and management-level governance
committees and, ultimately, to the Board level as appropriate.
Each Board and management-level governance committee has
defined authorities and responsibilities for considering a specific
set of risks, as outlined in each of their charters. Our Board and
management-level governance committee structure, and their
primary risk oversight responsibilities, is presented in Table 16.
Wells Fargo & Company
65
Risk Management (continued)
Table 16: Board and Management-level Governance Committee Structure
Wells Fargo & Company
Board Committees and Primary Risk Oversight Responsibility
Audit &
Examination
Committee
(1)
Corporate
Responsibility
Committee
Finance
Committee
Risk
Committee
(2)
Governance
& Nominating
Committee
Credit
Committee
Financial, regulatory
and risk reporting
and controls
Social and public
responsibility
matters
Interest Rate
Risk
Market Risk
Board-level
governance matters
Credit Risk
COMPANY-WIDE
RISKS including:
- Compliance
- Conduct
- Data
- Financial Crimes
- Information
Security
- Liquidity
- Model
- Operational
- Strategic
- Technology
Human
Resources
Committee
Conduct Risk
(culture, ethics
and integrity,
incentive
compensation)
Regulatory
and Risk
Reporting
Oversight
Committee
SOX
Disclosure
Committee
Management-level Governance Committees
Capital
Adequacy
Process
Committee
Enterprise Risk
Management
Committee (3)
Corporate
Allowance
for Credit
Losses
Approval
Governance
Committee
Incentive
Compensation
Committee
Capital
Management
Committee
Corporate
Asset and
Liability
Committee
Recovery
and
Resolution
Committee
(1) The Audit & Examination Committee additionally oversees the internal audit function, external auditor performance, and the disclosure framework for financial, regulatory
and risk reports prepared for the Board, management, and bank regulatory agencies, and assists the Board in its oversight of the Company’s compliance with legal and
regulatory requirements.
(2) The Risk Committee has formed a compliance subcommittee and a technology subcommittee to provide more focused oversight of those risks.
(3) Certain committees that report to the Enterprise Risk Management Committee have dual escalation and informational reporting paths to Board-level committees.
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 works closely with
management to understand and oversee the Company’s key risk
exposures.
The Risk Committee oversees company-wide risks. The
Board’s other standing committees also have primary oversight
responsibility for certain specific risk matters, as highlighted in
Table 16.
The Risk Committee additionally oversees the Company's
Corporate Risk function and plays an active role in approving
and overseeing the Company’s company-wide risk management
framework established by management to manage risk. 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 the Risk Committee
receives a quarterly report from the management-level
Enterprise Risk Management Committee regarding current or
emerging risk matters.
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 risks are considered and, if
necessary, decided upon at the appropriate level of the Company
and by the appropriate mix of executives.
The Enterprise Risk Management Committee, chaired by
the Company’s Chief Risk Officer (CRO), oversees the
management of all risk types across the Company. The
66
Wells Fargo & Company
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.
Corporate Risk develops our enterprise statement of risk
appetite in the context of our risk management framework
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 Board’s 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.
While the Enterprise Risk Management Committee and the
committees that report to it serve as the focal point for the
management of company-wide risk matters, the management of
specific risk types is supported by additional management-level
governance committees, which all report to at least one of the
Board’s standing committees.
The Company’s management-level governance committees
collectively help management facilitate company-wide
understanding and monitoring of risks and challenges faced by
the Company.
The 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 matters during and outside of
regular committee meetings, as appropriate.
Conduct Risk Management
Conduct risk is the risk resulting from behavior that does not
comply with the Company’s values or ethical principles.
Our Board has enhanced its oversight of conduct risk to
oversee the alignment of team member conduct to the
Company’s risk appetite (which the Board approves annually)
and culture as reflected in our Vision, Values and Goals and
Code of Ethics and Business Conduct. The Board’s Risk
Committee has primary oversight responsibility for company-
wide conduct risk, while certain other Board committees have
primary oversight responsibility for specific components of
conduct risk. For example, the conduct risk oversight
responsibilities of the Board’s Human Resources Committee
include the Company’s human capital management, company-
wide culture, the Ethics Oversight program (including the
Company’s Code of Ethics and Business Conduct), and oversight
of our company-wide incentive compensation risk management
program.
At the management level, the new Conduct Management
Office has primary oversight responsibility for key elements of
conduct risk, including internal investigations, sales practices
oversight, complaints oversight, and ethics oversight. This office
reports and is accountable to the CRO and the Enterprise Risk
Management Committee and also has direct escalation and
informational reporting paths to the relevant Board committees.
Operational Risk Management
Operational risk is the risk resulting from inadequate or failed
internal controls and processes, people and systems, or resulting
from external events. Operational risk is inherent in all Wells
Fargo products and services as it often arises in the presence of
other risk types.
The Board’s Risk Committee has primary oversight
responsibility for all aspects of operational risk. In this capacity,
it reviews and approves significant supporting operational risk
policies and programs, including the Company’s business
continuity, financial crimes, information security, privacy,
technology, and third-party risk management policies and
programs. In addition, it periodically reviews updates from
management on the overall state of operational risk, including
all related programs and risk types.
At the management level, the Operational Risk Group has
primary oversight responsibility for operational risk. This group
reports and is accountable to the CRO and the Enterprise Risk
Management Committee, and existing management-level
committees with primary oversight responsibility for key
elements of operational risk report to it while maintaining
relevant dual escalation and informational reporting paths to
Board-level committees.
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. Cyber attacks have also focused on targeting the
infrastructure of the internet, causing the widespread
unavailability of websites and degrading website performance.
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.
Compliance Risk Management
Compliance risk is the risk resulting from the failure to comply
with applicable laws, regulations, rules, or other regulatory
requirements, or the failure to appropriately address and limit
violations of law and any associated harm to customers.
Compliance risk encompasses compliance with the applicable
standards of self-regulatory organizations as well as with
internal policies and procedures.
The Board’s Risk Committee has primary oversight
responsibility for compliance risk. In this capacity, it periodically
receives updates and reports from management on the state of
compliance risk in the Company.
At the management level, Wells Fargo Compliance has
primary oversight responsibility for compliance risk. This
management-level organization reports and is accountable to the
CRO and the Enterprise Risk Management Committee and also
has a direct escalation and information reporting path to the
Wells Fargo & Company
67
Risk Management (continued)
Board's Risk Committee. We continue to enhance our oversight
of operational and compliance risk management, including as
required by the FRB’s February 2, 2018 consent order.
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,
2017
Dec 31,
2016
Commercial and industrial
$ 333,125
Real estate mortgage
Real estate construction
Lease financing
126,599
24,279
19,385
330,840
132,491
23,916
19,289
Total commercial
503,388
506,536
Consumer:
Real estate 1-4 family first mortgage
284,054
275,579
Real estate 1-4 family junior lien
mortgage
Credit card
Automobile
Other revolving credit and installment
Total consumer
Total loans
39,713
37,976
53,371
38,268
46,237
36,700
62,286
40,266
453,382
461,068
$ 956,770
967,604
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:
•
•
•
•
•
• Merger and acquisition activities
• Reputation risk
Loan concentrations and related credit quality
Counterparty credit risk
Economic and market conditions
Legislative or regulatory mandates
Changes in interest rates
Our credit risk management oversight process is governed
centrally, but provides for decentralized management and
accountability by our lines of business. Our overall credit process
includes comprehensive credit policies, disciplined credit
underwriting, frequent and detailed risk measurement and
modeling, extensive credit training programs, and a continual
loan review and audit process.
A key to our credit risk management is adherence to a well-
controlled underwriting process, which we believe is appropriate
for the needs of our customers as well as investors who purchase
the loans or securities collateralized by the loans.
68
Wells Fargo & Company
Credit Quality Overview Credit quality improved in 2017, as
our net charge-off rate remained low at 0.31% of average total
loans. We continued to benefit from improvements in the
performance of our residential real estate portfolio along with
lower losses in our oil and gas portfolio. In particular:
• Nonaccrual loans were $8.0 billion at December 31, 2017,
For additional information on PCI loans, see the “Risk
Management – Credit Risk Management – Real Estate 1-4
Family First and Junior Lien Mortgage Loans – Pick-a-Pay
Portfolio” section of this Report, Note 1 (Summary of Significant
Accounting Policies ) and Note 6 (Loans and Allowance for
Credit Losses) to Financial Statements in this Report.
down from $10.4 billion at December 31, 2016. Commercial
nonaccrual loans declined to $2.6 billion at December 31,
2017, compared with $4.1 billion at December 31, 2016, and
consumer nonaccrual loans declined to $5.4 billion at
December 31, 2017, compared with $6.3 billion at
December 31, 2016. The decline reflected an improved
housing market and continued improvement in our oil and
gas portfolio. Nonaccrual loans represented 0.84% of total
loans at December 31, 2017, compared with 1.07% at
December 31, 2016.
• Net charge-offs as a percentage of average total loans
•
declined to 0.31% in 2017, compared with 0.37% in 2016.
Net charge-offs as a percentage of our average commercial
and consumer portfolios were 0.09% and 0.55% in 2017,
respectively, compared with 0.22% and 0.53%, respectively,
in 2016.
Loans that are not government insured/guaranteed and
90 days or more past due and still accruing were
$49 million and $1.0 billion in our commercial and
consumer portfolios, respectively, at December 31, 2017,
compared with $64 million and $908 million at
December 31, 2016.
• Our provision for credit losses was $2.5 billion during 2017,
•
compared with $3.8 billion in 2016.
The allowance for credit losses declined to $12.0 billion, or
1.25% of total loans, at December 31, 2017, compared with
$12.5 billion, or 1.30%, at December 31, 2016.
Additional information on our loan portfolios and our credit
quality trends follows.
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 at December 31,
2017, totaled $12.8 billion, compared with $16.7 billion at
December 31, 2016, and $58.8 billion at December 31, 2008. The
decrease from December 31, 2016, was due in part to
prepayments observed in our Pick-a-Pay PCI portfolio, as well as
the sale of $569 million of Pick-a-Pay PCI loans in second
quarter 2017. PCI loans are considered to be accruing due to the
existence of the accretable yield amount, which represents the
cash expected to be collected in excess of their carrying value,
and not based on consideration given to contractual interest
payments. The accretable yield at December 31, 2017, was
$8.9 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. At December 31, 2017, $474 million in nonaccretable
difference remained to absorb losses on PCI loans.
Significant Loan Portfolio Reviews Measuring and
monitoring our credit risk is an ongoing process that tracks
delinquencies, collateral values, Fair Isaac Corporation (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 $352.5 billion, or 37% of total loans, at
December 31, 2017. The net charge-off rate for this portfolio was
0.15% in 2017 compared with 0.35% in 2016. At December 31,
2017, 0.56% of this portfolio was nonaccruing, compared with
0.95% at December 31, 2016, reflecting a decrease of $1.4 billion
in nonaccrual loans, predominantly due to improvement in the
oil and gas portfolio. Also, $17.9 billion of the commercial and
industrial loan and lease financing portfolio was internally
classified as criticized in accordance with regulatory guidance at
December 31, 2017, compared with $24.0 billion at
December 31, 2016. The decrease in criticized loans, which also
includes the decrease in nonaccrual loans, was primarily due to
improvement in the oil and gas portfolio.
Most 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.
Table 18 provides a breakout of commercial and industrial
loans and lease financing by industry, and includes $61.2 billion
of foreign loans at December 31, 2017. Foreign loans totaled
$19.2 billion within the investors category, $18.4 billion within
the financial institutions category and $1.4 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 on analysis of underlying
Wells Fargo & Company
69
Risk Management – Credit Risk Management (continued)
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 $18.4 billion of foreign loans in the financial institutions
category were predominantly originated by our Financial
Institutions business.
The oil and gas loan portfolio totaled $12.5 billion, or 1% of
total outstanding loans at December 31, 2017, compared with
$14.8 billion, or 2% of total outstanding loans at December 31,
2016. Oil and gas nonaccrual loans decreased to $1.1 billion at
December 31, 2017, compared with $2.4 billion at December 31,
2016, due to improved portfolio performance.
Table 18: Commercial and Industrial Loans and Lease
Financing by Industry (1)
(in millions)
Investors
Financial institutions
Cyclical retailers
Healthcare
Food and beverage
Real estate lessor
Industrial equipment
Technology
Oil and gas
Transportation
Public administration
Business services
Other
Total
December 31, 2017
Nonaccrual
loans
Total
portfolio (2)
% of total
loans
$
11
2
78
49
9
8
153
38
1,092
139
20
31
61,851
40,771
26,334
17,255
16,627
15,140
14,950
13,475
12,483
9,053
8,839
8,604
6%
4
3
2
2
2
2
1
1
1
1
1
345
107,128 (3)
$
1,975
352,510
11
37%
(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 $86 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 $6.9 billion.
Risk mitigation actions, including the restructuring of
repayment terms, securing collateral or guarantees, and entering
into extensions, are based on a re-underwriting of the loan and
our assessment of the borrower’s ability to perform under the
agreed-upon terms. Extension terms generally range from six to
thirty-six months and may require that the borrower provide
additional economic support in the form of partial repayment, or
additional collateral or guarantees. In cases where the value of
collateral or financial condition of the borrower is insufficient to
repay our loan, we may rely upon the support of an outside
repayment guarantee in providing the extension.
Our ability to seek performance under a guarantee is
directly related to the guarantor’s creditworthiness, capacity and
willingness to perform, which is evaluated on an annual basis, or
more frequently as warranted. Our evaluation is based on the
most current financial information available and is focused on
various key financial metrics, including net worth, leverage, and
current and future liquidity. We consider the guarantor’s
reputation, creditworthiness, and willingness to work with us
based on our analysis as well as other lenders’ experience with
the guarantor. Our assessment of the guarantor’s credit strength
is reflected in our loan risk ratings for such loans. The loan risk
rating and accruing status are important factors in our allowance
methodology.
In considering the accrual status of the loan, we evaluate the
collateral and future cash flows as well as the anticipated support
of any repayment guarantor. In many cases, the strength of the
guarantor provides sufficient assurance that full repayment of
the loan is expected. When full and timely collection of the loan
becomes uncertain, including the performance of the guarantor,
we place the loan on nonaccrual status. As appropriate, we also
charge the loan down in accordance with our charge-off policies,
generally to the net realizable value of the collateral securing the
loan, if any.
70
Wells Fargo & Company
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 among special mention, substandard, doubtful
and loss categories. The CRE portfolio, which included
$8.7 billion of foreign CRE loans, totaled $150.9 billion, or 16%
of total loans, at December 31, 2017, and consisted of
$126.6 billion of mortgage loans and $24.3 billion of
construction loans.
Table 19 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
Table 19: CRE Loans by State and Property Type
concentrations of CRE loans are in California, New York, Texas
and Florida, which combined represented 49% of the total CRE
portfolio. By property type, the largest concentrations are office
buildings at 28% and apartments at 16% of the portfolio. CRE
nonaccrual loans totaled 0.4% of the CRE outstanding balance at
December 31, 2017, compared with 0.5% at December 31, 2016.
At December 31, 2017, we had $4.3 billion of criticized CRE
mortgage loans, compared with $5.4 billion at December 31,
2016, and $298 million of criticized CRE construction loans,
compared with $461 million at December 31, 2016.
(in millions)
By state:
California
New York
Texas
Florida
North Carolina
Georgia
Arizona
Virginia
Illinois
Washington
Other
Total
By property:
Office buildings
Apartments
Industrial/warehouse
Retail (excluding shopping center)
Shopping center
Hotel/motel
Real estate - other
Institutional
Agriculture
1-4 family structure
Other
Total
Real estate mortgage
Real estate construction
Nonaccrual
loans
Total
portfolio
Nonaccrual
loans
Total
portfolio
Nonaccrual
loans
$
132
$
$
11
95
49
27
16
25
10
5
18
240
628
130
19
127
85
12
21
92
55
35
—
52
35,773
10,087
8,941
7,838
3,947
3,699
3,854
3,283
3,482
3,115
42,580
126,599
39,400
15,067
15,672
16,464
11,855
9,229
6,760
3,276
2,572
10
6,294
$
628
126,599
2
—
—
2
6
1
—
—
—
—
26
37
2
—
—
—
—
—
2
—
—
13
20
37
4,073
2,789
1,999
1,979
879
881
593
1,000
469
568
9,049
24,279
3,282
8,543
1,884
605
1,274
1,817
173
1,651
22
2,410
2,618
134
11
95
51
33
17
25
10
5
18
266
665
132
19
127
85
12
21
94
55
35
13
72
December 31, 2017
Total
Total
portfolio
39,846
12,876
10,940
9,817
4,826
4,580
4,447
4,283
3,951
3,683
51,629 (1)
% of
total
loans
4%
1
1
1
1
*
*
*
*
*
5
150,878
16%
42,682
23,610
17,556
17,069
13,129
11,046
6,933
4,927
2,594
2,420
8,912
4%
2
2
2
1
1
1
*
*
*
1
24,279
665
150,878
16%
*
(1)
Less than 1%.
Includes 40 states; no state had loans in excess of $3.5 billion.
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,
2017, foreign loans totaled $70.4 billion, representing
approximately 7% of our total consolidated loans outstanding,
compared with $65.7 billion, or approximately 7% of total
consolidated loans outstanding, at December 31, 2016. Foreign
loans were approximately 4% of our consolidated total assets at
December 31, 2017, and 3% at December 31, 2016.
Our 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 based on
our assessment of the borrower’s ability to repay, which gives
consideration for allowable transfers of risk such as guarantees
and collateral and may be different from the reporting based on
the borrower’s primary address. Our largest single foreign
country exposure based on our assessment of risk at
December 31, 2017, was the United Kingdom, which totaled
Wells Fargo & Company
71
Risk Management – Credit Risk Management (continued)
$28.4 billion, or approximately 1% of our total assets, and
included $5.0 billion of sovereign claims. Our United Kingdom
sovereign claims arise predominantly from deposits we have
placed with the Bank of England pursuant to regulatory
requirements in support of our London branch. The United
Kingdom officially announced its intention to leave the
European Union (Brexit) on March 29, 2017, starting the two-
year negotiation process leading to its departure. We continue to
conduct assessments and are executing our implementation
plans to ensure we can continue to prudently serve our
customers post-Brexit.
Table 20: Select Country Exposures
Table 20 provides information regarding our top 20
exposures by country (excluding the U.S.) and our Eurozone
exposure, based on our assessment of risk, which gives
consideration to the country of any guarantors and/or
underlying collateral. Our exposure to Puerto Rico (considered
part of U.S. exposure) is predominantly through automobile
lending and was not material to our consolidated country
exposure.
(in millions)
Top 20 country exposures:
United Kingdom
Canada
Germany
Cayman Islands
Ireland
Bermuda
China
Netherlands
India
Luxembourg
Australia
Chile
Guernsey
Brazil
France
Japan
South Korea
Jersey, C.I.
Switzerland
Mexico
Lending (1)
Securities (2)
Derivatives and other (3)
December 31, 2017
Total exposure
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign
Non
sovereign (4)
Total
$
4,986
31
4,323
—
—
—
—
—
—
—
—
—
—
—
—
297
—
—
—
103
20,828
17,429
—
196
1,807
273
1,703
5,732
3,543
3,141
2,961
2,337
2,341
1,162
1,575
1,674
1,609
1,569
971
921
1,174
662
998
958
8
—
—
—
(1)
77
—
—
—
—
—
(1)
—
5
(5)
—
—
—
12
—
97
81
154
358
133
664
121
55
15
14
96
(17)
68
451
95
5
7
—
8
—
—
—
24
1
—
—
—
—
—
—
—
—
1
—
—
—
792
427
397
213
178
191
34
189
—
168
75
—
3
1
214
55
7
15
27
2
4,993
227
4,339
—
—
—
23
78
—
—
—
—
—
(1)
—
302
(4)
—
—
103
23,427
18,129
28,420
18,356
2,112
5,945
3,818
3,413
3,149
2,884
2,474
1,994
1,771
1,729
1,627
1,584
1,281
959
1,249
1,128
1,120
965
6,451
5,945
3,818
3,413
3,172
2,962
2,474
1,994
1,771
1,729
1,627
1,583
1,281
1,261
1,245
1,128
1,120
1,068
Total top 20 country exposures
$
9,740
73,288
279
4,482
41
2,988
10,060
80,758
90,818
Eurozone exposure:
Eurozone countries included in Top 20 above (5) $
Austria
4,323
—
Spain
Belgium
Other Eurozone countries (6)
—
—
24
9,716
571
401
295
245
Total Eurozone exposure
$
4,347
11,228
85
—
—
—
8
93
1,227
—
29
(42)
57
1,271
9
—
—
—
—
9
1,146
1
23
6
—
4,417
12,089
16,506
—
—
—
32
572
453
259
302
572
453
259
334
1,176
4,449
13,675
18,124
(1) Lending exposure includes funded loans and unfunded commitments, leveraged leases, and money market placements presented on a gross basis prior to the deduction of
impairment allowance and collateral received under the terms of the credit agreements. For the countries listed above, there are $551 million in defeased leases secured
significantly by U.S. Treasury and government agency securities.
(2) 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.
(3) Represents counterparty exposure on foreign exchange and derivative contracts, and securities resale and lending agreements. This exposure is presented net of
counterparty netting adjustments and reduced by the amount of cash collateral. It includes credit default swaps (CDS) predominantly used for market making activities in
the U.S. and London based trading businesses, which sometimes results in selling and purchasing protection on the identical reference entities. 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, 2017, the gross notional amount of our CDS sold that reference assets in the Top 20 or Eurozone countries was $287 million, which was offset by the
notional amount of CDS purchased of $497 million. We did not have any CDS purchased or sold that reference pools of assets that contain sovereign debt or where the
reference asset was solely the sovereign debt of a foreign country.
(4) For countries presented in the table, total non-sovereign exposure comprises $39.7 billion exposure to financial institutions and $42.6 billion to non-financial corporations
at December 31, 2017.
(5) Consists of exposure to Germany, Ireland, Netherlands, Luxembourg and France included in Top 20.
(6)
Includes non-sovereign exposure to Italy, Portugal, and Greece in the amount of $154 million, $24 million and $2 million, respectively. We had no sovereign exposure to
Portugal and Greece, and the sovereign exposure to Italy was $8 million at December 31, 2017.
72
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, as presented in Table 21, include loans we
have made to customers and retained as part of our asset/
liability management strategy, the Pick-a-Pay portfolio acquired
from Wachovia which is discussed later in this Report and other
purchased loans, and loans included on our balance sheet as a
result of consolidation of variable interest entities (VIEs).
Table 21: Real Estate 1-4 Family First and Junior Lien Mortgage Loans
(in millions)
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
December 31, 2017
December 31, 2016
Balance
% of
portfolio
Balance
% of
portfolio
$
284,054
88%
$
275,579
39,713
12
46,237
86%
14
Total real estate 1-4 family mortgage loans
$ 323,767
100%
$ 321,816
100%
Part of our credit monitoring includes tracking delinquency,
current 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 2017 on the
non-PCI mortgage portfolio. Loans 30 days or more delinquent
at December 31, 2017, totaled $5.3 billion, or 2% of total non-
PCI mortgages, compared with $5.9 billion, or 2%, at
December 31, 2016. Loans with FICO scores lower than
640 totaled $11.7 billion, or 4% of total non-PCI mortgages at
December 31, 2017, compared with $16.6 billion, or 5%, at
December 31, 2016. Mortgages with a LTV/CLTV greater than
100% totaled $6.1 billion at December 31, 2017, or 2% of total
non-PCI mortgages, compared with $8.9 billion, or 3%, at
December 31, 2016. 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.
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 4% and 7% of total loans at
December 31, 2017 and 2016, 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. 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 36% at December 31, 2017, as a result of our modification
and loss mitigation efforts. 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 generally underwritten at the
time of the modification in accordance with underwriting
guidelines established for our loan modification programs.
Under these 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. Loans included under
these programs are accounted for as troubled debt restructurings
(TDRs) at the start of a trial period or at the time of permanent
modification, if no trial period is used. 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.
Wells Fargo & Company
73
Risk Management – Credit Risk Management (continued)
Real estate 1-4 family first and junior lien mortgage loans by
state are presented in Table 22. Our real estate 1-4 family non-
PCI mortgage loans to borrowers in California represented 12%
of total loans at December 31, 2017, located mostly within the
larger metropolitan areas, with no single California metropolitan
area consisting of more than 4% 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
first and junior lien mortgage portfolios as part of our credit risk
management process. Our underwriting and periodic review of
loans and lines secured by residential real estate collateral
includes appraisals or estimates from automated valuation
models (AVMs) to support property values. AVMs are computer-
based tools used to estimate the market value of homes. AVMs
are a lower-cost alternative to appraisals and support valuations
of large numbers of properties in a short period of time using
market comparables and price trends for local market areas. The
primary risk associated with the use of AVMs is that the value of
an individual property may vary significantly from the average
for the market area. We have processes to periodically validate
AVMs and specific risk management guidelines addressing the
circumstances when AVMs may be used. AVMs are not allowed
in real estate 1-4 family first and junior lien mortgage origination
underwriting. Broker evaluations and enhanced desktop
appraisal reports are allowed in junior lien originations and
some first lien line of credit originations up to $250,000. An
appraisal is required for all real estate 1-4 family first and junior
lien mortgage commitments greater than $250,000. 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 22: Real Estate 1-4 Family First and Junior Lien
Mortgage Loans by State
December 31, 2017
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
$ 101,464
10,599
112,063
12%
26,624
13,212
13,083
7,944
8,845
8,713
6,044
5,636
1,937
3,606
3,688
2,358
857
730
1,872
2,210
28,561
16,818
16,771
10,302
9,702
9,443
7,916
7,846
64,624
11,829
76,453
15,143
—
15,143
3
2
2
1
1
1
1
1
8
1
271,332
39,686
311,018
33
12,722
27
12,749
1
(in millions)
Real estate 1-4 family
loans (excluding PCI):
California
New York
New Jersey
Florida
Virginia
Washington
Texas
North Carolina
Pennsylvania
Other (1)
Government insured/
guaranteed loans (2)
Real estate 1-4 family
loans (excluding PCI)
Real estate 1-4 family
PCI loans
Total
$ 284,054
39,713
323,767
34%
(1) Consists of 41 states; no state had loans in excess of $6.8 billion.
(2) Represents loans whose repayments are predominantly insured by the Federal
Housing Administration (FHA) or guaranteed by the Department of Veterans
Affairs (VA).
74
Wells Fargo & Company
First Lien Mortgage Portfolio Our total real estate 1-4
family first lien mortgage portfolio increased $8.5 billion in
2017, as non-conforming loan growth was partially offset by a
decline in Pick-a-Pay loan balances. We retained $49.4 billion in
non-conforming originations, consisting of loans that exceed
conventional conforming loan amount limits established by
federal government-sponsored entities (GSEs) in 2017.
The credit performance associated with our real estate 1-4
family first lien mortgage portfolio continued to improve in
2017, 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 a net recovery of
0.02% in 2017, compared with a net charge-off of 0.03% in 2016.
Table 23: First Lien Mortgage Portfolio Performance
Nonaccrual loans were $4.1 billion at December 31, 2017,
compared with $5.0 billion at December 31, 2016. Improvement
in the credit performance was driven by an improving housing
environment. Real estate 1-4 family first lien mortgage loans
originated after 2008, which generally utilized tighter
underwriting standards, comprised approximately 79% of our
total real estate 1-4 family first lien mortgage portfolio as of
December 31, 2017.
Table 23 shows certain delinquency and loss information for
the first lien mortgage portfolio and lists the top five states by
outstanding balance.
(in millions)
California
New York
New Jersey
Florida
Washington
Other
Total
Government insured/guaranteed loans
PCI
Outstanding balance
% of loans 30 days or
more past due
Loss (recovery) rate
December 31,
December 31,
Year ended December 31,
2017
$
101,464
26,624
13,212
13,083
8,845
2016
94,015
23,815
12,669
13,737
7,852
92,961
91,868
256,189
243,956
15,143
12,722
15,605
16,018
2017
1.06%
1.65
2.74
3.95
0.85
2.25
1.78
2016
1.21
1.97
3.66
3.62
1.20
2.59
2.07
2017
(0.07)
0.03
0.16
(0.16)
(0.08)
0.02
(0.02)
2016
(0.08)
0.08
0.36
(0.09)
(0.13)
0.12
0.03
Total first lien mortgages
$
284,054
275,579
Wells Fargo & Company
75
Risk Management – Credit Risk Management (continued)
Pick-a-Pay Portfolio The Pick-a-Pay portfolio was one of the
consumer residential first lien 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 24
provides balances by types of loans as of December 31, 2017. As a
Table 24: Pick-a-Pay Portfolio – Comparison to Acquisition Date
result of our loan modification and loss mitigation efforts, Pick
a-Pay option payment loans have been reduced to $10.9 billion
at December 31, 2017, from $99.9 billion at acquisition.
Total adjusted unpaid principal balance of Pick-a-Pay PCI
loans was $16.7 billion at December 31, 2017, compared with
$61.0 billion at acquisition. Due to loan modification and loss
mitigation efforts, the adjusted unpaid principal balance of
option payment PCI loans has declined to 14% of the total Pick
a-Pay portfolio at December 31, 2017, compared with 51% at
acquisition. We expect to close on the sale of approximately
$2.0 billion unpaid principal balance of Pick-a-Pay PCI loans in
first quarter 2018.
December 31, 2017
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)
$
10,891
36%
$
99,937
3,771
15,366
30,028
26,038
$
$
13
51
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.
An increase in expected prepayments and passage of time
lowered our estimated weighted-average life to approximately
6.8 years at December 31, 2017, from 7.4 years at December 31,
2016. The accretable yield percentage for Pick-a-Pay PCI loans
for fourth quarter 2017 was 9.83%, up from 8.22% for fourth
quarter 2016, due to the increase in the amount of accretable
yield relative to the shortened weighted-average life.
For further information on the judgment involved in
estimating expected cash flows for PCI loans, see Note 1
(Summary of Significant Accounting Policies) to Financial
Statements in this Report.
Pick-a-Pay option payment 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).
Since December 31, 2008, we have completed over 138,000
proprietary and Home Affordability Modification Program
(HAMP) Pick-a-Pay loan modifications, which have resulted in
over $6.1 billion of principal forgiveness. We have also provided
interest rate reductions and loan term extensions to enable
sustainable homeownership for our Pick-a-Pay customers. As a
result of these loss mitigation programs, approximately 71% of
our Pick-a-Pay PCI adjusted unpaid principal balance as of
December 31, 2017, has been modified.
The predominant portion of our PCI loans is included in the
Pick-a-Pay portfolio. Our cash flows expected to be collected
have been favorably affected over time by lower expected
defaults and losses as a result of observed and forecasted
economic strengthening, particularly in housing prices, and our
loan modification efforts. Since acquisition, we have reclassified
$8.9 billion from the nonaccretable difference to the accretable
yield. Fluctuations in the accretable yield are driven by changes
in interest rate indices for variable rate PCI loans, prepayment
assumptions, and expected principal and interest payments over
the estimated life of the portfolio, which will be affected by the
pace and degree of improvements in the U.S. economy and
housing markets and projected lifetime performance resulting
from loan modification activity. Changes in the projected timing
of cash flow events, including loan liquidations, modifications
and short sales, can also affect the accretable yield and the
estimated weighted-average life of the portfolio.
76
Wells Fargo & Company
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. Junior lien loan products are mostly 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, our allowance process for junior lien
mortgages considers the relative difference in loss experience for
junior lien mortgages behind first lien mortgage loans we own or
service, compared with those behind first lien mortgage loans
owned or serviced by third parties. In addition, our allowance
process for junior lien mortgages that are current, but are in
Table 25: Junior Lien Mortgage Portfolio Performance
their revolving period, considers the inherent loss where the
borrower is delinquent on the corresponding first lien mortgage
loans.
Table 25 shows certain delinquency and loss information for
the junior lien mortgage portfolio and lists the top five states by
outstanding balance. The decrease in outstanding balances since
December 31, 2016, predominantly reflects loan paydowns. As of
December 31, 2017, 9% 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 lien mortgages with a CLTV ratio in excess of 100%,
3.29% were 30 days or more past due. CLTV means the ratio of
the total loan balance of first lien 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 3% of the junior lien mortgage portfolio at
December 31, 2017. For additional information on consumer
loans by LTV/CLTV, see Table 6.12 in Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report.
(in millions)
California
Florida
New Jersey
Virginia
Pennsylvania
Other
Total
PCI
Outstanding balance
% of loans 30 days or
more past due
Loss rate
December 31,
December 31,
Year ended December 31,
2017
$
10,599
3,688
3,606
2,358
2,210
17,225
39,686
27
2016
12,539
4,252
4,031
2,696
2,494
20,189
46,201
36
2017
2.09%
3.05
2.86
2.34
2.37
2.33
2.38
2016
1.86
2.17
2.79
1.97
2.07
2.09
2.09
2017
(0.40)
0.10
0.64
0.29
0.39
0.08
0.03
2016
0.01
0.65
1.06
0.72
0.72
0.52
0.46
Total junior lien mortgages
$
39,713
46,237
Wells Fargo & Company
77
Risk Management – Credit Risk Management (continued)
Our junior lien, as well as first lien, lines of credit portfolios
generally have draw periods of 10, 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 2017,
approximately 48% of these borrowers paid only the minimum
amount due and approximately 46% 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 31% paid only the
minimum amount due and approximately 64% 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 26 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 $132 million, because they are
predominantly insured by the FHA, and it excludes PCI loans,
which total $49 million, because their losses were generally
reflected in our nonaccretable difference established at the date
of acquisition.
Table 26: Junior Lien Mortgage Line and Loan and Senior Lien Mortgage Line Portfolios Payment Schedule
(in millions)
Junior lien lines and loans
First lien lines
Total (2)(3)
% of portfolios
Outstanding balance
December 31, 2017
$
$
39,686
13,485
53,171
100%
Scheduled end of draw/term
2023 and
2018
1,550
516
2,066
4
2019
2020
705
258
963
2
670
257
927
2
2021
1,353
600
1,953
4
2022
thereafter (1)
Amortizing
4,663
2,190
6,853
13
17,642
7,600
25,242
47
13,103
2,064
15,167
28
(1) 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)
(3)
$4.1 billion to $7.0 billion and averaging $5.6 billion per year.
Junior and first lien lines are primarily interest-only during their draw period. The unfunded credit commitments for junior and first lien lines totaled $62.3 billion at
December 31, 2017.
Includes scheduled end-of-term balloon payments for lines and loans totaling $223 million, $260 million, $288 million, $458 million, $215 million and $44 million for 2018,
2019, 2020, 2021, 2022, and 2023 and thereafter, respectively. Amortizing lines and loans include $110 million of end-of-term balloon payments, which are past due. At
December 31, 2017, $575 million, or 5% of outstanding lines of credit that are amortizing, are 30 days or more past due compared to $690 million or 2% for lines in their
draw period.
CREDIT CARDS Our credit card portfolio totaled $38.0 billion
at December 31, 2017, which represented 4% of our total
outstanding loans. The net charge-off rate for our credit card
portfolio was 3.49% for 2017, compared with 3.08% for 2016,
principally from seasoning of newer vintages.
AUTOMOBILE Our automobile portfolio, predominantly
composed of indirect loans, totaled $53.4 billion at December 31,
2017. The net charge-off rate for our automobile portfolio was
1.18% for 2017, compared with 0.84% for 2016. The increase in
net charge-offs in 2017, compared with 2016, was due to
increased loss severities resulting from a temporary moratorium
on certain repossessions for customers who have had CPI
policies purchased on their behalf while we remediate the
previously disclosed CPI issues, as well as updated industry
regulatory guidance regarding the timing of loss recognition for
automobile loans in bankruptcy, and also reflected the current
trend of increased charge-offs in the automobile lending
industry.
We have entered into an agreement to sell certain assets and
liabilities of Reliable Financial Services Inc. and Reliable Finance
Holding Company, which are subsidiaries of Wells Fargo’s auto
financing business in Puerto Rico. The sale, consisting of
approximately $1.5 billion in consumer auto loans and
$340 million in commercial loans, is expected to close in second
quarter 2018.
OTHER REVOLVING CREDIT AND INSTALLMENT Other
revolving credit and installment loans totaled $38.3 billion at
December 31, 2017, and primarily included student and security-
based loans. Our private student loan portfolio totaled
$11.9 billion at December 31, 2017. All remaining student loans
guaranteed by agencies on behalf of the U.S. Department of
Education under the Federal Family Education Loan Program
(FFELP) were sold as of March 31, 2017. The net charge-off rate
for other revolving credit and installment loans was 1.52% for
2017, compared with 1.46% for 2016.
78
Wells Fargo & Company
NONPERFORMING ASSETS (NONACCRUAL LOANS AND
FORECLOSED ASSETS) Table 27 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 automobile loans receive
notification of bankruptcy, regardless of their delinquency
status.
•
•
•
•
Credit card loans are not placed on nonaccrual status, but
are generally fully charged off when the loan reaches 180 days
past due.
Note 1 (Summary of Significant Accounting Policies –
Loans) to Financial Statements in this Report describes our
accounting policy for nonaccrual and impaired loans.
Nonaccrual loans were $8.0 billion at December 31, 2017,
down $2.4 billion from $10.4 billion at December 31, 2016, due
to a $1.3 billion decrease in commercial and industrial
nonaccruals reflecting continued improvement in the oil and gas
portfolio, as well as a decrease of $1.0 billion in consumer real
estate nonaccruals.
Table 27: 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
Consumer:
Real estate 1-4 family first mortgage (1)
Real estate 1-4 family junior lien mortgage
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans (2)(3)(4)
As a percentage of total loans
Foreclosed assets:
Government insured/guaranteed (5)
Non-government insured/guaranteed
Total foreclosed assets
Total nonperforming assets
As a percentage of total loans
2017
2016
2015
2014
2013
December 31,
$
1,899
3,216
628
37
76
685
43
115
1,363
969
66
26
538
1,490
187
24
775
2,254
416
30
2,640
4,059
2,424
2,239
3,475
4,122
1,086
130
58
5,396
8,036
0.84%
$
120
522
642
$
8,678
0.91%
4,962
1,206
106
51
6,325
10,384
1.07
197
781
978
11,362
1.17
7,293
1,495
121
49
8,958
11,382
1.24
446
979
1,425
12,807
1.40
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
15,457
19,605
1.79
2.38
(1)
Includes MHFS of $136 million, $149 million, $177 million, $177 million and $227 million at December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
(2) Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.
(3) Real estate 1-4 family mortgage loans predominantly insured by the FHA or guaranteed by the VA and student loans largely guaranteed by agencies on behalf of the U.S.
Department of Education under the FFELP are not placed on nonaccrual status because they are insured or guaranteed. All remaining student loans guaranteed under the
FFELP were sold as of March 31, 2017.
(4) See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans.
(5) 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 classification of certain government-guaranteed mortgage loans upon foreclosure, see Note 1 (Summary of Significant Accounting Policies) to
Financial Statements in this Report.
Wells Fargo & Company
79
Risk Management – Credit Risk Management (continued)
Table 28 provides a summary of nonperforming assets
during 2017.
Table 28: Nonperforming Assets by Quarter During 2017
(in millions)
Nonaccrual loans:
Commercial:
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
% of
total
% of
total
% of
total
Balance
loans
Balance
loans
Balance
loans
Balance
% of
total
loans
Commercial and industrial
$ 1,899
0.57% $ 2,397
0.73% $ 2,632
0.79% $ 2,898
0.88%
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 (1)
Total nonaccrual loans
Foreclosed assets:
Government insured/guaranteed
Non-government insured/guaranteed
Total foreclosed assets
0.50
0.15
0.39
0.52
1.45
2.73
0.24
0.15
1.19
0.84
628
37
76
2,640
4,122
1,086
130
58
5,396
8,036
120
522
642
0.46
0.15
0.42
0.62
1.50
2.68
0.25
0.15
1.22
0.91
593
38
81
3,109
4,213
1,101
137
59
5,510
8,619
137
569
706
0.48
0.13
0.46
0.67
1.60
2.56
0.18
0.15
1.26
0.95
630
34
89
3,385
4,413
1,095
104
59
5,671
9,056
149
632
781
0.51
0.16
0.50
0.73
1.73
2.60
0.17
0.14
1.34
1.02
672
40
96
3,706
4,743
1,153
101
56
6,053
9,759
179
726
905
Total nonperforming assets
$ 8,678
0.91% $ 9,325
0.98% $ 9,837
1.03% $ 10,664
1.11%
Change in NPAs from prior quarter
$
(647)
(512)
(827)
(698)
(1)
Includes an incremental $171 million of nonaccrual loans at September 30, 2017, reflecting updated industry regulatory guidance related to loans in bankruptcy.
80
Wells Fargo & Company
Table 29 provides an analysis of the changes in nonaccrual
loans.
Table 29: 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
Total outflows
Balance, end of period
Consumer nonaccrual loans
Balance, beginning of period
Inflows (1)
Outflows:
Returned to accruing
Foreclosures
Charge-offs
Payments, sales and other
Total outflows
Balance, end of period
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Year ended Dec 31,
2017
2017
2017
2017
2017
2016
Quarter ended
$
3,109
617
(126)
(1)
(139)
(820)
(1,086)
2,640
5,510
845
(345)
(72)
(94)
(448)
(959)
5,396
3,385
627
3,706
704
4,059
945
4,059
2,893
(97)
(3)
(173)
(630)
(903)
(61)
(15)
(116)
(833)
(133)
(1)
(202)
(962)
(417)
(20)
(630)
(3,245)
(1,025)
(1,298)
(4,312)
3,109
3,385
3,706
2,640
5,671
887
6,053
676
6,325
814
6,325
3,222
2,424
6,358
(205)
(26)
(1,319)
(3,173)
(4,723)
4,059
8,958
3,524
(1,595)
(2,137)
(397)
(56)
(109)
(486)
(425)
(72)
(117)
(444)
(428)
(81)
(151)
(426)
(281)
(471)
(1,804)
(1,048)
(1,058)
(1,086)
(4,151)
5,510
8,619
5,671
9,056
6,053
9,759
5,396
8,036
(327)
(720)
(2,973)
(6,157)
6,325
10,384
Total nonaccrual loans
$
8,036
(1) Quarter ended September 30, 2017, includes an incremental $171 million of nonaccrual loans, reflecting updated industry regulatory guidance related to loans in
bankruptcy.
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, 2017:
•
99% of total commercial nonaccrual loans and 99% of total
consumer nonaccrual loans are secured. Of the consumer
nonaccrual loans, 97% are secured by real estate and 82%
have a combined LTV (CLTV) ratio of 80% or less.
losses of $402 million and $1.8 billion have already been
recognized on 18% of commercial nonaccrual loans and 43%
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 active or 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). Thereafter, we re-evaluate each loan regularly and
record additional write-downs if needed.
85% of commercial nonaccrual loans were current on
interest, but were on nonaccrual status because the full or
timely collection of interest or principal had become
uncertain.
•
•
•
•
•
79% of commercial nonaccrual loans were current on both
principal and interest, but will remain on nonaccrual status
until the full and timely collection of principal and interest
becomes certain.
the remaining risk of loss of all nonaccrual loans has been
considered and we believe is adequately covered by the
allowance for loan losses.
of $2.3 billion of consumer loans in bankruptcy or
discharged in bankruptcy, and classified as nonaccrual,
$1.5 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 Making Home
Affordable (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.
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 $525 million of
interest would have been recorded as income on these loans,
compared with $404 million actually recorded as interest
income in 2017, versus $658 million and $481 million,
respectively, in 2016.
Wells Fargo & Company
81
Risk Management – Credit Risk Management (continued)
Table 30 provides a summary of foreclosed assets and an
analysis of changes in foreclosed assets.
Table 30: Foreclosed Assets
(in millions)
Summary by loan segment
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Year ended Dec 31,
2017
2017
2017
2017
2017
2016
Quarter ended
Government insured/guaranteed
$
120
PCI loans:
Commercial
Consumer
Total PCI loans
All other loans:
Commercial
Consumer
Total all other loans
Total foreclosed assets
Analysis of changes in foreclosed assets (1)
Balance, beginning of period
Net change in government insured/guaranteed (2)
Additions to foreclosed assets (3)
Reductions:
Sales
Write-downs and gains (losses) on sales
Total reductions
Balance, end of period
57
62
119
207
196
403
642
706
(17)
180
(231)
4
(227)
$
$
$
642
137
67
72
139
226
204
430
706
781
(12)
198
(257)
(4)
(261)
706
149
79
67
146
259
227
486
781
905
(30)
233
(330)
3
(327)
781
179
120
197
91
75
166
287
328
615
978
1,425
(249)
1,237
57
62
119
207
196
403
642
978
(77)
899
(1,125)
(1,512)
(33)
77
(1,158)
(1,435)
642
978
84
80
164
275
287
562
905
978
(18)
288
(307)
(36)
(343)
905
(1) During fourth quarter 2016, we evaluated a population of foreclosed properties that were previously security for FHA insured loans, and made the decision to retain some
of the properties as foreclosed real estate, thereby foregoing the FHA insurance claim. Accordingly, the loans for which we decided not to file a claim are reported as
additions to foreclosed assets rather than included as net change in government insured/guaranteed foreclosures.
(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 generally made up of inflows from mortgages held for investment and MHFS, and outflows when we are reimbursed
by FHA/VA.
Includes loans moved into foreclosure from nonaccrual status, PCI loans transitioned directly to foreclosed assets and repossessed automobiles.
(3)
Foreclosed assets at December 31, 2017, included
$372 million of foreclosed residential real estate, of which 32% is
predominantly FHA insured or VA guaranteed and expected to
have minimal or no loss content. The remaining foreclosed
assets balance of $270 million has been written down to
estimated net realizable value. Of the $642 million in foreclosed
assets at December 31, 2017, 55% have been in the foreclosed
assets portfolio one year or less.
82
Wells Fargo & Company
TROUBLED DEBT RESTRUCTURINGS (TDRs)
Table 31: Troubled Debt Restructurings (TDRs)
(in millions)
Commercial TDRs
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Total commercial TDRs
Consumer TDRs
2017
2016
2015
2014
2013
December 31,
$
2,096
901
44
35
2,584
1,119
91
6
3,076
3,800
1,123
1,456
125
1
2,705
724
1,880
314
2
2,920
1,034
2,248
475
8
3,765
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
12,080
1,849
14,134
2,074
16,812
2,306
18,226
2,437
18,925
2,468
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
356
87
126
194
14,692
17,768
4,801
12,967
$
$
$
17,768
300
85
101
299
16,993
20,793
6,193
14,600
20,793
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
(1) TDR loans include $1.4 billion, $1.5 billion $1.8 billion, $2.1 billion, and $2.5 billion at December 31, 2017, 2016, 2015, 2014, and 2013, respectively, of government
insured/guaranteed loans that are predominantly insured by the FHA or guaranteed by the VA and are accruing.
Table 32: TDRs Balance by Quarter During 2017
(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,
2017
2017
Jun 30,
2017
Mar 31,
2017
$
2,096
901
44
35
2,424
953
48
39
2,629
1,024
62
21
2,484
1,090
73
8
3,076
3,464
3,736
3,655
12,080
1,849
12,617
1,919
13,141
1,975
13,680
2,027
356
87
126
194
14,692
17,768
4,801
12,967
$
$
$
17,768
340
88
124
183
15,271
18,735
5,218
13,517
18,735
316
85
118
215
15,850
19,586
5,637
13,949
19,586
308
80
107
261
16,463
20,118
5,819
14,299
20,118
Table 31 and Table 32 provide information regarding the
recorded investment of loans modified in TDRs. The allowance
for loan losses for TDRs was $1.6 billion and $2.2 billion at
December 31, 2017 and 2016, 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. When we delay the timing on the
repayment of a portion of principal (principal forbearance), we
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 typically 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,
Wells Fargo & Company
83
Risk Management – Credit Risk Management (continued)
if applicable. For an accruing loan that has been modified, if the
borrower has demonstrated performance under the previous
terms and the underwriting process shows the capacity to
continue to perform under the restructured terms, the loan will
generally remain in accruing status. Otherwise, the loan will be
placed in nonaccrual status and may be returned to accruing
status when 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
Table 33: Analysis of Changes in TDRs
we believe that principal and interest contractually due under
the modified agreement will not be collectible.
Table 33 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,
2017
2017
2017
2017
2017
2016
Quarter ended
$
3,464
412
(65)
(1)
(734)
3,736
333
(74)
(2)
(529)
3,655
730
(59)
(12)
(578)
3,800
642
(108)
—
3,800
2,117
(306)
(15)
2,705
3,192
(473)
(16)
(679)
(2,520)
(1,608)
3,076
3,464
3,736
3,655
3,076
3,800
15,271
395
(52)
(135)
(798)
11
14,692
$
17,768
15,850
461
(51)
(146)
(811)
(32)
15,271
18,735
16,463
444
(51)
(159)
(801)
(46)
15,850
19,586
16,993
517
16,993
1,817
(51)
(179)
(779)
(38)
16,463
20,118
(205)
(619)
(3,189)
(105)
14,692
17,768
19,997
2,224
(218)
(851)
(4,056)
(103)
16,993
20,793
Inflows include loans that modify, even if they resolve, within the period as well as advances on loans that modified in a prior period.
(1)
(2) 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 September 30, 2017, while no loans were removed
from TDR classification for the quarters ended December 31, June 30 and March 31, 2017. During 2016, $4 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.
84
Wells Fargo & Company
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 when 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.
aging of those loans to continue up to 120 days, and overall
increases in delinquencies in the automobile lending industry.
These increases were partially offset by declines in commercial
real estate mortgages and other revolving credit and installment
loans.
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 were $10.9 billion at both
December 31, 2017 and 2016. All remaining student loans
guaranteed by agencies on behalf of the U.S. Department of
Education under the FFELP were sold as of March 31, 2017.
Excluding insured/guaranteed loans, loans 90 days or more
Table 34 reflects non-PCI loans 90 days or more past due
past due and still accruing at December 31, 2017, were up
$91 million, or 9%, from December 31, 2016, due to increases
related to loan growth in real estate 1-4 family first mortgages
and credit cards, as well as higher delinquencies in automobile
loans resulting from the impact of the temporary moratorium on
repossession activity for loans with CPI policies, which allowed
Table 34: Loans 90 Days or More Past Due and Still Accruing
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):
2017
2016
2015
2014
2013
$ 11,997
11,858
14,380
17,810
23,219
December 31,
Less: FHA insured/guaranteed by the VA (2)(3)
10,934
10,883
13,373
16,827
21,274
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
—
$
1,063
$
26
23
—
49
219
60
492
143
100
1,014
$
1,063
3
972
28
36
—
64
175
56
452
112
113
908
972
26
981
97
13
4
114
224
65
397
79
102
867
981
63
920
900
1,045
31
16
—
47
260
83
364
73
93
873
920
11
35
97
143
354
86
321
55
86
902
1,045
(1) PCI loans totaled $1.4 billion, $2.0 billion, $2.9 billion, $3.7 billion and $4.5 billion at December 31, 2017, 2016, 2015, 2014 and 2013, respectively.
(2) Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
(3)
(4) Represents loans whose repayments are largely guaranteed by agencies on behalf of the U.S. Department of Education under the FFELP. All remaining student loans
Includes mortgages held for sale 90 days or more past due and still accruing.
guaranteed under the FFELP were sold as of March 31, 2017.
Wells Fargo & Company
85
Risk Management – Credit Risk Management (continued)
NET CHARGE-OFFS
Table 35: Net Charge-offs
($ in millions)
2017
Commercial:
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
% of
charge-
offs
avg.
loans
charge-
offs
avg.
loans (1)
charge-
offs
avg.
loans (1)
charge-
offs
avg.
loans (1)
charge-
offs
avg.
loans (1)
Commercial and industrial
$
Real estate mortgage
Real estate construction
492
(44)
(30)
28
446
0.15% $
(0.03)
(0.12)
0.15
0.09
118
(10)
(3)
10
115
0.14% $
125
0.15% $
(0.03)
(0.05)
0.20
0.09
(3)
(15)
6
113
(0.01)
(0.24)
0.12
0.09
78
(6)
(4)
7
75
0.10% $
171
0.21%
(0.02)
(0.05)
0.15
0.06
(25)
(8)
5
143
(0.08)
(0.15)
0.11
0.11
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
2016
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
(48)
(0.02)
(23)
(0.03)
(16)
(0.02)
(16)
(0.02)
7
0.01
13
1,242
683
592
2,482
0.03
3.49
1.18
1.52
0.55
$ 2,928
0.31% $
(7)
(0.06)
336
188
142
636
751
3.66
1.38
1.46
0.56
0.31% $
$
1,156
(89)
(37)
30
1,060
0.36 % $
(0.07)
(0.16)
0.17
0.22
256
(12)
(8)
15
251
0.31 % $
(0.04)
(0.13)
0.32
0.20
79
0.03
(3)
—
229
1,052
520
580
2,460
0.46
3.08
0.84
1.46
0.53
$
3,520
0.37 % $
44
275
166
172
654
905
0.38
3.09
1.05
1.70
0.56
0.37 % $
1
277
202
140
604
717
259
(28)
(18)
2
215
20
49
245
137
139
590
805
—
3.08
1.41
1.44
0.53
0.30% $
0.32 % $
(0.09)
(0.32)
0.04
0.17
0.03
0.40
2.82
0.87
1.40
0.51
0.33 % $
(4)
(0.03)
320
126
154
580
655
368
(20)
(3)
12
357
14
62
270
90
131
567
924
3.67
0.86
1.58
0.51
0.27% $
0.46 % $
(0.06)
(0.06)
0.27
0.29
0.02
0.49
3.25
0.59
1.32
0.49
0.39 % $
23
309
167
156
662
805
273
(29)
(8)
1
237
48
74
262
127
138
649
886
0.21
3.54
1.10
1.60
0.59
0.34%
0.36 %
(0.10)
(0.13)
0.01
0.20
0.07
0.57
3.16
0.85
1.42
0.57
0.38 %
(1) Quarterly net charge-offs (recoveries) as a percentage of average respective loans are annualized.
Table 35 presents net charge-offs for the four quarters and full
year of 2017 and 2016. Net charge-offs in 2017 were $2.9 billion
(0.31% of average total loans outstanding) compared with $3.5
billion (0.37%) in 2016.
The decrease in commercial and industrial net charge-offs
in 2017 reflected continued improvement in our oil and gas
portfolio. Our commercial real estate portfolios were in a net
recovery position every quarter in 2017 and 2016. Total
consumer net charge-offs increased slightly from the prior year
due to an increase in credit card and automobile net charge-offs,
partially offset by a decrease in residential real estate net
charge-offs.
86
Wells Fargo & Company
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 36: 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. 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 36 presents the allocation of the allowance for credit
losses by loan segment and class for the last five years.
Dec 31, 2017
Dec 31, 2016
Dec 31, 2015
Dec 31, 2014
Dec 31, 2013
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
$ 3,752
35% $ 4,560
34% $ 4,231
33% $ 3,506
32% $ 3,040
29%
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
1,374
1,238
268
6,632
13
3
2
53
1,320
1,294
220
14
2
2
1,264
1,210
167
13
3
1
1,576
1,097
198
13
2
1
2,157
14
775
131
2
1
7,394
52
6,872
50
6,377
48
6,103
46
Real estate 1-4 family first mortgage
1,085
30
1,270
29
1,895
30
2,878
31
4,087
32
Real estate 1-4 family junior lien
mortgage
Credit card
Automobile
Other revolving credit and
installment
608
1,944
1,039
652
4
4
5
4
815
1,605
817
639
5
4
6
4
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
Total consumer
5,328
47
5,146
48
5,640
50
6,792
52
8,868
54
Total
$ 11,960
100% $ 12,540
100% $ 12,512
100% $ 13,169
100% $ 14,971
100%
Dec 31, 2017
Dec 31, 2016
Dec 31, 2015
Dec 31, 2014
Dec 31, 2013
$
$
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
11,004
956
11,960
1.15%
376
1.25
149
11,419
1,121
12,540
1.18
324
1.30
121
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
Wells Fargo & Company
87
Risk Management – Credit Risk Management (continued)
In addition to the allowance for credit losses, there was
We believe the allowance for credit losses of $12.0 billion at
December 31, 2017, was appropriate to cover credit losses
inherent in the loan portfolio, including unfunded credit
commitments, at that date. Approximately $694 million of the
allowance at December 31, 2017, was allocated to our oil and gas
portfolio, compared with $1.3 billion at December 31, 2016. This
represented 5.6% and 8.5% of total oil and gas loans outstanding
at December 31, 2017 and 2016, respectively. 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 will be 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.
$474 million at December 31, 2017, and $954 million at
December 31, 2016, of nonaccretable difference to absorb losses
for PCI loans, which totaled $12.8 billion at December 31, 2017.
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,
including loans from the GE Capital business acquisitions in
2016, 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.
The allowance for credit losses decreased $580 million, or
5%, in 2017, due to a decrease in our commercial allowance
reflecting credit quality improvement, including in the oil and
gas portfolio, as well as improvement in our residential real
estate portfolios, partially offset by increased allowance in the
credit card, automobile and other revolving credit and
installment portfolios. Total provision for credit losses was
$2.5 billion in 2017, $3.8 billion in 2016 and $2.4 billion in
2015. The provision for credit losses was $400 million less than
net charge-offs in 2017, reflecting improvement in the oil and
gas portfolio, compared with $250 million more than net charge-
offs in 2016. The 2015 provision was $450 million less than net
charge-offs.
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Wells Fargo & Company
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.
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 typically retain the servicing for 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, 2017, 95% was current and less than 1% was
subprime at origination. Our combined delinquency and
foreclosure rate on this portfolio was 5.14% at December 31,
2017, compared with 4.83% at December 31, 2016. Two percent
of this portfolio is private label securitizations for which we
originated the loans and, therefore, have some repurchase risk.
Table 37: Changes in Mortgage Repurchase Liability
The overall level of unresolved repurchase demands and
mortgage insurance rescissions outstanding at December 31,
2017, was $108 million, representing 482 loans, down from
$125 million, or 597 loans, a year ago both in number of
outstanding loans and in total dollar balances. The decrease was
predominantly due to private investor demands resolved with
minimal repurchase risk.
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 37 summarizes the changes in our mortgage
repurchase liability. We incurred net losses on repurchased
loans and investor reimbursements totaling $19 million in 2017,
compared with $46 million in 2016.
Dec 31,
Sep 30,
Jun 30,
Mar 31,
Year ended Dec 31,
Quarter ended
(in millions)
2017
2017
2017
2017
2017
Balance, beginning of period
$
179
Assumed with MSR purchases (1)
Provision for repurchase losses:
Loan sales
Change in estimate (2)
Net additions (reductions)
Losses
—
4
2
6
(4)
178
10
6
(12)
(6)
(3)
222
—
6
(45)
(39)
(5)
229
—
8
(8)
—
(7)
Balance, end of period
$
181
179
178
222
229
10
24
(63)
(39)
(19)
181
2016
378
—
36
(139)
(103)
(46)
229
2015
615
—
43
(202)
(159)
(78)
378
(1) Represents repurchase liability associated with portfolio of loans underlying mortgage servicing rights acquired during the period.
(2) Results from changes in investor demand and mortgage insurer practices, credit deterioration and changes in the financial stability of correspondent lenders.
Wells Fargo & Company
89
Risk Management – Credit Risk Management (continued)
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, 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. In addition, in
connection with our servicing activities, we could become subject
to consent orders and settlement agreements with federal and
state regulators for alleged servicing issues and practices. In
general, these can require us to provide customers with loan
modification relief, refinancing relief, and foreclosure prevention
and assistance, as well as can impose certain monetary penalties
on us.
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 $181 million at December 31, 2017,
and $229 million at December 31, 2016. In 2017, we released
$39 million, which increased net gains on mortgage loan
origination/sales activities, compared with a release of
$103 million in 2016. The release in 2017 was predominantly
due to assumption updates 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
$136 million at December 31, 2017, 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. 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.
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
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Wells Fargo & Company
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. As discussed in
more detail for trading activities below, we employ separate
management level oversight specific to market risk.
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 rising, earnings will initially
increase);
assets and liabilities may reprice at the same time but by
different amounts (for example, when the general level of
interest rates is rising, we may increase rates paid on
checking and savings deposit accounts by an amount that is
less than the general rise 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 increase sharply, MBS
held in the investment securities portfolio may pay down
slower than anticipated, which could impact portfolio
income); or
interest rates may also have a direct or indirect effect on
loan demand, collateral values, credit losses, mortgage
origination volume, the fair value of MSRs and other
financial instruments, the value of the pension liability and
other items affecting earnings.
•
•
•
•
We assess interest rate risk by comparing outcomes under
various net interest income 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 drivers of earnings and balance sheet
composition such as loan originations, prepayment speeds on
loans and investment securities, deposit flows and mix, as well
as pricing strategies.
Currently, our profile is such that we project net interest
income will benefit modestly from higher interest rates as our
assets would reprice faster and to a greater degree than our
liabilities, while in the case of lower interest rates, our assets
would reprice downward and to a greater degree than our
liabilities.
Our most recent simulations estimate net interest income
sensitivity over the next two years under a range of both lower
and higher interest rates. Measured impacts from standardized
ramps (gradual changes) and shocks (instantaneous changes)
are summarized in Table 38, indicating net interest income
sensitivity relative to the Company's base net interest income
plan. Ramp scenarios assume interest rates move gradually in
parallel across the yield curve relative to the base scenario in
year one, and the full amount of the ramp is held as a constant
differential to the base scenario in year two. The following
describes the simulation assumptions for the scenarios
presented in Table 38:
•
Simulations are dynamic and reflect anticipated growth
across assets and liabilities.
• Other macroeconomic variables that could be correlated
with the changes in interest rates are held constant.
• Mortgage prepayment and origination assumptions vary
across scenarios and reflect only the impact of the higher or
lower interest rates.
• Our base scenario deposit forecast incorporates mix changes
consistent with the base interest rate trajectory. Deposit mix
is modeled to be the same as in the base scenario across the
alternative scenarios. In higher rate scenarios, customer
activity that shifts balances into higher-yielding products
could reduce expected net interest income.
• We hold the size of the projected investment securities
portfolio constant across scenarios.
Table 38: Net Interest Income Sensitivity Over Next Two-Year
Horizon Relative to Base Expectation
Lower Rates
Higher Rates
100 bps
Ramp
Parallel
Decrease
100 bps
Instantaneous
Parallel
Increase
200 bps
Ramp
Parallel
Increase
$
(1.2) - (0.7)
1.8 - 2.3
1.9 - 2.4
($ in billions)
Base
First Year of
Forecasting
Horizon
Net Interest Income
Sensitivity to
Base Scenario
Key Rates at
Horizon End
Fed Funds Target
2.25 %
10-year CMT (1)
3.24
1.25
2.24
3.25
4.24
4.25
5.24
Second Year of
Forecasting
Horizon
Net Interest Income
Sensitivity to
Base Scenario
Key Rates at
Horizon End
$
(2.2) - (1.7)
2.5 - 3.0
4.3 - 4.8
Fed Funds Target
2.75 %
10-year CMT (1)
3.77
1.75
2.77
3.75
4.77
4.75
5.77
(1) U.S. Constant Maturity Treasury Rate
Between 2014 and 2016, we entered into receive fixed
interest rate swaps to hedge our LIBOR-based commercial loans,
when the expectation was for interest rates to be lower for
longer. By doing so, we converted lower-yielding floating rate
loans into higher-yielding fixed rate loans. At the peak, we had
$86 billion in notional value of loan swaps. Given our desire to
be modestly more asset sensitive, we began unwinding these
hedges in third quarter 2017, and have currently unwound all
these interest rate swaps. Elimination of these swaps will reduce
interest income from these loans in 2018, but it has increased
our sensitivity to changes in interest rates. Since the swaps were
entered into they generated incremental net interest income of
approximately $3 billion. The pre-tax loss in other
comprehensive income at the time of unwinding the swaps was
$1 billion and will be amortized to loan interest income over the
remaining life of the original contracts, which is approximately 3
Wells Fargo & Company
91
Risk Management – Asset/Liability Management (continued)
years. The sensitivity results presented in Table 38 reflect the full
swap portfolio unwinds to best illustrate our profile after the
swap repositioning.
The sensitivity results above do not capture interest rate
sensitive noninterest income and expense impacts. Our interest
rate sensitive noninterest income and expense is primarily
driven by mortgage activity, and may move in the opposite
direction of our net interest income. Typically, in response to
higher interest rates, mortgage activity, primarily refinancing
activity, generally declines. And in response to lower interest
rates, mortgage activity generally increases. Mortgage results are
also impacted by the valuation of MSRs and related hedge
positions. See the “Risk Management – Asset/Liability
Management – Mortgage Banking Interest Rate and Market
Risk” section in this Report for more information.
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,
2017, and December 31, 2016, 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.
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, 2016, and most of 2017, 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.
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. 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 resulting from a
decline in interest rates because the potential increase in
origination/servicing fees in that scenario provides a partial
“natural business hedge.”
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Wells Fargo & Company
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 predominantly 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 2017, 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
LIBOR index-based financial instruments used as economic
hedges for such ARMs. Additionally, hedge-carry income on
our economic hedges for the MSRs may not continue at
recent levels 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 $15.0 billion and $14.4 billion at December 31, 2017
and 2016, respectively. The weighted-average note rate on our
portfolio of loans serviced for others was 4.23% and 4.26% at
December 31, 2017 and 2016, respectively. The carrying value of
our total MSRs represented 0.88% and 0.85% of mortgage loans
serviced for others at December 31, 2017 and 2016, respectively.
As part of our mortgage banking activities, we enter into
commitments to fund residential mortgage loans at specified
times in the future. A mortgage loan commitment is an interest
rate lock that binds us to lend funds to a potential borrower at a
specified interest rate and within a specified period of time,
generally up to 60 days after inception of the rate lock. These
loan commitments are derivative loan commitments if the loans
that will result from the exercise of the commitments will be held
for sale. These derivative loan commitments are recognized at
fair value on the balance sheet with changes in their fair values
recorded as part of mortgage banking noninterest income. The
fair value of these commitments include, at inception and during
the life of the loan commitment, the expected net future cash
flows related to the associated servicing of the loan as part of the
fair value measurement of derivative loan commitments.
Changes subsequent to inception are based on changes in fair
value of the underlying loan resulting from the exercise of the
commitment and changes in the probability that the loan will not
fund within the terms of the commitment, referred to as a fall
out factor. The value of the underlying loan commitment is
affected 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
Wells Fargo & Company
93
Risk Management – Asset/Liability Management (continued)
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 and Eurodollar futures 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 to accommodate the investment and risk
management activities of our customers (which generally
comprises a subset of the transactions recorded as trading and
derivative assets and liabilities on our balance sheet), and to
execute economic hedging to manage certain balance sheet risks.
These activities mostly occur within our Wholesale Banking
businesses and to a lesser extent other divisions of the Company.
All of our trading assets, and derivative assets and liabilities
(including securities, foreign exchange transactions and
commodity transactions) 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 derivative
assets and liabilities. Net interest income earned from trading
activity is reflected in the interest income and interest expense
components of our income statement. Changes in fair value
related to trading assets, and derivative assets and liabilities are
reflected in net gains on trading activities, a component of
noninterest income in our income statement.
Table 39 presents total revenue from trading activities.
Table 39: Net Gains (Losses) from Trading Activities
(in millions)
2017
Interest income (1)
$
2,928
Less: Interest expense (2)
Net interest income
Noninterest income:
Net gains (losses) from
trading activities (3):
416
2,512
Year ended December 31,
2016
2,506
354
2,152
2015
1,971
357
1,614
Customer
accommodation
Economic hedges
and other (4)
Total net gains
from trading
activities
Total trading-related net
interest and noninterest
income
835
218
828
806
6
(192)
1,053
834
614
$
3,565
2,986
2,228
(1) Represents interest and dividend income earned on trading securities.
(2) Represents interest and dividend expense incurred on trading securities we
have sold but have not yet purchased.
(3) Represents realized gains (losses) from our trading activity and unrealized
gains (losses) due to changes in fair value of our trading positions, attributable
to the type of business activity.
(4) Excludes economic hedging of mortgage banking 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.
In 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.
Economic hedges and other Economic hedges in trading
activities are not designated in a hedge accounting relationship
and exclude economic hedging related to our asset/liability risk
management and 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.
Daily Trading-Related Revenue Table 40 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.
94
Wells Fargo & Company
Table 40: Distribution of Daily Trading-Related Revenues
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, commodity prices,
mortgage rates, and market 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.
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.
VaR measurement between different financial institutions is
not readily comparable due to modeling and assumption
differences from company to company. VaR measures are more
useful when interpreted as an indication of trends rather than an
absolute measure to be compared across 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.
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.
Trading VaR is the measure used to provide insight into the
market risk exhibited by the Company’s trading positions. The
Company calculates Trading VaR for risk management purposes
to establish line of business and Company-wide risk limits.
Trading VaR is calculated based on all trading positions
Wells Fargo & Company
95
Risk Management – Asset/Liability Management (continued)
classified as trading assets, other liabilities, derivative assets or
derivative liabilities on our balance sheet.
Table 41 shows the Company’s Trading General VaR by risk
category. The average Company Trading General VaR for 2017
was $21 million with a low of $11 million and high of $31 million.
Table 41: 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, 2017
Year ended
December 31, 2016
Period
end
Average
Low
High
Period
end
Average
Low
High
$
12
13
10
1
0
(24)
$
12
24
15
12
1
1
(32)
21
11
6
9
1
0
36
27
17
2
1
11
31
20
13
14
1
0
(25)
23
17
12
15
2
1
(26)
21
12
5
11
1
0
15
32
23
19
4
14
27
(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 is designed to capture 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).
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.
Committee Capital Accord of the Basel Committee on Banking
Supervision. The Company must calculate regulatory capital
under the Basel III market risk capital rule, which requires
banking organizations with significant trading activities to adjust
their capital requirements to reflect 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 derivative assets and
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 mostly concentrated in the trading assets, and derivative
assets and liabilities 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 hold smaller 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
Regulatory Market Risk Capital reflects U.S. regulatory agency
risk-based capital regulations that are based on the Basel
determination of regulatory capital and risk-weighted assets
(RWAs). The Company uses the same VaR models for both
96
Wells Fargo & Company
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
Table 42: Regulatory 10-Day 99% General VaR by Risk Category
VaR uses historical simulation analysis based on 99% confidence
level and a 10-day holding period.
Table 42 shows the General VaR measure categorized by
major risk categories. The average 10-day Company Regulatory
General VaR for 2017 was $29 million with a low of $17 million
and high of $45 million.
(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, 2017
December 31, 2016
Period
Period
end Average
Low High
end Average
Low
High
Year ended
$
$
43
22
4
3
1
65
29
6
5
5
(42)
(83)
31
33
27
29
31
11
1
2
1
16
17
96
71
23
21
29
42
45
47
28
3
6
3
33
30
4
6
3
(69)
(51)
18
21
25
26
18
9
(0)
1
1
7
6
83
56
12
23
25
54
56
(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.
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 holding period.
Total VaR (as presented in Table 43) is composed of General
VaR and Specific Risk and uses the previous 12 months of
historical market data in compliance with regulatory
requirements.
Total Stressed VaR (as presented in Table 43) 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 43) 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 trading products.
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.
Wells Fargo & Company
97
Risk Management – Asset/Liability Management (continued)
Table 43 provides information on Total VaR, Total Stressed
VaR and the Incremental Risk Charge results for the quarter
ended December 31, 2017. Incremental Risk Charge uses the
higher of the quarterly average or the quarter end result. For the
Table 43: Market Risk Regulatory Capital Modeled Components
fourth quarter, the required capital for market risk equals the
quarter end result.
(in millions)
Total VaR
Total Stressed VaR
Incremental Risk Charge
Quarter ended December 31, 2017
December 31, 2017
Average
$
51
339
57
Low
43
277
35
High
66
430
86
Quarter
end
Risk-
based
capital (1)
Risk-
weighted
assets (1)
51
361
63
153
1,913
1,017
12,709
63
790
(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 44 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, 2017 and 2016.
Table 44: Covered Securitization Positions by Exposure Type
(Net Market Value)
(in millions)
ABS
CMBS
RMBS CLO/CDO
December 31, 2017
Securitization exposure:
Securities
Derivatives
Total
$
719
257
805
3
(5)
0
$
722
252
805
December 31, 2016
Securitization Exposure:
Securities
Derivatives
Total
$
801
3
$
804
397
4
401
911
1
912
913
(1)
912
791
(8)
783
Securitization Due Diligence and Risk Monitoring The market
risk capital rule requires that the Company conduct due
diligence on the risk of each securitization position within three
days of its purchase. 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
(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.
98
Wells Fargo & Company
Table 45 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, 2017 and
2016. The market RWAs are calculated as the sum of the
components in the table below.
Table 45: 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 46 depicts the changes in market risk
regulatory capital and RWAs under Basel III for the full year and
fourth quarter of 2017.
Table 46: Analysis of Changes in Market Risk Regulatory
Capital and RWAs
(in millions)
Risk-
based
capital
Risk-
weighted
assets
Balance, December 31, 2016
$
3,528
44,100
Total VaR
Total Stressed VaR
Incremental Risk Charge
Securitized Products Charge
(94)
(1,178)
(118)
(154)
16
(1,474)
(1,920)
196
Standardized Specific Risk Charge
(281)
(3,508)
De minimis Charges
(4)
(48)
Balance, December 31, 2017
$
2,893
36,168
Balance, September 30, 2017
$
2,970
37,130
Total VaR
Total Stressed VaR
Incremental Risk Charge
Securitized Products Charge
Standardized Specific Risk Charge
De minimis Charges
(10)
180
29
(101)
(172)
(3)
(126)
2,248
368
(1,266)
(2,152)
(34)
Balance, December 31, 2017
$
2,893
36,168
The largest contributor to the changes to market risk
regulatory capital and RWAs for fourth quarter 2017 was
associated with changes in positions due to normal trading
activity.
December 31, 2017
December 31, 2016
Risk-
based
capital
Risk-
weighted
assets
$
153
1,913
1,017
12,709
63
576
790
7,203
Risk-
based
capital
247
1,135
217
561
Risk
weighted
assets
3,091
14,183
2,710
7,007
1,076
13,454
1,357
16,962
8
99
11
147
$
2,893
36,168
3,528
44,100
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 capital calculation. The number of actual backtesting
exceptions is dependent on current market 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 line of
business levels within the Company.
Table 47 shows daily Total VaR (1-day, 99%) used for
regulatory market risk capital backtesting for the 12 months
ended December 31, 2017. The Company’s average Total VaR for
fourth quarter 2017 was $17 million with a low of $15 million
and a high of $20 million.
Wells Fargo & Company
99
Risk Management – Asset/Liability Management (continued)
Table 47: Daily Total 1-Day 99% VaR Measure (Rolling 12 Months)
Market Risk Governance The Board’s Finance Committee has
primary oversight over market risk-taking activities of the
Company and reviews the acceptable market risk appetite. Our
management-level Market Risk Committee, which reports to the
Board’s Finance Committee, 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, within Corporate Risk,
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 management-level 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 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.
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.
100
Wells Fargo & Company
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, the class
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, 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 updated quarterly and is reflected on our
balance sheet. For additional information about the associated
litigation matters, see the “Interchange Litigation” section in
Note 15 (Legal Actions) to Financial Statements in this Report as
supplemented by Note 11 (Legal Actions) to Financial
Statements in our 2018 Quarterly Reports on Form 10-Q.
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 Market Risk Committee.
Gains and losses on these securities are recognized in net income
when realized and periodically include OTTI charges.
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 48 provides information regarding our marketable
and nonmarketable equity investments as of December 31, 2017
and 2016.
Table 48: Nonmarketable and Marketable Equity Investments
(in millions)
Nonmarketable equity investments:
Cost method:
Federal bank stock
Private equity
Auction rate securities
Total cost method
Equity method:
LIHTC (1)
Private equity
Tax-advantaged renewable energy
New market tax credit and other
Total equity method
Fair value (2)
Total nonmarketable equity
investments (3)
Marketable equity securities:
Dec 31,
Dec 31,
2017
2016
$ 5,369
1,394
400
6,407
1,465
525
7,163
8,397
10,269
3,839
1,950
294
9,714
3,635
2,054
305
16,352
15,708
4,867
3,275
$ 28,382
27,380
Cost
$
532
146
678
706
505
1,211
Total marketable equity securities (4) $
(1) Represents low income housing tax credit (LIHTC) investments.
(2) Represents nonmarketable equity investments for which we have elected the
fair value option. See Note 7 (Premises, Equipment, Lease Commitments and
Other Assets) and Note 17 (Fair Values of Assets and Liabilities) to Financial
Statements in this Report for additional information.
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.
(3)
(4)
Changes in equity market prices may also indirectly affect
Net unrealized gains
Wells Fargo & Company
101
Risk Management – Asset/Liability Management (continued)
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 (HQLA), 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 rule is applicable to the Company on a
consolidated basis and to our insured depository institutions
with total assets greater than $10 billion. In addition, the FRB
finalized rules imposing enhanced liquidity management
standards on large bank holding companies (BHC) such as Wells
Fargo, and has finalized a rule that requires large bank holding
companies to publicly disclose on a quarterly basis certain
quantitative and qualitative information regarding their LCR
calculations.
The FRB, OCC and FDIC have proposed a rule that would
implement a stable funding requirement, the net stable funding
ratio (NSFR), which would require large banking organizations,
such as Wells Fargo, to maintain a sufficient amount of stable
funding in relation to their assets, derivative exposures and
commitments over a one-year horizon period.
Liquidity Coverage Ratio As of December 31, 2017, the
consolidated Company and Wells Fargo Bank, N.A. were above
Table 50: Primary Sources of Liquidity
the minimum LCR requirement of 100%, which is calculated as
HQLA divided by projected net cash outflows, as each is defined
under the LCR rule. Table 49 presents the Company’s quarterly
average values for the daily-calculated LCR and its components
calculated pursuant to the LCR rule requirements.
Table 49: Liquidity Coverage Ratio
(in millions)
HQLA (1)(2)
Projected net cash outflows
LCR
HQLA in excess of projected net cash
outflows
Average for Quarter ended
December 31, 2017
$
$
393,103
317,274
124%
75,829
(1) Excludes excess HQLA at Wells Fargo Bank, N.A.
(2) Net of applicable haircuts required under the LCR rule.
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 50. Our primary sources of
liquidity are substantially the same in composition as HQLA
under the LCR rule; however, our primary sources of liquidity
will generally exceed HQLA calculated under the LCR rule due to
the applicable haircuts to HQLA and the exclusion of excess
HQLA at our subsidiary insured depository institutions required
under the LCR rule.
Our cash is predominantly 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, 2017
December 31, 2016
(in millions)
Total Encumbered Unencumbered
Total
Encumbered Unencumbered
Interest-earning deposits
$ 192,580
Securities of U.S. Treasury and federal agencies
51,125
Mortgage-backed securities of federal agencies (1)
246,894
Total
$ 490,599
—
964
46,062
47,026
192,580
200,671
50,161
70,898
200,832
205,655
443,573
477,224
—
1,160
52,672
53,832
200,671
69,738
152,983
423,392
(1)
Included in encumbered securities at December 31, 2017, were securities with a fair value of $1.1 billion which were purchased in December 2017, but settled in January
2018.
In addition to our primary sources of liquidity shown in
Table 50, 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, 2017, deposits were
140% of total loans compared with 135% at December 31, 2016.
Additional funding is provided by long-term debt and short-
term borrowings. We access domestic and international capital
markets for long-term funding (generally greater than one year)
through issuances of registered debt securities, private
placements and asset-backed secured funding.
102
Wells Fargo & Company
Table 51 shows selected information for short-term
borrowings, which generally mature in less than 30 days.
Table 51: Short-Term Borrowings
(in millions)
Balance, period end
Dec 31,
2017
Sep 30,
2017
Jun 30,
2017
Mar 31,
2017
Dec 31,
2016
Quarter ended
Federal funds purchased and securities sold under agreements to repurchase
$ 88,684
79,824
78,683
76,366
78,124
Commercial paper
Other short-term borrowings
Total
Average daily balance for period
—
14,572
$ 103,256
—
13,987
93,811
11
16,662
95,356
10
18,495
94,871
120
18,537
96,781
Federal funds purchased and securities sold under agreements to repurchase
$ 88,197
81,980
79,826
79,942
107,271
Commercial paper
Other short-term borrowings
Total
Maximum month-end balance for period
—
13,945
$ 102,142
4
17,209
99,193
10
15,927
95,763
51
121
18,556
17,306
98,549
124,698
Federal funds purchased and securities sold under agreements to repurchase (1)
$ 91,604
83,260
78,683
81,284
109,645
Commercial paper (2)
Other short-term borrowings (3)
—
11
11
78
121
14,948
18,301
18,281
19,439
18,537
(1) Highest month-end balance in each of the last five quarters was in November, August, June and February 2017, and October 2016.
(2) There were no month-end balances in fourth quarter 2017; highest month-end balance in each of the previous four quarters was in July, June and January 2017, and
November 2016.
(3) Highest month-end balance in each of the last five quarters was in November, July, April and February 2017, and December 2016.
Parent In February 2017, 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. As of December 31, 2017, the
Parent was authorized by the Board to issue $50 billion in
outstanding short-term debt and $180 billion in outstanding
long-term debt. The Parent's short-term debt issuance authority
granted by the Board was limited to debt issued to affiliates, and
was revoked by the Board at management's request in January
2018. The Parent's long-term debt issuance authority granted by
the Board includes debt issued to affiliates and others. At
December 31, 2017, the Parent had available $50.0 billion in
short-term debt issuance authority and $18.6 billion in long
term debt issuance authority. In 2017, the Parent issued
$22.3 billion of senior notes, of which $16.4 billion 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.
Wells Fargo Bank, N.A. As of December 31, 2017,
Wells Fargo Bank, N.A. was authorized by its board of directors
to issue $100 billion in outstanding short-term debt and
$175 billion in outstanding long-term debt and had available
$97.8 billion in short-term debt issuance authority and
$113.0 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, 2017, Wells Fargo Bank, N.A. had
remaining issuance capacity under the bank note program of
$50.0 billion in short-term senior notes and $38.0 billion in
long-term senior or subordinated notes. In 2017, Wells Fargo
Bank, N.A. issued $1.2 billion of unregistered senior notes, none
of which were issued under the bank note program. In January
2018, Wells Fargo Bank, N.A. issued $6.0 billion of unregistered
senior notes under the bank note program. In addition, during
2017, Wells Fargo Bank, N.A. executed advances of $21.9 billion
with the Federal Home Loan Bank of Des Moines, and as of
December 31, 2017, Wells Fargo Bank, N.A. had outstanding
advances of $45.9 billion across the Federal Home Loan Bank
System. In January 2018, Wells Fargo Bank, N.A. executed
$10.5 billion of 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 3, 2017, Fitch Ratings, Inc. downgraded certain
of the Company’s ratings by one notch and revised the ratings
outlook from negative to stable. On February 6, 2018, Moody’s
affirmed the Company’s ratings and revised the ratings outlook
from stable to negative. On February 7, 2018, S&P Global
Ratings downgraded the Company’s ratings by one notch and
revised the ratings outlook from negative to stable. Both the
Parent and Wells Fargo Bank, N.A. remain among the top-rated
financial firms in the U.S.
See the “Risk Factors” section in this Report for additional
information regarding our credit ratings and the potential
impact a credit rating downgrade would have on our liquidity
Wells Fargo & Company
103
Risk Management – Asset/Liability Management (continued)
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.
Table 52: Credit Ratings
The current credit ratings of the Parent and Wells Fargo
Bank, N.A. are presented in Table 52.
Moody's
S&P
Fitch Ratings, Inc.
DBRS
Wells Fargo & Company
Wells Fargo Bank, N.A.
Senior debt
Short-term
borrowings
Long-term
deposits
Short-term
borrowings
A2
A
A+
P-1
A-2
F1
AA (low)
R-1 (middle)
Aa1
A+
AA
AA
P-1
A-1
F1+
R-1 (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.
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 both dividends and share repurchases, as well as
through the issuance of preferred stock and long and short-term
debt. Retained earnings increased $12.2 billion from
December 31, 2016, predominantly from Wells Fargo net income
of $22.2 billion, less common and preferred stock dividends of
$9.3 billion. During 2017, we issued 72.0 million shares of
common stock. In April 2017, we issued 27.6 million Depositary
Shares, each representing a 1/1000th interest in a share of Non-
Cumulative Perpetual Class A Preferred Stock, Series Y, for an
aggregate public offering price of $690 million. During 2017, we
repurchased 196.5 million shares of common stock in open
market transactions, private transactions and from employee
benefit plans, at a cost of $10.7 billion. We entered into a
$1 billion forward repurchase contract with an unrelated third
party in January 2018 that settled in February 2018 for
15.7 million shares. We also entered into a $600 million forward
repurchase contract with an unrelated third party in February
2018 that is expected to settle in second quarter 2018 for
approximately 11 million shares. For additional information
about our forward repurchase agreements, see Note 1 (Summary
of Significant Accounting Policies) to Financial Statements in
this Report.
Regulatory Capital Guidelines
The Company and each of our insured depository institutions are
subject to various regulatory capital adequacy requirements
administered by the FRB and the OCC. Risk-based capital (RBC)
guidelines establish a risk-adjusted ratio relating capital to
different categories of assets and off-balance sheet exposures as
discussed below.
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 9.0%,
comprised of a 4.5% minimum requirement plus a capital
conservation buffer of 2.5% and for us, as a global
systemically important bank (G-SIB), a capital surcharge to
be calculated annually, which is 2.0% based on our year-
end 2016 data;
a minimum tier 1 capital ratio of 10.5%, comprised of a
6.0% minimum requirement plus the capital conservation
buffer of 2.5% and the G-SIB capital surcharge of 2.0%;
a minimum total capital ratio of 12.5%, comprised of a
8.0% minimum requirement plus the capital conservation
buffer of 2.5% and the G-SIB capital surcharge of 2.0%;
a potential countercyclical buffer of up to 2.5% to be added
to the minimum capital ratios, which is currently not in
effect but could 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 plus 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
104
Wells Fargo & Company
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, including Wells Fargo. 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.
Company’s RWAs, which is the higher of method one and
method two. 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 years. Under the
Standardized Approach (fully phased-in), our CET1 ratio of
11.98% exceeded the minimum of 9.0% by 298 basis points at
December 31, 2017.
Because the Company has been designated as a G-SIB, we
The tables that follow provide information about our risk-
will also be subject to the FRB’s rule implementing the
additional capital surcharge of between 1.0-4.5% 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 phase-in period for
the G-SIB surcharge began on January 1, 2016 and will become
fully effective on January 1, 2019. Based on year-end 2016 data,
our 2018 G-SIB surcharge under method two is 2.0% of the
Table 53: Capital Components and Ratios (Fully Phased-In) (1)
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 27 (Regulatory and Agency Capital
Requirements) to Financial Statements in this Report.
Table 53 summarizes our CET1, tier 1 capital, total capital,
risk-weighted assets and capital ratios on a fully phased-in basis
at December 31, 2017 and December 31, 2016. As of
December 31, 2017, our CET1, tier 1, and total capital ratios were
lower using RWAs calculated under the Standardized Approach.
(in millions, except ratios)
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, 2017
Advanced
Approach
Standardized
Approach
$
154,022
177,466
208,395
154,022
177,466
218,159
Advanced
Approach
146,424
169,063
200,344
December 31, 2016
Standardized
Approach
146,424
169,063
210,796
1,225,939
1,285,563
1,298,688
1,358,933
12.56%
14.48
17.00
11.98 *
13.80 *
16.97 *
11.27
13.02
15.43 *
10.77 *
12.44 *
15.51
(A)
(B)
(C)
(D)
(A)/(D)
(B)/(D)
(C)/(D)
*Denotes the lowest capital ratio as determined under the 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 54 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 GAAP financial measures.
Wells Fargo & Company
105
Capital Management (continued)
Table 54 provides information regarding the calculation and
composition of our risk-based capital under the Advanced and
Standardized Approaches at December 31, 2017 and
December 31, 2016.
Table 54: Risk-Based Capital Calculation and Components
(in millions)
Total equity
Adjustments:
Preferred stock
Additional paid-in capital on ESOP preferred stock
Unearned ESOP shares
Noncontrolling interests
Total common stockholders’ equity
Adjustments:
Goodwill
Certain identifiable intangible assets (other than MSRs)
Other assets (1)
Applicable deferred taxes (2)
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
Additional paid-in capital on ESOP preferred stock
Unearned ESOP shares
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 (3)
Other
Total Tier 2 capital (Fully Phased-In)
Effect of Transition Requirements
Total Tier 2 capital (Transition Requirements)
Total qualifying capital (Fully Phased-In)
Total Effect of Transition Requirements
Total qualifying capital (Transition Requirements)
Risk-Weighted Assets (RWAs) (4)(5):
Credit risk
Market risk
Operational risk
Total RWAs (Fully Phased-In)
Credit risk
Market risk
Operational risk
December 31, 2017
December 31, 2016
Advanced
Approach
Standardized
Approach
$
208,079
208,079
Advanced
Approach
200,497
Standardized
Approach
200,497
(25,358)
(25,358)
(24,551)
(24,551)
(122)
1,678
(1,143)
(122)
1,678
(1,143)
(126)
1,565
(916)
(126)
1,565
(916)
183,134
183,134
176,469
176,469
(26,587)
(1,624)
(2,155)
962
292
154,022
743
154,765
(26,587)
(1,624)
(2,155)
962
292
154,022
743
154,765
154,022
154,022
25,358
122
(1,678)
(358)
177,466
743
178,209
(26,693)
(26,693)
(2,723)
(2,088)
1,772
(313)
146,424
2,361
148,785
146,424
24,551
126
(1,565)
(473)
169,063
2,301
171,364
(2,723)
(2,088)
1,772
(313)
146,424
2,361
148,785
146,424
24,551
126
(1,565)
(473)
169,063
2,301
171,364
177,466
169,063
169,063
28,994
11,960
(261)
40,693
1,195
41,888
218,159
1,938
220,097
1,249,395
36,168
N/A
1,285,563
1,224,495
36,168
N/A
29,465
2,088
(272)
31,281
1,780
33,061
200,344
4,081
204,425
960,763
44,100
293,825
1,298,688
936,664
44,100
293,825
29,465
12,540
(272)
41,733
1,780
43,513
210,796
4,081
214,877
1,314,833
44,100
N/A
1,358,933
1,292,098
44,100
N/A
$
$
$
$
$
(A)
(B)
25,358
122
(1,678)
(358)
177,466
743
178,209
177,466
28,994
2,196
(261)
30,929
1,195
32,124
(A)+(B) $
208,395
$
$
$
$
1,938
210,333
890,171
36,168
299,600
1,225,939
863,777
36,168
299,600
Total RWAs (Transition Requirements)
$
1,199,545
1,260,663
1,274,589
1,336,198
(1) Represents goodwill and other intangibles on nonmarketable equity investments and on held-for-sale assets, which are included in other assets.
(2) Applicable deferred taxes relate to goodwill and other intangible assets. They were determined by applying the combined federal statutory rate and composite state income
tax rates to the difference between book and tax basis of the respective goodwill and intangible assets at period end.
(3) 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
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.
(4) 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.
(5) 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.
106
Wells Fargo & Company
Table 55 presents the changes in Common Equity Tier 1
under the Advanced Approach for the year ended December 31,
2017.
Table 55: Analysis of Changes in Common Equity Tier 1
(in millions)
Common Equity Tier 1 (Fully Phased-In) at December 31, 2016
$
Net income applicable to common stock
Common stock dividends
Common stock issued, repurchased, and stock compensation-related items
Goodwill
Certain identifiable intangible assets (other than MSRs)
Other assets (1)
Applicable deferred taxes (2)
Investment in certain subsidiaries and other
Change in Common Equity Tier 1
146,424
20,554
(7,658)
(6,836)
105
1,100
(68)
(810)
1,211
7,598
Common Equity Tier 1 (Fully Phased-In) at December 31, 2017
$
154,022
(1) Represents goodwill and other intangibles on nonmarketable equity investments and on held-for-sale assets, which are included in other assets.
(2) Applicable deferred taxes relate to goodwill and other intangible assets. They were determined by applying the combined federal statutory rate and composite state income
tax rates to the difference between book and tax basis of the respective goodwill and intangible assets at period end.
Table 56 presents net changes in the components of RWAs
under the Advanced and Standardized Approaches for the year
ended December 31, 2017.
Table 56: Analysis of Changes in RWAs
(in millions)
Advanced Approach
Standardized Approach
RWAs (Fully Phased-In) at December 31, 2016
$
1,298,688
1,358,933
Net change in credit risk RWAs
Net change in market risk RWAs
Net change in operational risk RWAs
Total change in RWAs
RWAs (Fully Phased-In) at December 31, 2017
Effect of Transition Requirements
RWAs (Transition Requirements) at December 31, 2017
$
(70,592)
(7,932)
5,775
(72,749)
1,225,939
(26,394)
1,199,545
(65,438)
(7,932)
N/A
(73,370)
1,285,563
(24,900)
1,260,663
Wells Fargo & Company
107
Capital Management (continued)
TANGIBLE COMMON EQUITY We also evaluate our business
based on certain ratios that utilize tangible common equity.
Tangible common equity is a non-GAAP financial measure and
represents total equity less preferred equity, noncontrolling
interests, and goodwill and certain identifiable intangible assets
(including goodwill and intangible assets associated with certain
of our nonmarketable equity investments but excluding
mortgage servicing rights), net of applicable deferred taxes.
These tangible common equity ratios are as follows:
•
Tangible book value per common share, which represents
tangible common equity divided by common shares
outstanding.
• Return on average tangible common equity (ROTCE), which
represents our annualized earnings contribution as a
percentage of tangible common equity.
The methodology of determining tangible common equity
may differ among companies. Management believes that
tangible book value per common share and return on average
tangible common equity, which utilize tangible common equity,
are useful financial measures because they enable investors and
others to assess the Company's use of equity.
Table 57 provides a reconciliation of these non-GAAP
financial measures to GAAP financial measures.
Table 57: Tangible Common Equity
(in millions, except ratios)
Total equity
Adjustments:
Preferred stock
Balance at period end
Average balance for the year ended
Dec 31,
2017
Dec 31,
2016
Dec 31,
2015
Dec 31,
2017
Dec 31,
2016
Dec 31,
2015
$ 208,079
200,497
193,891
205,654
200,690
191,584
(25,358)
(24,551)
(22,214)
(25,592)
(24,363)
(21,715)
Additional paid-in capital on ESOP preferred stock
(122)
(126)
(110)
Unearned ESOP shares
Noncontrolling interests
1,678
1,565
1,362
(1,143)
(916)
(893)
(139)
2,143
(948)
(161)
(138)
2,011
1,716
(936)
(1,048)
Total common stockholders’ equity
(A)
183,134
176,469
172,036
181,118
177,241
170,399
Adjustments:
Goodwill
Certain identifiable intangible assets (other than
MSRs)
Other assets (1)
Applicable deferred taxes (2)
Tangible common equity
Common shares outstanding
Net income applicable to common stock
(B)
(C)
(D)
(26,587)
(26,693)
(25,529)
(26,629)
(26,700)
(25,673)
(1,624)
(2,723)
(3,167)
(2,155)
(2,088)
(2,074)
962
1,772
2,071
(2,176)
(2,184)
1,570
(3,254)
(3,793)
(2,117)
(1,654)
1,897
2,248
$ 153,730
146,737
143,337
151,699
147,067
141,527
4,891.6
5,016.1
5,092.1
N/A
N/A
N/A
Book value per common share
(A)/(C)
$
37.44
Tangible book value per common share
(B)/(C)
31.43
Return on average common stockholders’ equity
(ROE)
(D)/(A)
Return on average tangible common equity (ROTCE) (D)/(B)
N/A
N/A
N/A
N/A
35.18
29.25
N/A
N/A
N/A
$ 20,554
20,373
21,470
33.78
28.15
N/A
N/A
N/A
N/A
N/A
N/A
11.35 %
13.55
11.49
13.85
N/A
N/A
12.60
15.17
(1) Represents goodwill and other intangibles on nonmarketable equity investments and on held-for-sale assets, which are included in other assets.
(2) Applicable deferred taxes relate to goodwill and other intangible assets. They were determined by applying the combined federal statutory rate and composite state income
tax rates to the difference between book and tax basis of the respective goodwill and intangible assets at period end.
108
Wells Fargo & Company
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 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 became effective on
January 1, 2018, requires a covered BHC to maintain a SLR of at
least 5.0% (comprised of the 3.0% minimum requirement plus a
supplementary leverage buffer of 2.0%) to avoid restrictions on
capital distributions and discretionary bonus payments. The rule
also requires 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. At December 31, 2017, our SLR for the Company was
8.0% assuming full phase-in of the 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
58 for information regarding the calculation and components of
the SLR.
Table 58: Fully Phased-In SLR
(in millions, except ratio)
Tier 1 capital
Total average assets
Less: deductions from Tier 1 capital (1)
Total adjusted average assets
Adjustments:
Derivative exposures (2)
Repo-style transactions (3)
Other off-balance sheet exposures (4)
Total adjustments
$
Three months ended
December 31, 2017
177,466
1,935,318
29,918
1,905,400
73,359
3,382
243,221
319,962
Total leverage exposure
$
2,225,362
Supplementary leverage ratio
8.0%
(1) Amounts permitted to be deducted from Tier 1 capital primarily include
goodwill and other intangible assets, net of associated deferred tax liabilities.
(2) Represents adjustments for off balance sheet derivative exposures, and
derivative collateral netting as defined for supplementary leverage ratio
determination purposes.
(3) Adjustments for repo-style transactions represent counterparty credit risk for
all repo-style transactions where Wells Fargo & Company is the principal (i.e.,
principal counterparty facing the client).
(4) Adjustments for other off-balance sheet exposures represent the notional
amounts of all off-balance sheet exposures (excluding off balance sheet
exposures associated with derivative and repo-style transactions) less the
adjustments for conversion to credit equivalent amounts under the regulatory
capital rule.
OTHER REGULATORY CAPITAL MATTERS In December 2016,
the FRB finalized 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 rules, which become
effective on January 1, 2019, U.S. G-SIBs will 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) 7.5% of total leverage exposure (the
denominator of the SLR calculation). Additionally, U.S. G-SIBs
will be required to maintain (i) 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 will be added to the 18% minimum and (ii) an
external TLAC leverage buffer equal to 2.0% of total leverage
exposure that will be added to the 7.5% minimum, in order to
avoid restrictions on capital distributions and discretionary
bonus payments. The rules will 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 rules will 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. While the rules permit permanent
grandfathering of a significant portion of otherwise ineligible
long-term debt that was issued prior to December 31, 2016, long
term debt issued after that date must be fully compliant with the
eligibility requirements of the rules in order to count toward the
minimum TLAC amount. As a result of the rules, we will need to
issue additional long-term debt to remain compliant with the
requirements. As of December 31, 2017, we estimate that our
eligible external TLAC as a percentage of total risk-weighted
assets was 24.1% compared with an expected January 1, 2019
required minimum of 22.0%.
In addition, as discussed in the “Risk Management – Asset/
Liability Management – Liquidity and Funding – Liquidity
Standards” section in this Report, federal banking regulators
have issued a final rule regarding the U.S. implementation of the
Basel III LCR and a proposed rule regarding the NSFR.
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 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 includes 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.
Wells Fargo & Company
109
Capital Management (continued)
Our 2017 capital plan, which was submitted on April 4,
2017, as part of CCAR, included a comprehensive capital outlook
supported by an assessment of expected sources and uses of
capital over a given planning horizon under a range of expected
and stress scenarios. As part of the 2017 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 June 22, 2017. On June 28, 2017, the FRB notified us that
it did not object to our capital plan included in the 2017 CCAR.
Federal banking regulators 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
must submit a mid-cycle stress test based on second quarter 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 October 2017.
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.
Regulatory Matters
In January 2016, the Board authorized the repurchase of
350 million shares of our common stock. At December 31, 2017,
we had remaining authority to repurchase approximately
71 million shares, subject to regulatory and legal conditions. In
January 2018, the Board authorized the repurchase of an
additional 350 million shares of our common stock. For more
information about share repurchases during fourth quarter 2017,
see Part II, Item 5 in our 2017 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, 2017, there were 23,327,854 warrants
outstanding, exercisable at $33.701 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.
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
matters discussed below and other regulations and regulatory
oversight matters, see Part I, Item 1 “Regulation and
Supervision” of our 2017 Form 10-K, and the “Capital
Management,” “Forward-Looking Statements” and “Risk
Factors” sections and Note 27 (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. 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
110
Wells Fargo & Company
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 re-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. Similarly, the FRB has proposed
additional requirements regarding effective risk
management practices at large BHCs, including its
expectations for boards of directors and senior
management. 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 implementing new
origination, notification, disclosure and other requirements,
as well as additional limitations on the fees and charges that
may be increased from the estimates provided by lenders.
The CFPB finalized amendments to the rule implementing
the Home Mortgage Disclosure Act, resulting in a significant
expansion of the data points lenders are 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, the CFPB finalized
rules, most of which become effective on April 1, 2019, to
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 automobile 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. Federal banking regulators, the SEC and
CFTC (collectively, the Volcker supervisory regulators)
jointly released a final rule to implement the Volcker Rule’s
restrictions. As a banking entity with more than $50 billion
in consolidated assets, we are also subject to enhanced
compliance program requirements.
• 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 has adopted rules applicable
to our provisionally registered swap dealer, Wells Fargo
Bank, N.A., that require, among other things, extensive
regulatory and public reporting of swaps, central clearing
and trading of swaps on exchanges or other multilateral
platforms, and compliance with comprehensive internal and
external business conduct standards. The SEC is expected to
implement parallel rules applicable to security-based swaps.
In addition, federal regulators have adopted final rules
establishing margin requirements for swaps and security-
based 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 certain ABS to hold at
least a 5% ownership stake in the ABS. Federal regulatory
agencies have issued final rules to implement this credit risk
retention requirement, which included an exemption for,
among other things, GSE mortgage backed securities. The
final rules may impact our ability to issue certain asset-
backed securities or otherwise participate in various
securitization transactions.
•
• 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
Wells Fargo & Company
111
Regulatory Matters (continued)
January 2015, the U.S. Supreme Court denied the petition
for writ of certiorari.
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 applicable to us, 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
December 19, 2017, the FRB and FDIC announced that our most
recent resolution plan submission did not have any deficiencies;
however, they identified a specific shortcoming that would need
to be addressed in our next submission. If the FRB or FDIC
determines that our resolution plan has deficiencies, they may
impose more stringent capital, leverage or liquidity
requirements on us or restrict our growth, activities or
operations until we adequately remedy the deficiencies. If the
FRB or FDIC ultimately determines that we have been unable to
remedy any deficiencies, they could require us to divest certain
assets or operations.
We must also prepare and submit to the FRB 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. Our insured national
bank subsidiary, Wells Fargo Bank, N.A. (the “Bank”), must also
prepare and submit to the OCC 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 fines, restrictions on
our business or ultimately require us to divest assets.
If Wells Fargo were to fail, it may be resolved in a
bankruptcy proceeding or, if certain conditions are met, under
the resolution regime created by the Dodd-Frank Act known as
the “orderly liquidation authority.” The orderly liquidation
authority allows for the appointment of the FDIC as receiver for
a systemically important financial institution that is in default or
in danger of default if, among other things, the resolution of the
institution under the U.S. Bankruptcy Code would have serious
adverse effects on financial stability in the United States. If the
FDIC is appointed as receiver for Wells Fargo & Company (the
“Parent”), then the orderly liquidation authority, rather than the
U.S. Bankruptcy Code, would determine the powers of the
receiver and the rights and obligations of our security holders.
The FDIC’s orderly liquidation authority requires that security
holders of a company in receivership bear all losses before U.S.
taxpayers are exposed to any losses, and allows the FDIC to
disregard the strict priority of creditor claims under the U.S.
Bankruptcy Code in certain circumstances.
Whether under the U.S. Bankruptcy Code or by the FDIC
under the orderly liquidation authority, Wells Fargo could be
resolved using a “multiple point of entry” strategy, in which the
Parent and one or more of its subsidiaries would each undergo
separate resolution proceedings, or a “single point of entry”
strategy, in which the Parent would likely be the only material
legal entity to enter resolution proceedings. The FDIC has
announced that a single point of entry strategy may be a
desirable strategy under its implementation of the orderly
liquidation authority, but not all aspects of how the FDIC might
exercise this authority are known and additional rulemaking is
possible.
The strategy described in our most recent resolution plan
submission is a multiple point of entry strategy; however, we
have made a decision to move to a single point of entry
strategy for our next resolution plan submission. We are not
obligated to maintain either a single point of entry or multiple
point of entry strategy, and the strategies reflected in our
resolution plan submissions are not binding in the event of an
actual resolution of Wells Fargo, whether conducted under
the U.S. Bankruptcy Code or by the FDIC under the orderly
liquidation authority.
To facilitate the orderly resolution of systemically important
financial institutions in case of material distress or failure,
federal banking regulations require that institutions, such as
Wells Fargo, maintain a minimum amount of equity and
unsecured debt to absorb losses and recapitalize operating
subsidiaries. Federal banking regulators have also required
measures to facilitate the continued operation of operating
subsidiaries notwithstanding the failure of their parent
companies, such as limitations on parent guarantees, and have
issued guidance encouraging institutions to take legally binding
measures to provide capital and liquidity resources to certain
subsidiaries in order to facilitate an orderly resolution. In
response to the regulators’ guidance and to facilitate the orderly
resolution of the Company using either a single point of entry or
multiple point of entry resolution strategy, on June 28, 2017, the
Parent entered into a support agreement (the “Support
Agreement”) with WFC Holdings, LLC, an intermediate holding
company and subsidiary of the Parent (the “IHC”), and the Bank,
Wells Fargo Securities, LLC (“WFS”), and Wells Fargo Clearing
Services, LLC (“WFCS”), each an indirect subsidiary of the
Parent. Pursuant to the Support Agreement, the Parent
transferred a significant amount of its assets, including the
majority of its cash, deposits, liquid securities and intercompany
loans (but excluding its equity interests in its subsidiaries and
certain other assets), to the IHC and will continue to transfer
those types of assets to the IHC from time to time. In the event
of our material financial distress or failure, the IHC will be
obligated to use the transferred assets to provide capital and/or
liquidity to the Bank pursuant to the Support Agreement and to
WFS and WFCS through repurchase facilities entered into in
connection with the Support Agreement. Under the Support
Agreement, the IHC will also provide funding and liquidity to the
Parent through subordinated notes and a committed line of
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Wells Fargo & Company
credit, which, together with the issuance of dividends, is
expected to provide the Parent, during business as usual
operating conditions, with the same access to cash necessary to
service its debts, pay dividends, repurchase its shares, and
perform its other obligations as it would have had if it had not
entered into these arrangements and transferred any assets. If
certain liquidity and/or capital metrics fall below defined
triggers, the subordinated notes would be forgiven and the
committed line of credit would terminate, which could
materially and adversely impact the Parent’s liquidity and its
ability to satisfy its debts and other obligations, and could result
in the commencement of bankruptcy proceedings by the Parent
at an earlier time than might have otherwise occurred if the
Support Agreement were not implemented. The Parent's and the
IHC's respective obligations under the Support Agreement are
secured pursuant to a related security agreement.
Other Regulatory Related Matters
• Department of Labor ERISA fiduciary standard. In April
2016, the U.S. Department of Labor adopted a rule under
the Employee Retirement Income Security Act of 1974
(ERISA) that, among other changes and subject to certain
exceptions, as of the applicability date of June 9, 2017,
makes anyone, including broker-dealers, providing
investment advice to retirement investors a fiduciary who
must act in the best interest of clients when providing
investment advice for direct or indirect compensation to a
retirement plan, to a plan fiduciary, participant or
beneficiary, or to an investment retirement account (IRA) or
IRA holder. The rule impacts the manner in which business
is conducted with retirement investors and affects product
offerings with respect to retirement plans and IRAs.
• OCC revocation of relief. On November 18, 2016, the OCC
revoked provisions of certain consent orders that provided
Wells Fargo Bank, N.A. relief from specific requirements
and limitations regarding rules, policies, and procedures for
corporate activities; OCC approval of changes in directors
and senior executive officers; and golden parachute
payments. As a result, Wells Fargo Bank, N.A. is no longer
eligible for expedited treatment for certain applications; is
now required to provide prior written notice to the OCC of a
change in directors and senior executive officers; and is now
subject to certain regulatory limitations on golden
parachute payments.
•
•
Community Reinvestment Act (CRA) rating. In March
2017, we announced that the OCC had downgraded our
most recent CRA rating, which covers the years 2009 –
2012, to “Needs to Improve” due to previously issued
regulatory consent orders. A “Needs to Improve” rating
imposes regulatory restrictions and limitations on certain of
the Company’s nonbank activities, including its ability to
engage in certain nonbank mergers and acquisitions or
undertake new financial in nature activities, and CRA
performance is taken into account by regulators in
reviewing applications to establish bank branches and for
approving proposed bank mergers and acquisitions. The
rating also results in the loss of expedited processing of
applications to undertake certain activities, and requires the
Company to receive prior regulatory approval for certain
activities, including to issue or prepay certain subordinated
debt obligations, open or relocate bank branches, or make
certain public welfare investments. In addition, a “Needs to
Improve” rating could have an impact on the Company’s
relationships with certain states, counties, municipalities or
other public agencies to the extent applicable law, regulation
or policy limits, restricts or influences whether such entity
may do business with a company that has a below
“Satisfactory” rating.
FRB consent order regarding governance oversight and
compliance and operational risk management. On
February 2, 2018, the Company entered into a consent order
with the FRB, which requires the Company to submit to the
FRB within 60 days of the date of the consent order plans to
further enhance the Board's governance oversight and the
Company’s compliance and operational risk management.
The consent order also requires third-party reviews related
to the adoption and implementation of such plans by
September 30, 2018. Until these third-party reviews are
complete and the plans are approved and implemented to
the satisfaction of the FRB, the Company’s total
consolidated assets will be limited to the level as of
December 31, 2017. Compliance with this asset cap will be
measured on a two-quarter daily average basis to allow for
management of temporary fluctuations. Once the asset cap
limitation is removed, a second third-party review must be
conducted to assess the efficacy and sustainability of the
improvements.
Wells Fargo & Company
113
•
•
•
•
•
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
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 for credit losses are
validated in accordance with Company policies by an
internal model validation group.
Assessment of limitations to credit loss estimation models.
We apply our judgment to adjust 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 judgment
and review.
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 for credit losses. This imprecision
considers economic environmental factors, modeling
assumptions and performance, process risk, and other
subjective factors, including industry trends and emerging
risk assessments.
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;
the valuation of residential MSRs;
the fair value of financial instruments;
income taxes; and
liability for contingent litigation losses.
Liability for contingent litigation losses was added as a new
critical accounting policy in second quarter 2017, and the
accounting policy for PCI loans was removed in fourth quarter
2017 due to no longer being deemed critical.
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 judgment and review required to
determine the allowance for credit losses, management
considers changes in economic conditions, customer behavior,
and collateral value, among other influences. From time to time,
economic factors or business decisions, such as the addition or
liquidation of a loan product or business unit, may affect the
loan portfolio, causing management to provide for 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
114
Wells Fargo & Company
SENSITIVITY TO CHANGES Table 59 demonstrates the impact
of the sensitivity of our estimates on our allowance for credit
losses.
•
Table 59: Allowance Sensitivity Summary
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.
December 31, 2017
Estimated
Both prepayment speed and discount rate assumptions can,
(in billions)
Assumption:
Favorable (1)
Adverse (2)
increase/(decrease)
in allowance
$
(3.5)
6.3
(1) 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.
(2) 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.
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
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).
•
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 or investor
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.
Wells Fargo & Company
115
Critical Accounting Policies (continued)
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 of the fair value hierarchy as described in Note 17 (Fair
Value of Assets and Liabilities) to Financial Statements in this
Report. 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 60 presents the summary of the fair value of financial
instruments recorded at fair value on a recurring basis, and the
amounts measured using significant Level 3 inputs (before
derivative netting adjustments). The fair value of the remaining
assets and liabilities were measured using valuation
methodologies involving market-based or market-derived
information (collectively Level 1 and 2 measurements).
Table 60: 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, 2017
December 31, 2016
Total Level 3
(1)
balance
Total
balance
Level 3
(1)
$ 416.6
24.9
436.3
23.5
21%
1
23
1
$ 27.3
2.0
30.9
1.7
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 file consolidated and separate company U.S. 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 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. Deferred income tax expense results from changes in
deferred tax assets and liabilities between periods. 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 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. We account for interest and penalties as a component
of income tax expense. For prior reporting periods, we did not
record U.S. tax on undistributed earnings of certain non-U.S.
subsidiaries to the extent the earnings were indefinitely
reinvested outside of the U.S. Foreign taxes paid are generally
applied as credits to reduce U.S. income taxes payable. However,
in 2017, we recorded an estimate of the U.S. tax expense
associated with a deemed repatriation of the Company's
previously undistributed foreign earnings as required under the
Tax Act.
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Wells Fargo & Company
We apply judgment when establishing an accrual for
potential losses associated with legal actions and in establishing
the range of reasonably possible losses in excess of the accrual.
Our judgment in establishing accruals and the range of
reasonably possible losses in excess of the Company's accrual for
probable and estimable losses is influenced by our
understanding of information currently available related to the
legal evaluation and potential outcome of actions, including
input and advice on these matters from our internal counsel,
external counsel and senior management. These matters may be
in various stages of investigation, discovery or proceedings. They
may also involve a wide variety of claims across our businesses,
legal entities and jurisdictions. The eventual outcome may be a
scenario that was not considered or was considered remote in
anticipated occurrence. Accordingly, our estimate of potential
losses will change over time and the actual losses may vary
significantly.
The outcomes of legal actions are unpredictable and subject
to significant uncertainties, and it is inherently difficult to
determine whether any loss is probable or even possible. It is
also inherently difficult to estimate the amount of any loss and
there may be matters for which a loss is probable or reasonably
possible but not currently estimable. Accordingly, actual losses
may be in excess of the established accrual or the range of
reasonably possible loss.
See Note 15 (Legal Actions) to Financial Statements in this
Report for further information.
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, 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 22 (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.
Liability for Contingent Litigation Losses
The Company is involved in a number of judicial, regulatory,
arbitration and other proceedings concerning matters arising
from the conduct of its business activities, and many of those
proceedings expose the Company to potential financial loss. We
establish accruals for these legal actions when potential losses
associated with the actions become probable and the costs can
be reasonably estimated. For such accruals, we record the
amount we consider to be the best estimate within a range of
potential losses that are both probable and estimable; however,
if we cannot determine a best estimate, then we record the low
end of the range of those potential losses. The actual costs of
resolving legal actions may be substantially higher or lower than
the amounts accrued for those actions.
Wells Fargo & Company
117
Current Accounting Developments
Table 61 lists the significant accounting updates applicable to us
that have been issued by the FASB but are not yet effective.
Table 61: Current Accounting Developments – Issued Standards
Standard
Description
Effective date and financial statement impact
The guidance is effective on January 1, 2019. Early application is
permitted in any interim period prior to the effective date. Application of
the new guidance will result in an increase in retained earnings of
approximately $400 million.
We expect to adopt the guidance in first quarter 2019 using the modified
retrospective method with a cumulative-effect adjustment to retained
earnings as of the beginning of the year of adoption. Our investment
securities portfolio includes holdings of available-for-sale (AFS) and
held-to-maturity (HTM) callable debt securities held at a premium. At
adoption, the guidance is expected to result in a cumulative effect
adjustment which will be primarily offset with a corresponding
adjustment to other comprehensive income related to AFS securities.
After adoption, the guidance will reduce interest income prior to the call
date because the premium will be amortized over a shorter time period.
Our implementation effort includes identifying the population of debt
securities subject to the new guidance, which are primarily obligations of
U.S. states and political subdivisions, and quantifying the expected
impacts. The impact of the Update on our consolidated financial
statements will be affected by our portfolio composition at the time of
adoption, which may change between December 31, 2017, and the
adoption date.
We adopted the guidance in first quarter 2018 with retrospective
application. We will change the presentation of our cash and cash
equivalents on our consolidated statement of cash flows to include both
cash and due from banks as well as interest-earning deposits with
banks, which are inclusive of any restricted cash. We will make a
corresponding change to our consolidated balance sheets.
The guidance is effective in first quarter 2020 with a cumulative-effect
adjustment to retained earnings as of the beginning of the year of
adoption. While early adoption is permitted beginning in first quarter
2019, we do not expect to elect that option. We are evaluating the
impact of the Update on our consolidated financial statements. We
expect the Update will result in an increase in the allowance for credit
losses given the change to estimated losses over the contractual life
adjusted for expected prepayments with an anticipated material impact
from longer duration portfolios, as well as the addition of an allowance
for debt securities. The amount of the increase will be impacted by the
portfolio composition and credit quality at the adoption date as well as
economic conditions and forecasts at that time.
Accounting Standards
Update (ASU or Update)
2018-02 – Income
Statement-Reporting
Comprehensive Income
(Topic 220): Reclassification
of Certain Tax Effects from
Accumulated Other
Comprehensive Income
ASU 2017-08 – Receivables
– Nonrefundable Fees and
Other Costs (Subtopic
310-20): Premium
Amortization on Purchased
Callable Debt Securities
Currently, the effect of remeasuring
deferred tax assets and liabilities due to
a change in tax laws or rates must be
recognized in income from continuing
operations in the reporting period that
includes the enactment date. That
guidance is applicable even in situations
in which the related income tax effects
were originally recognized in other
comprehensive income. The Update
permits a one-time reclassification from
accumulated other comprehensive
income to retained earnings for these
stranded tax effects resulting from the
Tax Cuts and Jobs Act.
The Update changes the accounting for
certain purchased callable debt
securities held at a premium to shorten
the amortization period for the premium
to the earliest call date rather than to
the maturity date. Accounting for
purchased callable debt securities held
at a discount does not change. The
discount would continue to amortize to
the maturity date.
ASU 2016-18 – Statement of
Cash Flows (Topic 230):
Restricted Cash
ASU 2016-13 – Financial
Instruments – Credit Losses
(Topic 326): Measurement of
Credit Losses on Financial
Instruments
The Update requires that restricted cash
and cash equivalents are included with
the total cash and cash equivalents in
the consolidated statement of cash
flows. In addition, the nature of any
restrictions will be disclosed in the
footnotes to the financial statements.
The Update changes the accounting for
credit losses on loans and debt
securities. For loans and held-to
maturity debt securities, the Update
requires a current expected credit loss
(CECL) approach to determine the
allowance for credit losses. CECL
requires loss estimates for the remaining
estimated life of the financial asset using
historical experience, current conditions,
and reasonable and supportable
forecasts. Also, the Update eliminates
the existing guidance for PCI loans, but
requires an allowance for purchased
financial assets with more than
insignificant deterioration since
origination. In addition, the Update
modifies 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 allows for reversal of
credit impairments in future periods
based on improvements in credit.
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Wells Fargo & Company
Standard
Description
Effective date and financial statement impact
ASU 2016-04 – Liabilities –
Extinguishments of Liabilities
(Subtopic 405-20):
Recognition of Breakage for
Certain Prepaid Stored-Value
Products
The Update modifies the accounting for
certain prepaid card products to require
the recognition of breakage. Breakage
represents the estimated amount that
will not be redeemed by the cardholder
for goods or services.
We adopted the Update in first quarter 2018 with a cumulative-effect
adjustment to opening retained earnings. The new guidance resulted in
a reduction in the balance of the liability, with an increase to retained
earnings given estimated breakage at the date of adoption of
approximately $26 million.
ASU 2016-02 – Leases
(Topic 842)
The Update requires lessees to recognize We expect to adopt the guidance in first quarter 2019 using the modified
leases on the balance sheet with lease
liabilities and corresponding right-of-use
assets based on the present value of
lease payments. Lessor accounting
activities are largely unchanged from
existing lease accounting. The Update
also eliminates leveraged lease
accounting but allows existing leveraged
leases to continue their current
accounting until maturity, termination or
modification.
retrospective method and practical expedients for transition. The
practical expedients allow us to largely account for our existing leases
consistent with current guidance except for the incremental balance
sheet recognition for lessees. We have started our implementation of the
Update which has included an initial evaluation of our leasing contracts
and activities. As a lessee we are developing our methodology to
estimate the right-of use assets and lease liabilities, which is based on
the present value of lease payments (the December 31, 2017, future
minimum lease payments were $6.6 billion, as disclosed in Table 7.2 of
Note 7 (Premises, Equipment, Lease Commitments and Other Assets) in
this Report). We do not expect a material change to the timing of
expense recognition. Given the limited changes to lessor accounting, we
do not expect material changes to recognition or measurement, but we
continue to evaluate the guidance and application to our activities. We
are evaluating our existing disclosures and will provide additional
information as a result of adoption of the Update.
ASU 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.
We adopted the Update in first quarter 2018 and recorded a cumulative-
effect adjustment as of January 1, 2018 that increased retained
earnings $106 million and decreased other comprehensive income
$118 million.
Our investments in marketable equity securities classified as
available-for-sale as of the adoption date will be accounted for at fair
value with unrealized gains or losses reflected in earnings. Additionally,
our share of the unrealized gains or losses of marketable equity
securities held by investees in our nonmarketable equity investments
accounted for using the equity method will be reflected in earnings as of
the adoption date. Previously, such unrealized gains or losses were
reflected in other comprehensive income. Upon adoption, we recorded a
transition adjustment to reclassify $118 million in net unrealized gains
from other comprehensive income to retained earnings.
The accounting for our investments in nonmarketable equity
instruments accounted for under the cost method of accounting at the
adoption date, except for Federal bank stock, will be measured either, at
fair value with unrealized gains and losses reflected in earnings, or the
measurement alternative. The measurement alternative is similar to the
cost method of accounting, except the carrying value is adjusted
through earnings for subsequent observable transactions in the same or
similar investment. We will account for substantially all of our private
equity cost method investments using the measurement alternative and
our auction rate securities portfolio will be accounted for at fair value
with unrealized gains and losses reflected in earnings. Upon adoption,
we recorded a transition adjustment of $12 million to decrease retained
earnings from our auction rates securities portfolio at fair value. No
transition adjustment is recorded for those investments changing to the
measurement alternative, which is applied prospectively.
In connection with our adoption of this Update, we will present all
holdings of marketable equity securities accounted for as available-for
sale and as trading assets as well as nonmarketable equity investments
in a new line on the balance sheet labeled “Equity investments.” We will
also eliminate the “Trading assets” line on the balance sheet and present
trading securities and trading loans in other line items consistent with
their form. Additionally, for purposes of disclosing the fair value of loans
carried at amortized cost, we will determine the fair value based on “exit
price” as required by the Update. Accordingly, the fair value amounts
disclosed for such loans will change upon adoption of the Update.
Wells Fargo & Company
119
Current Accounting Developments (continued)
Standard
Description
Effective date and financial statement impact
ASU 2014-09 – Revenue
from Contracts With
Customers (Topic 606) and
subsequent related Updates
The Update modifies the guidance used
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 guidance. The Update
also requires new qualitative and
quantitative disclosures, including
disaggregation of revenues and
descriptions of performance obligations.
In addition to the list above, the following Updates are
applicable to us but are not expected to have a material impact
on our consolidated financial statements:
•
ASU 2017-11 – Earnings Per Share (Topic 260);
Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting
for Certain Financial Instruments with Down Round
Features, (Part II) Replacement of the Indefinite Deferral
for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope
Exception
ASU 2017-09 – Compensation – Stock Compensation
(Topic 718): Scope of Modification Accounting
ASU 2017-07 – Compensation – Retirement Benefits (Topic
715): Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost
•
•
We adopted the Update in first quarter 2018, and recorded a
cumulative-effect adjustment to opening retained earnings to
application of the new guidance effective January 1, 2018. Th
adjustment, which decreased retained earnings by $44 million
changes in the timing of revenue for corporate trust services t
provided over the life of the associated trust.
reflect
is
, is due to
hat are
principles
with the
dingly, we
nue
Our accounting policies did not change materially since the
of revenue recognition from the Update are largely consistent
prior guidance and practices applied by our businesses. Accor
do not have material changes to the timing or amount of reve
recognition. However, the presentation of some costs associated with the
contracts of our broker-dealer and card businesses will change beginning
in first quarter 2018. These presentation changes will reduce our
revenue with a corresponding offset to reduce expenses. Based on
results for 2017, we do not expect the impact of this prospective
presentation change to be material to our total revenue and expenses.
In Note 20 (Revenue from Contracts with Customers) to Financial
Statements in this Report, we describe our key sources of revenue that
are within the scope of the new guidance, and include qualitative
disclosures to describe how revenue is recognized for the types of
services performed. In first quarter 2018, we will provide additional
disaggregation of specific categories of revenue, including service
charges on deposit accounts, brokerage advisory, trust and investment
management, and card fees.
•
•
•
•
•
ASU 2017-04 – Intangibles – Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
ASU 2017-03 – Accounting Changes and Error Corrections
(Topic 250) and Investments-Equity Method and Joint
Ventures (Topic 323): Amendments to SEC Paragraphs
Pursuant to Staff Announcements at the September 22,
2016 and November 17, 2016 EITF Meetings (SEC Update)
ASU 2017-01 – Business Combinations (Topic 805):
Clarifying the Definition of a Business
ASU 2016-16 – Income Taxes (Topic 740): Intra-Entity
Transfers of Assets Other Than Inventory
ASU 2016-15 – Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments
Forward-Looking Statements
This document contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.
In addition, we may make forward-looking statements in our
other documents filed or furnished with the SEC, and our
management may make forward-looking statements orally to
analysts, investors, representatives of the media and others.
Forward-looking statements can be identified by words such as
“anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,”
“expects,” “target,” “projects,” “outlook,” “forecast,” “will,”
“may,” “could,” “should,” “can” and similar references to future
periods. In particular, forward-looking statements include, but
are not limited to, statements we make about: (i) the future
operating or financial performance of the Company, including
our outlook for future growth; (ii) our noninterest expense and
efficiency ratio; (iii) future credit quality and performance,
including our expectations regarding future loan losses and
allowance 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 or
liquidity 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,
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Wells Fargo & Company
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 (including the impact of the Tax Cuts & Jobs Act),
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
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;
•
•
•
•
•
•
•
•
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.
•
•
•
•
•
•
•
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;
negative effects from the retail banking sales practices
matter and from other instances where customers may have
experienced financial harm, including on our legal,
operational and compliance costs, our ability to engage in
certain business activities or offer certain products or
services, our ability to keep and attract customers, our
ability to attract and retain qualified team members, and
our reputation;
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.
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.
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
Wells Fargo & Company
121
Risk Factors (continued)
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,
Britain’s vote to withdraw from the European Union, as well as
continued concerns over commodity prices and global economic
difficulties, may impact the stability of financial markets and the
global economy. In particular, Britain’s vote to withdraw from
the European Union could increase economic barriers between
Britain and the European Union, limit our ability to conduct
business in the European Union, impose additional costs on us,
subject us to different laws, regulations and/or regulatory
authorities, or adversely impact our business, financial results
and operating model. 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.
A weakening in business or economic conditions, including
higher unemployment levels or declines in home prices, can also
adversely affect our borrowers’ ability to repay their loans, which
can negatively impact our credit performance. 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.
Furthermore, 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
2017, approximately 25% of our revenue was fee income, which
included trust and investment fees, card fees and other fees. We
earn fee income from managing assets for others and providing
brokerage and other investment advisory and wealth
management services. Because investment management fees are
often based on the value of assets under management, a fall in
the market prices of those assets could reduce our fee income.
Changes in stock market prices could affect the trading activity
of investors, reducing commissions and other fees we earn from
our brokerage business. The U.S. stock market experienced all-
time highs in 2017, 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, as
well as our other comprehensive income, 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
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 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.
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Wells Fargo & Company
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.
In addition, our floating rate funding, certain hedging
transactions, and certain of the products that we offer, such as
floating rate loans and derivatives in connection with customer
accommodation activities, reference a benchmark rate, such as
LIBOR, or other financial metric in order to determine the
applicable interest rate or payment amount. In the event any
such benchmark rate or other referenced financial metric is
significantly changed, replaced or discontinued (for example, if
LIBOR is discontinued), there may be uncertainty or differences
in the calculation of the applicable interest rate or payment
amount depending on the terms of the governing instrument
and there may be significant work required to transition to using
any new benchmark rate or other financial metric. This could
result in different financial performance for previously booked
transactions, require different hedging strategies, or require
renegotiation of previously booked transactions, and may impact
our existing transaction data, products, systems, operations and
pricing processes.
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, credit spreads or
option volatility could reduce our net interest income and
earnings, as well as our other comprehensive income, 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.
Furthermore, the value of the securities we hold in our
investment securities portfolio can fluctuate due to changes in
interest rates and other factors. For example, the value of our
investments in asset-backed securities can fluctuate due to
changes in interest rates, credit spreads, and prepayment rates,
as well as defaults by the borrowers on the underlying exposures.
The value of our investments in municipal bonds may decline if
tax reform, including lower income tax rates, affects the
attractiveness of investing in such types of securities. Our net
income also is exposed to changes in interest rates, credit
spreads, foreign exchange rates, and equity and commodity
prices in connection with our trading activities, which are
conducted primarily to accommodate the investment and risk
management activities of our customers, as well as when we
execute economic hedging to manage certain balance sheet risks.
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. In addition, although high market volatility can
increase our exposure to trading-related losses, periods of low
volatility may have an adverse effect on our businesses as a
result of reduced customer activity levels. 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”, “– Mortgage
Banking Interest Rate and Market Risk”, “– Market Risk –
Trading Activities”, and “– Market Risk – Equity Investments”
and the “Balance Sheet Analysis – Investment Securities”
sections in this Report and Note 5 (Investment Securities) to
Financial Statements in this Report.
Wells Fargo & Company
123
Risk Factors (continued)
Effective liquidity management, which ensures that we
can meet customer loan requests, customer deposit
maturities/withdrawals and other cash commitments,
including principal and interest payments on our debt,
efficiently under both normal operating conditions and
other unpredictable circumstances of industry or
financial market stress, is essential for the operation of
our business, and our financial results and condition
could be materially adversely affected if we do not
effectively manage our liquidity. Our liquidity is essential
for the operation of our business. We primarily rely on bank
deposits to be a low cost and stable source of funding for the
loans we make and the operation of our business. 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 U.S. government debt levels
and any associated downgrade of U.S. government debt ratings
may cause uncertainty and volatility as well. A downgrade 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 (including on
an intraday basis), 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
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Wells Fargo & Company
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, as well as certain
contractual arrangements, can limit those
dividends. Wells Fargo & Company, the parent holding
company (the “Parent”), is a separate and distinct legal entity
from its subsidiaries. It receives substantially all of its funding
and liquidity from dividends and other distributions from its
subsidiaries. We generally use these dividends and distributions,
among other things, to pay dividends on our common and
preferred stock and interest and principal on our debt. Federal
and state laws limit the amount of dividends and distributions
that our bank and some of our nonbank subsidiaries, including
our broker-dealer subsidiaries, may pay to the Parent. In
addition, under a Support Agreement (the “Support Agreement”)
dated June 28, 2017 among the Parent, WFC Holdings, LLC, an
intermediate holding company and subsidiary of the Parent (the
“IHC”), and Wells Fargo Bank, N.A., Wells Fargo Securities,
LLC, and Wells Fargo Clearing Services, LLC, each an indirect
subsidiary of the Parent, the IHC may be restricted from making
dividend payments to the Parent if certain liquidity and/or
capital metrics fall below defined triggers. 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 2017 Form 10-K and to Note 3 (Cash,
Loan and Dividend Restrictions) and Note 27 (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, team members, and the banking and financial system
as a whole, not necessarily our security holders. Economic,
market and political conditions during the past few years have
led to a significant amount of legislation and regulation in the
U.S. and abroad affecting the financial services industry, 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 requirements, standards or expectations could result
in fees, penalties, restrictions on our ability to engage in certain
business activities, or other adverse consequences.
On July 21, 2010, the Dodd-Frank Act, the most significant
financial reform legislation since the 1930s, became law. The
Dodd-Frank Act, among other things, imposes significant
requirements and restrictions impacting the financial services
industry. 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,
automobile, credit card and other consumer lending and non-
lending businesses, are subject to numerous and, in many cases,
highly complex consumer protection laws and regulations, as
well as enhanced regulatory scrutiny and more and expanded
regulatory examinations and/or investigations. In particular, we
may be negatively affected by the activities of the Consumer
Financial Protection Bureau (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,
the CFPB has issued a number of rules impacting residential
mortgage lending practices and prepaid cards. If we fail to meet
enhanced regulatory requirements and expectations with respect
to our consumer businesses, we may be subject to increased
costs, fines, penalties, restrictions on our business activities
including the products and services we can provide, and/or harm
to our reputation.
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. Final
rules to implement the requirements of the Volcker Rule were
issued in December 2013. 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 has adopted
rules applicable to our provisionally registered swap dealer,
Wells Fargo Bank, N.A., that require, among other things,
extensive regulatory and public reporting of swaps, central
clearing and trading of swaps on exchanges or other multilateral
platforms, and compliance with comprehensive internal and
external business conduct standards. The SEC is expected to
implement parallel rules applicable to security-based swaps. In
addition, federal regulators have adopted final rules establishing
margin requirements for swaps and security-based swaps not
Wells Fargo & Company
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Risk Factors (continued)
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.
The Dodd-Frank Act also imposes changes on the ABS
markets by requiring sponsors of certain ABS to hold at least a
5% ownership stake in the ABS. Federal regulatory agencies have
issued final rules to implement this credit risk retention
requirement, which included an exemption for, among other
things, GSE mortgage backed securities. The final rules may
impact our ability to issue certain ABS or otherwise participate
in various securitization transactions.
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 March 2016, the FDIC issued
a final rule, which became effective on July 1, 2016, that imposes
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
surcharge is in addition to the base assessments we pay and
could significantly increase the overall amount of our deposit
insurance assessments. The FDIC expects the surcharge to be in
effect for approximately two years; however, if the DIF reserve
ratio does not reach 1.35% by December 31, 2018, the final rule
provides that the FDIC will impose a shortfall assessment on any
bank that was subject to the surcharge.
We are also subject to various rules and regulations related
to the prevention of financial crimes and combating terrorism,
including the U.S. Patriot Act of 2001. These rules and
regulations require us to, among other things, implement
policies and procedures related to anti-money laundering, anti-
bribery and corruption, fraud, compliance, suspicious activities,
currency transaction reporting and due diligence on customers.
Although we have policies and procedures designed to comply
with these rules and regulations, to the extent they are not fully
effective or do not meet heightened regulatory standards or
expectations, we may be subject to fines, penalties, restrictions
on certain activities, reputational harm, or other adverse
consequences.
Our businesses are also subject to laws and regulations
enacted by U.S. and non-U.S. regulators and governmental
authorities relating to the privacy of the information of
customers, team members and others. These laws and
regulations, among other things, increase our compliance
obligations; have a significant impact on our businesses’
collection, processing, sharing, use, and retention of personal
data and reporting of data breaches; and provide for significantly
increased penalties for non-compliance.
In April 2016, the U.S. Department of Labor adopted a rule
under the Employee Retirement Income Security Act of 1974
(ERISA) that, among other changes and subject to certain
exceptions, as of the applicability date of June 9, 2017, makes
anyone, including broker-dealers, providing investment advice
to retirement investors a fiduciary who must act in the best
interest of clients when providing investment advice for direct or
indirect compensation to a retirement plan, to a plan fiduciary,
participant or beneficiary, or to an investment retirement
account (IRA) or IRA holder. The rule impacts the manner in
which business is conducted with retirement investors and
affects product offerings with respect to retirement plans and
IRAs.
On November 18, 2016, the OCC revoked provisions of
certain consent orders that provided Wells Fargo Bank, N.A.
relief from specific requirements and limitations regarding rules,
policies, and procedures for corporate activities; OCC approval
of changes in directors and senior executive officers; and golden
parachute payments. As a result, Wells Fargo Bank, N.A. is no
longer eligible for expedited treatment for certain applications;
is now required to provide prior written notice to the OCC of a
change in directors and senior executive officers; and is now
subject to certain regulatory limitations on golden parachute
payments.
In March 2017, we announced that the OCC had
downgraded our most recent Community Reinvestment Act
(CRA) rating, which covers the years 2009-2012, to “Needs to
Improve” due to previously issued regulatory consent orders. A
“Needs to Improve” rating imposes regulatory restrictions and
limitations on certain of the Company’s nonbank activities,
including its ability to engage in certain nonbank mergers and
acquisitions or undertake new financial in nature activities, and
CRA performance is taken into account by regulators in
reviewing applications to establish bank branches and for
approving proposed bank mergers and acquisitions. The rating
also results in the loss of expedited processing of applications to
undertake certain activities, and requires the Company to receive
prior regulatory approval for certain activities, including to issue
or prepay certain subordinated debt obligations, open or relocate
bank branches, or make certain public welfare investments. In
addition, a “Needs to Improve” rating could have an impact on
the Company’s relationships with certain states, counties,
municipalities or other public agencies to the extent applicable
law, regulation or policy limits, restricts or influences whether
such entity may do business with a company that has a below
“Satisfactory” rating.
On February 2, 2018, the Company entered into a consent
order with the FRB, which requires the Company to submit to
the FRB within 60 days of the date of the consent order plans to
further enhance the Board's governance oversight and the
Company’s compliance and operational risk management. The
consent order also requires third-party reviews related to the
adoption and implementation of such plans by September 30,
2018. Until these third-party reviews are complete and the plans
are approved and implemented to the satisfaction of the FRB,
the Company’s total consolidated assets will be limited to the
level as of December 31, 2017, which could adversely affect our
results of operations or financial condition. Compliance with this
asset cap will be measured on a two-quarter daily average basis
to allow for management of temporary fluctuations. Once the
asset cap limitation is removed, a second third-party review
must be conducted to assess the efficacy and sustainability of the
improvements. The Company may be subject to further actions,
including the imposition of consent orders or similar regulatory
agreements or civil money penalties, by other federal regulators
regarding similar issues, including the Company’s risk
management policies and procedures.
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
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Wells Fargo & Company
the mortgage financing market in an effort to assist borrowers
experiencing difficulty in making mortgage payments or
refinancing their mortgages. The extent and timing of any
regulatory reform or the adoption of any legislation regarding
the GSEs and/or the home mortgage market, as well as any
effect on the Company’s business and financial results, are
uncertain.
Any other future legislation and/or regulation, if adopted,
also could significantly change our regulatory environment and
increase our cost of doing business, limit the activities we may
pursue or affect the competitive balance among banks, savings
associations, credit unions, and other financial services
companies, and have a material adverse effect on our financial
results and condition.
For more information, refer to the “Regulatory Matters”
section in this Report and the “Regulation and Supervision”
section in our 2017 Form 10-K.
We could be subject to more stringent capital, leverage
or liquidity requirements or restrictions on our growth,
activities or operations if regulators determine that our
resolution or recovery plan is deficient. 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
or FDIC determines that our resolution plan has deficiencies,
they may impose more stringent capital, leverage or liquidity
requirements on us or restrict our growth, activities or
operations until we adequately remedy the deficiencies. If the
FRB or FDIC ultimately determines that we have been unable to
remedy any deficiencies, they could require us to divest certain
assets or operations.
We must also prepare and submit to the FRB 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. Our insured national
bank subsidiary, Wells Fargo Bank, N.A. (the “Bank”), must also
prepare and submit to the OCC 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 the FRB or the OCC determines that our recovery
plan is deficient, they may impose fines, restrictions on our
business or ultimately require us to divest assets.
Our security holders may suffer losses in a resolution
of Wells Fargo, whether in a bankruptcy proceeding or
under the orderly liquidation authority of the FDIC,
even if creditors of our subsidiaries are paid in full. If
Wells Fargo were to fail, it may be resolved in a bankruptcy
proceeding or, if certain conditions are met, under the resolution
regime created by the Dodd-Frank Act known as the “orderly
liquidation authority.” The orderly liquidation authority allows
for the appointment of the FDIC as receiver for a systemically
important financial institution that is in default or in danger of
default if, among other things, the resolution of the institution
under the U.S. Bankruptcy Code would have serious adverse
effects on financial stability in the United States. If the FDIC is
appointed as receiver for Wells Fargo & Company (the “Parent”),
then the orderly liquidation authority, rather than the U.S.
Bankruptcy Code, would determine the powers of the receiver
and the rights and obligations of our security holders. The
FDIC’s orderly liquidation authority requires that security
holders of a company in receivership bear all losses before U.S.
taxpayers are exposed to any losses, and allows the FDIC to
disregard the strict priority of creditor claims under the U.S.
Bankruptcy Code in certain circumstances.
Whether under the U.S. Bankruptcy Code or by the FDIC
under the orderly liquidation authority, Wells Fargo could be
resolved using a “multiple point of entry” strategy, in which the
Parent and one or more of its subsidiaries would each undergo
separate resolution proceedings, or a “single point of entry”
strategy, in which the Parent would likely be the only material
legal entity to enter resolution proceedings. The FDIC has
announced that a single point of entry strategy may be a
desirable strategy under its implementation of the orderly
liquidation authority, but not all aspects of how the FDIC might
exercise this authority are known and additional rulemaking is
possible.
The strategy described in our most recent resolution plan
submission is a multiple point of entry strategy; however, we
have made a decision to move to a single point of entry strategy
for our next resolution plan submission. We are not obligated to
maintain either a single point of entry or multiple point of entry
strategy, and the strategies reflected in our resolution plan
submissions are not binding in the event of an actual resolution
of Wells Fargo, whether conducted under the U.S. Bankruptcy
Code or by the FDIC under the orderly liquidation authority.
To facilitate the orderly resolution of systemically important
financial institutions in case of material distress or failure,
federal banking regulations require that institutions, such as
Wells Fargo, maintain a minimum amount of equity and
unsecured debt to absorb losses and recapitalize operating
subsidiaries. Federal banking regulators have also required
measures to facilitate the continued operation of operating
subsidiaries notwithstanding the failure of their parent
companies, such as limitations on parent guarantees, and have
issued guidance encouraging institutions to take legally binding
measures to provide capital and liquidity resources to certain
subsidiaries in order to facilitate an orderly resolution. In
response to the regulators’ guidance and to facilitate the orderly
resolution of the Company using either a single point of entry or
multiple point of entry resolution strategy, on June 28, 2017, the
Parent entered into the Support Agreement with WFC Holdings,
LLC, an intermediate holding company and subsidiary of the
Parent (the “IHC”), and the Bank, Wells Fargo Securities, LLC
(“WFS”), and Wells Fargo Clearing Services, LLC (“WFCS”),
each an indirect subsidiary of the Parent. Pursuant to the
Support Agreement, the Parent transferred a significant amount
of its assets, including the majority of its cash, deposits, liquid
securities and intercompany loans (but excluding its equity
interests in its subsidiaries and certain other assets), to the IHC
and will continue to transfer those types of assets to the IHC
from time to time. In the event of our material financial distress
or failure, the IHC will be obligated to use the transferred assets
to provide capital and/or liquidity to the Bank pursuant to the
Support Agreement and to WFS and WFCS through repurchase
facilities entered into in connection with the Support Agreement.
Under the Support Agreement, the IHC will also provide funding
and liquidity to the Parent through subordinated notes and a
committed line of credit, which, together with the issuance of
dividends, is expected to provide the Parent, during business as
usual operating conditions, with the same access to cash
necessary to service its debts, pay dividends, repurchase its
shares, and perform its other obligations as it would have had if
Wells Fargo & Company
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Risk Factors (continued)
it had not entered into these arrangements and transferred any
assets. If certain liquidity and/or capital metrics fall below
defined triggers, the subordinated notes would be forgiven and
the committed line of credit would terminate, which could
materially and adversely impact the Parent’s liquidity and its
ability to satisfy its debts and other obligations, and could result
in the commencement of bankruptcy proceedings by the Parent
at an earlier time than might have otherwise occurred if the
Support Agreement were not implemented. The Parent's and the
IHC's respective obligations under the Support Agreement are
secured pursuant to a related security agreement.
Any resolution of the Company will likely impose losses on
shareholders, unsecured debt holders and other creditors of the
Parent, while the Parent’s subsidiaries may continue to operate.
Creditors of some or all of our subsidiaries may receive
significant or full recoveries on their claims, while the Parent’s
security holders could face significant or complete losses. This
outcome may arise whether the Company is resolved under the
U.S. Bankruptcy Code or by the FDIC under the orderly
liquidation authority, and whether the resolution is conducted
using a multiple point of entry or a single point of entry strategy.
Furthermore, in a multiple point of entry or single point of entry
strategy, losses at some or all of our subsidiaries could be
transferred to the Parent and borne by the Parent’s security
holders. Moreover, if either resolution strategy proved to be
unsuccessful, our security holders could face greater losses than
if the strategy had not been implemented.
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). 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 9.0%,
comprised of a 4.5% minimum requirement plus a capital
conservation buffer of 2.5% and for us, as a global
systemically important bank (G-SIB), a capital surcharge to
be calculated annually, which is 2.0% based on our year-end
2016 data;
a minimum tier 1 capital ratio of 10.5%, comprised of a 6.0%
minimum requirement plus the capital conservation buffer
of 2.5% and the G-SIB capital surcharge of 2.0%;
a minimum total capital ratio of 12.5%, comprised of a 8.0%
minimum requirement plus the capital conservation buffer
of 2.5% and the G-SIB capital surcharge of 2.0%;
a potential countercyclical buffer of up to 2.5% to be added
to the minimum capital ratios, which is currently not in
effect but could 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 plus 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 of between 1.0-4.5% 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 2016 data, our 2018 G-SIB surcharge is 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 became effective on January 1, 2018,
requires a covered BHC to maintain a SLR of at least 5.0%
(comprised of the 3.0% minimum requirement plus a
supplementary leverage buffer of 2.0%) to avoid restrictions on
capital distributions and discretionary bonus payments. The rule
also requires that all of our insured depository institutions
maintain a SLR of 6.0% under applicable regulatory capital
adequacy guidelines.
In December 2016, the FRB finalized 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
rules, which become effective on January 1, 2019, U.S. G-SIBs
will 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) 7.5% of total
leverage exposure (the denominator of the SLR calculation).
Additionally, U.S. G-SIBs will be required to maintain (i) 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 will be
added to the 18% minimum and (ii) an external TLAC leverage
buffer equal to 2.0% of total leverage exposure that will be added
to the 7.5% minimum, in order to avoid restrictions on capital
distributions and discretionary bonus payments. The rules will
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 rules will
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. While the rules permit permanent
grandfathering of a significant portion of otherwise ineligible
long-term debt that was issued prior to December 31, 2016, long-
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Wells Fargo & Company
term debt issued after that date must be fully compliant with the
eligibility requirements of the rules in order to count toward the
minimum TLAC amount. As a result of the rules, we will need to
issue additional long-term debt to remain compliant with the
requirements.
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 FRB also finalized rules imposing enhanced
liquidity management standards on large BHCs such as Wells
Fargo, and has finalized a rule that requires large bank holding
companies to publicly disclose on a quarterly basis certain
quantitative and qualitative information regarding their LCR
calculations.
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 re-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. 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, including as a result
of business growth, acquisitions or a change in our risk profile,
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 Matters” sections in this Report and the
“Regulation and Supervision” section of our 2017 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 to a
target range of 125 to 150 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 2% inflation. 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.
CREDIT RISK
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. 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.
Our provision for credit losses was $400 million less than
net charge-offs in 2017 and $250 million more than net charge-
offs in 2016, which had a positive effect on our earnings in 2017
but a negative effect in 2016. 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, 2017, 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
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Risk Factors (continued)
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
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. Similarly, challenging economic
or market conditions affecting a particular industry or geography
may also impact related or dependent industries or the ability of
borrowers living in such affected areas or working in such
industries to meet their financial obligations. 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, which includes
nonconforming mortgage loans we retain on our balance sheet.
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.
Challenges and/or changes in foreign economic conditions
may increase our foreign credit risk. Our foreign loan exposure
represented approximately 7% of our total consolidated
outstanding loans and 4% of our total assets at December 31,
2017. Economic difficulties in foreign jurisdictions could also
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.
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 “Risk Management –
Credit Risk Management” section in this Report.
RISKS RELATED TO OUR MORTGAGE BUSINESS
Our mortgage banking revenue can be volatile from
quarter to quarter, including from the impact of
changes in interest rates on our origination activity and
on the value of our MSRs, MHFS and associated
economic hedges, 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, 2017, 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 retain 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.
For more information, refer to the “Risk Management –
When rates rise, the demand for mortgage loans usually
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
tends to fall, reducing the revenue we receive from loan
originations. Under the same conditions, revenue from our
MSRs can increase through increases in fair value. When rates
fall, mortgage originations usually tend to increase and the value
of our MSRs usually tends to decline, also with some offsetting
revenue effect. Even though they can act as a “natural hedge,”
the hedge is not perfect, either in amount or timing. For
example, the negative effect on revenue from a decrease in the
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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 nonconforming
loans may be reduced, thereby reducing the interest income we
earn from originating these 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.
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
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. 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. 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
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
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
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Risk Factors (continued)
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 and servicing flood zone properties.
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. In addition, we may
have certain servicing obligations for properties that fall within a
flood zone. 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. Furthermore, if any of the companies that insure the
mortgage loans in our servicing portfolio experience financial
difficulties or credit downgrades, we may incur additional costs
to obtain replacement insurance coverage with another provider,
possibly at a higher cost than the coverage we would replace. 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. We may also incur costs if we
are unable to meet certain foreclosure timelines as prescribed by
GSE or other government servicing guidelines. 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 or
other servicing related 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 mortgage servicing
practices, including with respect to our foreclosure practices or
our servicing of flood zone properties. 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.
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 Other
Commitments) and Note 15 (Legal Actions) to Financial
Statements in this Report.
OPERATIONAL AND LEGAL RISK
A failure in or breach of our operational or security
systems, controls 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 more than 8,300 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, controls 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, become insufficient
based on our evolving business needs, 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
internet or website availability; 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. Furthermore,
enhancements and upgrades to our infrastructure or operating
systems may be time-consuming, entail significant costs, and
create risks associated with implementing new systems and
integrating them with existing ones. Due to the complexity and
interconnectedness of our systems, the process of enhancing our
infrastructure and operating systems, including their security
measures, can itself create a risk of system disruptions and
security issues. 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.
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Those parties also may attempt to misrepresent personal or
financial information to obtain loans or other financial products
from us or 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,
hardware, 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 risk and information security risk to us, including
from cyber attacks, information breaches or loss, breakdowns,
disruptions or failures of their own systems or infrastructure, or
any deficiencies in the performance of their responsibilities.
Furthermore, as a result of financial institutions and technology
systems becoming more interconnected and complex, any
operational or information security incident at a third party may
increase the risk of loss or material impact to us or the financial
industry as a whole. Moreover, because we rely on third parties
to provide services to us and facilitate certain of our business
activities, we face increased operational risk. If third parties we
rely on do not adequately or appropriately provide their services
or perform their responsibilities, or we do not effectively manage
or oversee these third party relationships, we may suffer
material harm, including business disruptions, losses or costs to
remediate any of the deficiencies, reputational damage, legal or
regulatory proceedings, or other adverse consequences.
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. Cyber attacks have also focused on targeting
the infrastructure of the internet, causing the widespread
unavailability of websites and degrading website performance.
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 or incidents.
Disruptions or failures in the physical infrastructure,
controls or operating systems that support our businesses and
customers, cyber attacks on us or third parties with which we do
business or that facilitate our business activities, or security
breaches of the networks, systems or devices that our customers
use to access our products and services could result in customer
attrition, financial losses, the inability of our customers to
transact business with us, violations of applicable privacy and
other laws, regulatory fines, penalties or intervention, litigation
exposure, 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,
identified or managed. Our risk management framework is also
dependent on ensuring that effective operational controls and a
sound culture exist throughout the Company. The inability to
develop effective operational controls or to foster the
appropriate culture in each of our lines of business could
adversely impact the effectiveness of our risk management
framework. Similarly, if we are unable to effectively manage our
business or operations, we may be exposed to increased risks or
unexpected losses. We are also exposed to risks if we do not
accurately or completely execute a process or transaction,
whether due to human error or otherwise. In certain instances,
we rely on models to measure, monitor and predict risks, such as
market and interest rate risks, as well as to help inform business
decisions; 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 business
activities, and any issues with the quality or effectiveness of our
data aggregation and validation procedures could result in
ineffective risk management practices or business decisions or
inaccurate regulatory or other 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
Wells Fargo & Company
133
Risk Factors (continued)
focused on ensuring that financial institutions build and
maintain robust risk management policies and practices. If our
risk management framework proves ineffective, we could suffer
unexpected losses which could materially adversely affect our
results of operations or financial condition.
Risks related to sales practices and other instances
where customers may have experienced financial harm.
Various government entities and offices have undertaken formal
or informal inquiries, investigations or examinations arising out
of certain sales practices of the Company that were the subject of
settlements with the Consumer Financial Protection Bureau, the
Office of the Comptroller of the Currency and the Office of the
Los Angeles City Attorney announced by the Company on
September 8, 2016. In addition to imposing monetary penalties
and other sanctions, regulatory authorities may require
admissions of wrongdoing and compliance with other conditions
in connection with such matters, which can lead to restrictions
on our ability to engage in certain business activities or offer
certain products or services, limitations on our ability to access
capital markets, limitations on capital distributions, the loss of
customers, and/or other direct and indirect adverse
consequences. A number of lawsuits have also been filed by
non-governmental parties seeking damages or other remedies
related to these sales practices. The ultimate resolution of any of
these pending legal proceedings or government investigations,
depending on the sanctions and remedy sought and granted,
could materially adversely affect our results of operations and
financial condition. We may also incur additional costs and
expenses in order to address and defend these pending legal
proceedings and government investigations, and we may have
increased compliance and other costs related to these matters.
Furthermore, negative publicity or public opinion resulting from
these matters may increase the risk of reputational harm to our
business, which can impact our ability to keep and attract
customers, affect our ability to attract and retain qualified team
members, result in the loss of revenue, or have other material
adverse effects on our results of operations and financial
condition. In addition, the ultimate results and conclusions of
our company-wide review of sales practices issues are still
pending and could lead to an increase in the identified number
of potentially impacted customers, additional legal or regulatory
proceedings, compliance and other costs, reputational damage,
the identification of issues in our practices or methodologies that
were used to identify, prevent or remediate sales practices
related matters, the loss of additional team members, or further
changes in policies and procedures that may impact our
business.
Furthermore, our priority of rebuilding trust has included
an ongoing effort to identify other areas or instances where
customers may have experienced financial harm. For example,
as we centralize operations in our automobile lending business
and tighten controls and oversight of third-party risk
management, we have identified certain issues related to
historical practices concerning the origination, servicing, and/or
collection of consumer automobile loans, including related
insurance products. The identification of such other areas or
instances where customers may have experienced financial harm
could lead to, and in some cases has already resulted in,
additional remediation costs, loss of revenue or customers, legal
or regulatory proceedings, compliance and other costs,
reputational damage, or other adverse consequences.
For more information, refer to the “Overview – Sales
Practices Matters” and “– Additional Efforts to Rebuild Trust”
sections and Note 15 (Legal Actions) to Financial Statements in
this Report.
We may incur fines, penalties and other negative
consequences from regulatory violations, possibly even
inadvertent or unintentional violations, or from any
failure to meet regulatory standards or expectations.
We maintain systems and procedures designed to ensure that we
comply with applicable laws and regulations. However, we are
subject to heightened compliance and regulatory oversight and
expectations, particularly due to the evolving and increasing
regulatory landscape we operate in. In addition, a single event or
issue may give rise to numerous and overlapping investigations
and proceedings, either by multiple federal and state agencies in
the U.S. or by multiple regulators and other governmental
entities in different jurisdictions. Also, the laws and regulations
in jurisdictions in which we operate may be different or even
conflict with each other, such as differences between U.S. federal
and state law or differences between U.S. and foreign laws as to
the products and services we may offer or other business
activities we may engage in, which can lead to compliance
difficulties or issues. Furthermore, many legal and regulatory
regimes require us to report transactions and other information
to regulators and other governmental authorities, self-regulatory
organizations, exchanges, clearing houses and customers. We
are also required to withhold funds and make various tax-related
payments, relating to our own tax obligations and those of our
customers. We may be subject to fines, penalties, restrictions on
our business, or other negative consequences if we do not timely,
completely, or accurately provide regulatory reports, customer
notices or disclosures, or make tax-related withholdings or
payments, on behalf of ourselves or our customers. Moreover,
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 or restrictions on certain activities
for inadvertent or unintentional violations even if reasonable
processes are in place to prevent the violations. Any violation of
these or other applicable laws or regulatory requirements, even if
inadvertent or unintentional, or any failure to meet regulatory
standards or expectations could result in fees, penalties,
restrictions on our ability to engage in certain business activities,
reputational harm, loss of customers or other negative
consequences.
Negative publicity, including as a result of our actual or
alleged conduct or public opinion of the financial
services industry generally, 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, our size and profile in the financial
services industry, and sales practices related matters and other
instances where customers may have experienced financial
harm. 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
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Wells Fargo & Company
and attract customers. Negative public opinion could result from
our actual or alleged conduct in any number of activities,
including sales practices; mortgage, automobile or other
consumer lending practices; servicing and foreclosure activities;
management of client accounts or investments; lending,
investing or other business relationships; corporate governance;
regulatory compliance; risk management; 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. Although we
have policies and procedures in place intended to detect and
prevent conduct by team members and third party service
providers that could potentially harm customers or our
reputation, there is no assurance that such policies and
procedures will be fully effective in preventing such conduct.
Furthermore, our actual or perceived failure to address or
prevent any such conduct or otherwise to effectively manage our
business or operations could result in significant reputational
harm. 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.
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 locations 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 or negative publicity for the
Company specifically or large financial institutions generally will
not harm our reputation and adversely affect our business and
financial results.
Risks related to legal actions. Wells Fargo and some of its
subsidiaries are involved in judicial, regulatory, arbitration, and
other proceedings or investigations concerning matters arising
from the conduct of our business activities. Although we believe
we have a meritorious defense in all significant legal actions
pending against us, there can be no assurance as to the ultimate
outcome. We establish accruals for legal actions when potential
losses associated with the actions become probable and the costs
can be reasonably estimated. We may still incur costs for a legal
action even if we have not established an accrual. In addition,
the actual cost of resolving a legal action may be substantially
higher than any amounts accrued for that action. The ultimate
resolution of a pending legal proceeding or investigation,
depending on the remedy sought and granted, could materially
adversely affect our results of operations and financial condition.
As noted above, we are subject to heightened regulatory
oversight and scrutiny, which may lead to regulatory
investigations, proceedings or enforcement actions. In addition
to imposing monetary penalties and other sanctions, regulatory
authorities may require criminal pleas or other admissions of
wrongdoing and compliance with other conditions in connection
with settling such matters, which can lead to reputational harm,
loss of customers, restrictions on the ability to access capital
markets, limitations on capital distributions, the inability to
engage in certain business activities or offer certain products or
services, and/or other direct and indirect adverse effects.
For more information, refer to Note 15 (Legal Actions) to
Financial Statements in this Report.
RISKS RELATED TO OUR INDUSTRY’S COMPETITIVE
OPERATING ENVIRONMENT
We face significant and increasing competition in the
rapidly evolving financial services industry. We compete
with other financial institutions in a highly competitive industry
that is undergoing significant changes as a result of financial
regulatory reform, technological advances, 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 securities trading, lending and
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, including our
senior leaders, and in many areas of our business, including
commercial banking, brokerage, investment advisory, capital
markets, risk management and technology, the competition for
highly qualified personnel is intense. We also seek to retain a
pipeline of team members to provide continuity of succession for
our senior leadership positions. In order to attract and retain
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135
Risk Factors (continued)
highly qualified team members, we must provide competitive
compensation. As a large financial institution and additionally to
the extent we remain subject to consent orders 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, especially if some of our competitors
may not be subject to these same compensation limitations. If
we are unable to continue to attract and retain qualified team
members, including successors for senior leadership positions,
our business performance, competitive position and future
prospects may be adversely affected.
RISKS RELATED TO OUR FINANCIAL STATEMENTS
Changes in accounting policies or accounting
standards, and changes in how accounting standards
are interpreted or applied, could materially affect how
we report our financial results and condition. Our
accounting policies are fundamental to determining and
understanding our financial results and condition. As described
below, some of these policies require use of estimates and
assumptions that may affect the value of our assets or liabilities
and financial results. Any changes in our accounting policies
could materially affect our financial statements.
From time to time the FASB and the SEC change the
financial accounting and reporting standards that govern the
preparation of our external financial statements. For example,
Accounting Standards Update 2016-13 - Financial Instruments-
Credit Losses (Topic 326), which becomes effective in first
quarter 2020, will replace 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.
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.
For more information, refer to the “Current Accounting
Developments” section in this Report.
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, derivative assets and liabilities, investment securities,
certain loans, MSRs, private equity investments, structured
notes and certain repurchase and resale agreements, among
other items, require a determination of their fair value in order
to prepare our financial statements. Where quoted market prices
are not available, we may make fair value determinations based
on internally developed models or other means which ultimately
rely to some degree on management judgment, and there is no
assurance that our models will capture or appropriately reflect
all relevant inputs required to accurately determine fair value.
Some of these and other assets and liabilities may have no direct
observable price levels, making their valuation particularly
subjective, being based on significant estimation and judgment.
In addition, sudden illiquidity in markets or declines in prices of
certain loans and securities may make it more difficult to value
certain balance sheet items, which may lead to the possibility
that such valuations will be subject to further change or
adjustment and could lead to declines in our earnings.
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) requires
our management to evaluate the Company’s disclosure controls
and procedures and its internal control over financial reporting
and requires our auditors to issue a report on our internal
control over financial reporting. We are required to disclose, in
our annual report on Form 10-K, the existence of any “material
weaknesses” in our internal controls. We cannot assure that we
will not identify one or more material weaknesses as of the end
of any given quarter or year, nor can we predict the effect on our
stock price of disclosure of a material weakness. Sarbanes-Oxley
also limits the types of non-audit services our outside auditors
may provide to us in order to preserve their independence from
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 may require regulatory approvals and
conditions, and we may experience difficulty
integrating any acquired company or business. We
regularly explore opportunities to expand our products, services
and assets by acquiring companies or businesses in the financial
services industry. 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. 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. 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
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Wells Fargo & Company
earnings per share if we issue common stock in connection with
the acquisition.
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, an increase in our compliance costs or risk profile,
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 2018 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.
Controls and Procedures
Disclosure Controls and Procedures
The Company’s management evaluated the effectiveness, as of December 31, 2017, 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, 2017.
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
2017 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, 2017,
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, 2017, 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
137
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Wells Fargo & Company:
Opinion on Internal Control Over Financial Reporting
We have audited Wells Fargo & Company and Subsidiaries’ (the Company) internal control over financial reporting as of December 31,
2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the consolidated balance sheets of the Company as of December 31, 2017 and 2016, 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, 2017, and
the related notes (collectively, the “consolidated financial statements”), and our report dated March 1, 2018, expressed an unqualified
opinion on those consolidated financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
San Francisco, California
March 1, 2018
138
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 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,
2017
2016
2015
$
2,928
10,664
786
12
41,388
3,131
58,909
3,013
758
5,157
424
9,352
49,557
2,528
47,029
5,111
14,495
3,960
3,557
4,350
1,049
1,053
479
1,268
1,907
1,603
2,506
9,248
784
9
39,505
1,611
53,663
1,395
330
3,830
354
5,909
47,754
3,770
43,984
5,372
14,243
3,936
3,727
6,096
1,268
834
942
879
1,927
1,289
1,971
8,937
785
19
36,575
990
49,277
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
38,832
40,513
40,756
17,363
10,442
5,566
2,237
2,849
1,152
1,287
17,588
58,484
27,377
4,917
22,460
277
$
22,183
1,629
$
20,554
$
4.14
4.10
1.540
4,964.6
5,017.3
16,552
10,247
5,094
2,154
2,855
1,192
1,168
13,115
52,377
32,120
10,075
22,045
107
21,938
1,565
20,373
4.03
3.99
1.515
5,052.8
5,108.3
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
(1) Total other-than-temporary impairment (OTTI) losses were $205 million, $207 million and $136 million for the years ended December 31, 2017, 2016 and 2015,
respectively. Of total OTTI, losses of $262 million, $189 million and $183 million were recognized in earnings, and losses (reversal of losses) of $(57) million, $18 million
and $(47) million were recognized as non-credit-related OTTI in other comprehensive income for the years ended December 31, 2017, 2016 and 2015, respectively.
Includes OTTI losses of $344 million, $453 million and $376 million for the years ended December 31, 2017, 2016 and 2015, respectively.
(2)
The accompanying notes are an integral part of these statements.
Wells Fargo & Company
139
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 and prior service gains (losses) arising during the period
Amortization of net actuarial loss, settlements and other to net income
Foreign currency translation adjustments:
Net unrealized gains (losses) arising during the period
Reclassification of net gains to net income
Other comprehensive income (loss), before tax
Income tax (expense) benefit related to other comprehensive income
Other comprehensive income (loss), net of tax
Less: Other comprehensive income (loss) from noncontrolling interests
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,
2017
2016
2015
$
22,183
21,938
22,894
2,719
(737)
(3,458)
(1,240)
(3,318)
(1,530)
(540)
(543)
177
1,549
(1,029)
(1,089)
49
153
96
—
1,197
(434)
763
(62)
825
(52)
158
(3)
—
(512)
114
(137)
(5)
(5,447)
(4,928)
1,996
1,774
(3,451)
(3,154)
(17)
67
(3,434)
(3,221)
23,008
18,504
19,673
215
90
449
$
23,223
18,594
20,122
140
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 $138,985 and $99,155)
Mortgages held for sale (includes $16,116 and $22,042 carried at fair value) (1)
Loans held for sale
Loans (includes $376 and $758 carried at fair value) (1)
Allowance for loan losses
Net loans
Mortgage servicing rights:
Measured at fair value
Amortized
Premises and equipment, net
Goodwill
Derivative assets
Other assets (includes $4,867 and $3,275 carried at fair value) (1)
Total assets (2)
Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Short-term borrowings
Derivative liabilities
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 (loss)
Treasury stock – 590,194,846 shares and 465,702,148 shares
Unearned ESOP shares
Total Wells Fargo stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
Dec 31,
2017
$
23,367
272,605
92,329
277,085
139,335
20,070
108
956,770
(11,004)
945,766
13,625
1,424
8,847
26,587
12,228
Dec 31,
2016
20,729
266,038
74,397
308,364
99,583
26,309
80
967,604
(11,419)
956,185
12,959
1,406
8,333
26,693
14,498
118,381
114,541
$
1,951,757
1,930,115
$
373,722
962,269
375,967
930,112
1,335,991
1,306,079
103,256
8,796
70,615
96,781
14,492
57,189
225,020
255,077
1,743,678
1,729,618
25,358
9,136
60,893
145,263
(2,144)
(29,892)
(1,678)
206,936
1,143
208,079
24,551
9,136
60,234
133,075
(3,137)
(22,713)
(1,565)
199,581
916
200,497
$
1,951,757
1,930,115
(1) Parenthetical amounts represent assets and liabilities for which we have elected the fair value option.
(2) Our consolidated assets at December 31, 2017 and 2016, 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, $116 million and $168 million; Federal funds sold, securities purchased under resale agreements and other short-term
investments, $376 million and $74 million; Trading assets, $294 million and $130 million; Investment securities, $0 million and $0 million; Net loans, $12.5 billion and
$12.6 billion; Derivative assets, $0 million and $1 million; Other assets, $349 million and $452 million; and Total assets, $13.6 billion and $13.4 billion, respectively.
(3) Our consolidated liabilities at December 31, 2017 and 2016, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Derivative
liabilities, $5 million and $33 million; Accrued expenses and other liabilities, $132 million and $107 million; Long-term debt, $1.5 billion and $3.7 billion; and Total
liabilities, $1.6 billion and $3.8 billion, respectively.
The accompanying notes are an integral part of these statements.
Wells Fargo & Company
141
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 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, 2015
Balance Cumulative effect from change in consolidation accounting (2)
Balance January 1, 2016
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, 2016
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
69,876,577
(163,400,892)
826,598
826
(825,499)
(825)
15,303,927
120,000
3,000
121,099
3,001
(78,220,388)
—
11,259,917 $
22,214
5,092,128,810 $
9,136
11,259,917
22,214
5,092,128,810
9,136
63,441,805
(159,647,152)
1,150,000
1,150
(963,205)
(963)
20,185,863
86,000
2,150
272,795
2,337
(76,019,484)
—
11,532,712 $
24,551
5,016,109,326 $
9,136
(1) For the year ended December 31, 2015, includes $500 million related to a private forward repurchase transaction entered into in fourth quarter 2015 that settled in first
quarter 2016 for 9.2 million shares of common stock. For the year ended December 31, 2016, includes $750 million related to a private forward repurchase transaction that
settled in first quarter 2017 for 14.7 million shares of common stock. See Note 1 (Summary of Significant Accounting Policies) for additional information.
(2) Effective January 1, 2016, we adopted changes in consolidation accounting pursuant to Accounting Standards Update (ASU) 2015-02: Amendments to the Consolidation
Analysis. Accordingly, we recorded a $121 million net increase to beginning noncontrolling interests as a cumulative-effect adjustment.
The accompanying notes are an integral part of these statements.
(continued on following pages)
142
Wells Fargo & Company
Cumulative
other
comprehensive
income (loss)
3,518
3,518
(3,221)
Retained
earnings
107,040
107,040
22,894
—
3,041
(8,947)
718
Wells Fargo stockholders’ equity
Total
Wells Fargo
stockholders’
equity
Noncontrolling
interests
Treasury
stock
(13,690)
(13,690)
Unearned
ESOP
shares
(1,360)
(1,360)
184,394
184,394
22,894
(3,221)
2
2,644
(8,697)
—
825
—
(49)
2,972
(7,580)
(1,426)
453
844
(1,057)
8,604
(900)
898
(2)
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
121
868
868
382
67
(424)
25
893
121
(3,221)
297
11
(5,177)
(18,867)
(1,362)
192,998
297
(18,867)
(1,362)
192,998
1,014
194,012
(3,434)
3,040
(7,866)
974
(1,249)
1,046
12,209
133,075
(3,434)
(3,137)
6
(3,846)
(22,713)
(203)
(1,565)
21,938
(3,434)
2
2,386
(8,116)
—
963
—
(17)
2,101
(7,661)
(1,566)
277
779
(1,069)
6,583
199,581
107
(17)
(188)
(98)
916
22,045
(3,451)
(186)
2,386
(8,116)
—
963
—
(17)
2,101
(7,661)
(1,566)
277
779
(1,069)
6,485
200,497
(7,642)
(1,426)
13,826
120,866
120,866
21,938
(451)
(7,712)
(1,566)
Additional
paid-in
capital
60,537
60,537
2
(397)
250
74
(73)
107
(49)
(28)
62
453
844
(1,068)
177
60,714
60,714
2
(203)
(250)
99
(83)
(11)
(17)
(49)
51
277
779
(1,075)
(480)
60,234
Wells Fargo & Company
143
(continued from previous pages)
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity
(in millions, except shares)
Balance December 31, 2016
Cumulative effect from change in hedge accounting (1)
Balance January 1, 2017
Net income
Other comprehensive income (loss), net of tax
Noncontrolling interests
Common stock issued
Common stock repurchased
Preferred stock issued to ESOP
Preferred stock released by ESOP
Preferred stock
Common stock
Shares
Amount
Shares
Amount
11,532,712 $
24,551
5,016,109,326 $
9,136
11,532,712
24,551
5,016,109,326
9,136
950,000
950
57,257,564
(196,519,707)
Preferred stock converted to common shares
(833,077)
(833)
14,769,445
Common stock warrants repurchased/exercised
Preferred stock issued
Common stock dividends
Preferred stock dividends
Tax benefit from stock incentive compensation (2)
Stock incentive compensation expense
Net change in deferred compensation and related plans
Net change
Balance December 31, 2017
27,600
690
144,523
807
(124,492,698)
—
11,677,235 $
25,358
4,891,616,628 $
9,136
(1) Financial information has been revised to reflect the impact of the adoption in fourth quarter 2017 of Accounting Standards Update (ASU) 2017-12 – Derivatives and
Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. See Note 1 (Summary of Significant Accounting Policies) for more information.
(2) Effective January 1, 2017, we adopted Accounting Standards Update 2016-09 (Improvements to Employee Share-Based Payment Accounting). Accordingly, tax benefit
from stock incentive compensation is reported in income tax expense in the consolidated statement of income.
The accompanying notes are an integral part of these statements.
144
Wells Fargo & Company
Wells Fargo stockholders’ equity
Additional
paid-in
capital
Retained
earnings
Cumulative
other
comprehensive
income (loss)
Treasury
stock
Unearned
ESOP
shares
Total
Wells Fargo
stockholders’
equity
Noncontrolling
interests
Total
equity
60,234
133,075
(3,137)
(22,713)
(1,565)
199,581
916
200,497
(381)
168
(213)
(2,969)
(22,713)
(1,565)
199,368
60,234
132,694
22,183
825
(277)
2,758
(10,658)
736
(981)
868
—
(133)
750
31
(35)
97
(133)
(13)
50
—
875
(830)
659
60,893
(7,708)
(1,629)
12,569
145,263
825
(15)
(7,179)
(113)
(2,144)
(29,892)
(1,678)
206,936
22,183
825
—
2,348
(9,908)
—
833
—
(133)
677
(7,658)
(1,629)
—
875
(845)
7,568
916
277
(62)
12
227
1,143
(213)
200,284
22,460
763
12
2,348
(9,908)
—
833
—
(133)
677
(7,658)
(1,629)
—
875
(845)
7,795
208,079
Wells Fargo & Company
145
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
Originations and purchases of MHFS and LHFS
Proceeds from sales of and paydowns on mortgages originated for sale and LHFS
Net change in:
Trading assets
Deferred income taxes
Derivative assets and liabilities
Other assets
Other accrued expenses and liabilities (1)
Net cash provided by operating activities
Cash flows from investing activities:
Net change in:
Year ended December 31,
2017
2016
2015
$
22,460
22,045
23,276
2,528
886
5,406
(973)
2,046
(181,321)
135,054
33,332
666
(5,025)
(1,174)
4,837
18,722
3,770
139
4,970
(6,086)
1,945
(205,314)
127,488
62,550
1,793
2,089
(14,232)
(211)
946
2,442
62
3,288
(6,496)
1,958
(178,294)
133,201
42,754
(2,265)
(354)
(2,165)
(1,503)
15,904
Federal funds sold, securities purchased under resale agreements and other short-term investments
(13,490)
3,991
(11,866)
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 (2)
Proceeds from sales (including participations) of loans held for investment
Purchases (including participations) of loans
Principal collected on nonbank entities' loans (2)
Loans originated by nonbank entities (2)
Net cash paid for acquisitions
Proceeds from sales of foreclosed assets and short sales
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
Stock tendered for payment of withholding taxes (1)
Repurchased
Cash dividends paid
Net change in noncontrolling interests
Other, net
Net cash provided (used) 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
(122,119)
(107,235)
42,714
45,710
(103,671)
31,584
41,105
(120,980)
10,673
—
3,982
(3,023)
317
10,439
(3,702)
7,448
(6,814)
(320)
5,198
(625)
(5,164)
29,912
14,020
43,575
(80,802)
677
(1,629)
1,211
(393)
(9,908)
(7,480)
30
(133)
7,957
(23,593)
1,975
(4,316)
(39,002)
10,061
(6,221)
6,844
(7,743)
(30,584)
7,311
(508)
82,767
(1,198)
90,111
(34,462)
2,101
(1,566)
1,415
(494)
(8,116)
(7,472)
(188)
(107)
(10,920)
122,791
2,638
20,729
23,367
9,103
6,592
$
$
1,618
19,111
20,729
5,573
8,446
25,431
33,912
(79,778)
5,290
(25,424)
3,496
(2,352)
(57,020)
11,672
(13,759)
5,023
(7,437)
(3)
7,803
(2,223)
54,867
34,010
43,030
(27,333)
2,972
(1,426)
1,726
(679)
(8,697)
(7,400)
(232)
33
90,871
(460)
19,571
19,111
3,816
13,688
(1) Prior periods have been revised to conform to the current period presentation.
(2) Prior periods have been revised to reflect classification changes due to entity restructuring activities.
The accompanying notes are an integral part of these statements. See Note 1 (Summary of Significant Accounting Policies) for noncash activities.
146
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, trust and investments, mortgage
banking, investment banking, retail banking, brokerage, and
consumer and commercial finance through banking locations,
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 (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));
income taxes (Note 22 (Income Taxes)); and
liabilities for contingent litigation losses (Note 15 (Legal
Actions)).
•
•
•
Actual results could differ from those estimates.
Accounting Standards Adopted in 2017
In 2017, we adopted the following new accounting guidance:
•
Accounting Standards Update (ASU or Update) 2017-12 –
Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities;
ASU 2016-09 – Compensation – Stock Compensation
(Topic 718): Improvements to Employee Share-Based
Payment Accounting;
ASU 2016-07 – Investments – Equity Method and Joint
Ventures (Topic 323): Simplifying the Transition to the
Equity Method of Accounting;
ASU 2016-06 – Derivatives and Hedging (Topic 815):
Contingent Put and Call Options in Debt Instruments; and
ASU 2016-05 – Derivatives and Hedging (Topic 815):
Effect of Derivative Contract Novations on Existing Hedge
Accounting Relationships.
•
•
•
•
ASU 2017-12 provides targeted improvements to the hedge
accounting model intended to facilitate financial reporting that
more closely reflects an entity’s risk management activities and
to simplify application of hedge accounting. Changes under the
new guidance include expansion of the types of risk management
strategies eligible for hedge accounting, easing the
documentation and effectiveness assessment requirements,
changing how ineffectiveness is measured, and changing the
presentation and disclosure requirements for hedge accounting
activities.
We early adopted ASU 2017-12 in fourth quarter 2017.
Our financial statements for the year ended December 31,
2017, include a cumulative-effect adjustment to opening
retained earnings and adjustments to our 2017 earnings to
reflect application of the new guidance effective January 1,
2017. The new guidance significantly reduces but does not
eliminate interest-rate related hedge ineffectiveness and
mitigates certain components of foreign currency related
hedge ineffectiveness. In particular, we continued to
experience hedge ineffectiveness volatility related to certain
hedges of foreign-currency denominated debt liabilities. The
adjustment as of January 1, 2017, reduced retained earnings by
$381 million and increased other comprehensive income by
$168 million. The effect of adoption on previously reported
year-to-date results through September 30, 2017, increased
net income by $169 million ($242 million pre-tax) and
decreased other comprehensive income by $163 million.
ASU 2016-09 simplifies the accounting for share-based
payment awards issued to employees. We have income tax
effects based on changes in our stock price from the grant date to
the vesting date of the employee stock compensation. The
Update requires these income tax effects to be recognized in the
statement of income within income tax expense instead of within
additional paid-in capital. In addition, the Update requires
changes to the Statement of Cash Flows including the
classification between the operating and financing section for tax
activity related to employee stock compensation, which we
adopted retrospectively. We recorded excess tax benefits and tax
deficiencies within income tax expense in the statement of
income in first quarter 2017, on a prospective basis.
ASU 2016-07 eliminates the requirement for companies to
retroactively apply the equity method of accounting for
investments when increases in ownership interests or degree of
influence result in the adoption of the equity method. Under the
guidance, the equity method should be applied prospectively in
the period in which the ownership changes occur. We adopted
this change in first quarter 2017. The Update has been applied
on a prospective basis and did not have a material impact on our
consolidated financial statements.
ASU 2016-06 clarifies the criteria entities should use when
evaluating whether embedded contingent put and call options in
debt instruments should be separated from the debt instrument
and accounted for separately as derivatives. The Update clarifies
that companies should not consider whether the event that
triggers the ability to exercise put or call options is related to
interest rates or credit risk. We adopted this change in first
quarter 2017. The Update did not have a material impact on our
consolidated financial statements.
ASU 2016-05 clarifies that a change in the counterparty to a
derivative instrument that has been designated as an accounting
hedge does not require the hedging relationship to be
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Note 1: Summary of Significant Accounting Policies (continued)
dedesignated as long as all other hedge accounting criteria
continue to be met. We adopted the guidance in first quarter
2017. The Update did not have a material impact on our
consolidated financial statements.
Accounting Standards with Retrospective Application
The following accounting pronouncements have been issued by
the FASB but are not yet effective:
•
ASU 2016-18 – Statement of Cash Flows (Topic 230):
Restricted Cash; and
ASU 2016-15 – Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments.
•
ASU 2016-18 requires that amounts described as restricted
cash and cash equivalents be included with cash and cash
equivalents in the statement of cash flows. In addition, we will be
required to disclose information in our footnotes about the
nature of the restriction on cash and cash equivalents. The
Update is effective for us in first quarter 2018 with retrospective
application. The Update did not have a material impact on our
consolidated financial statements.
ASU 2016-15 addresses eight specific cash flow issues with the
objective of reducing the existing diversity in practice for
reporting in the Statement of Cash Flows. The Update is effective
for us in first quarter 2018 with retrospective application. The
Update did not have a material impact on our consolidated
financial statements.
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
equity securities, which we recognize at fair value with changes
in fair value included in other comprehensive income (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 other depository institutions.
Trading Assets
Trading assets are predominantly securities, including corporate
debt, U.S. government agency obligations and other securities
and certain loans held for market-making purposes to support
the buying and selling demands of our customers. 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 net
gains from trading activities. For securities and loans in trading
assets, interest and dividend income are recorded in interest
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
•
•
•
•
•
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Wells Fargo & Company
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 of
amortized cost basis, 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
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
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Note 1: Summary of Significant Accounting Policies (continued)
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 in 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.
•
•
•
or principal, unless both well-secured and in the process of
collection;
part of the principal balance has been charged off, except for
credit card loans, which are generally not placed on
nonaccrual status, but are generally fully charged off when
the loan reaches 180 days past due;
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 automobile loans receive
notification of 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 and an
accretable yield is established. Accordingly, such loans are not
classified as nonaccrual because they continue to earn interest
from accretable yield, independent of performance in accordance
of their contractual terms, and 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.
Unearned income, deferred fees and costs, and discounts
We typically re-underwrite modified loans at the time of a
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 2017.
Loans also include direct financing leases that are recorded
at the aggregate of minimum lease payments receivable plus the
estimated residual value of the leased property, less unearned
income. Leveraged leases, which are a form of direct financing
leases, are recorded net of related non-recourse debt. Leasing
income is recognized as a constant percentage of outstanding
lease financing balances over the lease terms in interest income.
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.
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
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;
•
•
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Wells Fargo & Company
•
•
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 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.
Automobile 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 in the commercial portfolio segment and loans
modified in a TDR, whether on accrual or 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, if applicable. For modifications
where we forgive principal, the entire amount of such principal
forgiveness is immediately charged off. Loans classified as TDRs,
including loans in trial payment periods (trial modifications), are
considered impaired loans. Other than resolutions such as
foreclosures, sales and transfers to held-for-sale, we may remove
loans held for investment from TDR classification, but only if
they have been refinanced or restructured at market terms and
qualify as a new loan.
PURCHASED CREDIT-IMPAIRED LOANS Loans acquired with
evidence of credit deterioration since their origination and where
it is probable that we will not collect all contractually required
principal and interest payments are PCI loans. PCI loans are
recorded at fair value at the date of acquisition, and the
historical allowance for credit losses related to these loans is not
carried over. Fair value at date of acquisition is generally
determined using a discounted cash flow method and any excess
cash flow 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 if aggregated based on common risk characteristics. 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. Based on quarterly evaluations of remaining cash
flows expected to be collected, expected decreases may result in
recording a provision for loss and expected increases may result
in a prospective yield adjustment after first reversing any
allowance for losses related to the loan, or pool of loans.
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 other 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, which assumes that
the amount received from resolution approximates pool
performance expectations. Any material change in remaining
effective yield caused by this removal method is addressed by
our quarterly cash flow evaluation process for each
pool.
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 FHA or VA.
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
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Note 1: Summary of Significant Accounting Policies (continued)
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
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
generally determine the allowance 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 ACL
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, derivative assets and liabilities,
other assets, other liabilities (including liabilities for mortgage
repurchase losses), or long-term debt 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 mortgage banking 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 mortgage banking noninterest income, analyzed
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Wells Fargo & Company
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
allowance is adjusted as the fair value changes.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Capital leases, where we are the
lessee, are included in premises and equipment at the capitalized
amount less accumulated amortization.
We primarily use the straight-line method of depreciation
and amortization. Estimated useful lives range up to 40 years for
buildings, up to 10 years for furniture and equipment, and the
shorter of the estimated useful life (up to 8 years) or the lease
term for leasehold improvements. We amortize capitalized
leased assets on a straight-line basis over the lives of the
respective leases.
Goodwill and Identifiable Intangible Assets
Goodwill is recorded in business combinations under the
purchase method of accounting when the purchase price is
higher than the fair value of net assets, including identifiable
intangible assets.
We assess goodwill for impairment at a reporting unit level
on an annual basis or more frequently in certain circumstances.
We have determined that our reporting units are one level below
the operating segments and distinguish these reporting units
based on how the segments and reporting units are managed,
taking into consideration the economic characteristics, nature of
the products, and customers of the segments and reporting
units. 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. If we sell a business, a portion of
goodwill is included with the carrying amount of the divested
business.
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 other 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.
Derivatives and Hedging Activities
DERIVATIVES 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) qualifying for hedge
accounting in a hedge of the fair value of a recognized asset or
liability or an unrecognized firm commitment, including hedges
of foreign currency exposure (“fair value hedge”), (2) qualifying
for hedge accounting in a hedge of a forecasted transaction or of
the variability of cash flows to be received or paid related to a
recognized asset or liability (“cash flow hedge”), or (3) held for
customer accommodation trading or asset/liability risk
management or other purposes, including economic hedges not
qualifying for hedge accounting. For derivatives not designated
as a fair value or cash flow hedge, we report changes in the fair
values in current period noninterest income.
DOCUMENTATION AND EFFECTIVENESS ASSESSMENT FOR
ACCOUNTING HEDGES 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. We assess
hedge effectiveness using regression analysis, both at inception
of the hedging relationship and on an ongoing basis. For fair
value hedges, 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). For cash flow
hedges, the regression analysis involves regressing the periodic
changes in fair value of the hedging instrument against the
periodic changes in fair value of the hypothetical derivative. The
hypothetical derivative has terms that identically match and
offset the cash flows of the forecasted transaction being hedged
due to changes in the hedged risk(s). The assessment for fair
value and cash flow hedges includes an evaluation of the
quantitative measures of the regression results used to validate
the conclusion of high effectiveness. 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.
FAIR VALUE HEDGES For a fair value hedge, we record
changes in the fair value of the derivative and the hedged asset
or liability due to the hedged risk in current period net income,
except for certain derivatives in which a portion is recorded to
OCI. We present derivative gains or losses in the same income
statement category as the hedged asset or liability, as follows:
•
For fair value hedges of interest rate risk, amounts are
reflected in net interest income.
For hedges of foreign currency risk, amounts representing
the fair value changes less the accrual for periodic cash flow
settlements are reflected in noninterest income. The
periodic cash flow settlements are reflected in net interest
income.
•
Wells Fargo & Company
153
Note 1: Summary of Significant Accounting Policies (continued)
•
For hedges of both interest rate risk and foreign currency
risk, amounts representing the fair value change less the
accrual for periodic cash flow settlements is attributed to
both net interest income and noninterest income. The
periodic cash flow settlements are reflected in net interest
income.
The entire derivative gain or loss is included in the
assessment of hedge effectiveness for all fair value hedge
relationships, except for hedges of foreign-currency
denominated available-for-sale investment securities and long
term debt liabilities, as follows:
• When hedged with cross-currency swaps, the change in fair
value of the derivative attributable to cross-currency basis
spread changes component is excluded from the assessment
of hedge effectiveness. The initial fair value of the excluded
component is amortized to net interest income. For these
hedges, the difference between changes in fair value of the
excluded component and the amount recorded in earnings
is recorded in OCI.
• When hedged with foreign currency forward derivatives, the
change in fair value of the derivative attributable to the time
value component related to the changes in the difference
between the spot and forward price is excluded from the
assessment of hedge effectiveness. For these hedges, the
changes in fair value of the excluded component are
recorded in net interest income.
CASH FLOW HEDGES For a cash flow hedge, we record
changes in the fair value of the derivative in OCI. We
subsequently reclassify gains and losses from these changes in
fair value from OCI to net income in the same period(s) that the
hedged transaction affects net income and in the same income
statement category as the hedged item, thus to net interest
income. The entire gain or loss on these derivatives is included
in the assessment of hedge effectiveness.
DISCONTINUING HEDGE ACCOUNTING 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 no longer
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 remaining 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 noninterest income.
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 net income at which point the related OCI amount is
reclassified to net income. If cash flow hedge accounting is
discontinued and it is probable the forecasted transaction will no
longer occur, the accumulated gains and losses reported in OCI
at the de-designation date is immediately reclassified to net
income. 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 changes in fair value included in
noninterest income.
EMBEDDED DERIVATIVES 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 net income, 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 noninterest income.
COUNTERPARTY CREDIT RISK AND NETTING 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. Counterparty credit
risk related to derivatives is considered in determining fair value
and our assessment of hedge effectiveness. 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. In the second quarter of 2017, we adopted
Settlement to Market treatment for the cash collateralizing our
interest rate derivative contracts with certain centrally cleared
counterparties. As a result of this adoption, derivative balances
with these counterparties are considered settled by the collateral.
For additional information on our derivatives and hedging
activities, see Note 16 (Derivatives).
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.
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Wells Fargo & Company
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 using a yield curve
with maturity dates that closely match the estimated timing of
the expected benefit payments for our plans. The yield curve is
derived from a broad-based universe of high quality corporate
bonds as of the measurement date.
Benefits and Other Expenses) for additional information on our
pension accounting.
Income Taxes
We file consolidated and separate company U.S. 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 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. Deferred income tax expense
results from changes in deferred tax assets and liabilities
between periods. 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 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. We account for interest and penalties
as a component of income tax expense. We do not record U.S.
tax on undistributed earnings of certain non-U.S. subsidiaries to
the extent the earnings are indefinitely reinvested outside of the
U.S. Foreign taxes paid are generally applied as credits to reduce
U.S. income taxes payable. In 2017, we did however, record an
estimate of the U.S. tax expense associated with a deemed
repatriation as required under the Tax Act.
Our determination of the reasonableness of our expected
See Note 22 (Income Taxes) to Financial Statements in this
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, 2017, is 20 years. See Note 21 (Employee
Report for a further description of our provision for income
taxes and related income tax assets and liabilities.
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 conditions that can result in forfeiture 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.
Wells Fargo & Company
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Note 1: Summary of Significant Accounting Policies (continued)
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.
Private Share Repurchases
During 2017 and 2016, we repurchased approximately 89
million shares and 56 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 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 capital plans, 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.
We had no unsettled private share repurchase contracts at
December 31, 2017. At December 31, 2016, we had a
$750 million private forward repurchase contract outstanding
that settled in first quarter 2017 for 14.7 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.
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.
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Wells Fargo & Company
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)
Year ended December 31,
2017
2016
2015
Trading assets retained from securitizations of MHFS
$
52,435
72,399
46,291
Transfers from loans to MHFS
Transfers from available-for-sale to held-to-maturity securities
Deconsolidation of reverse mortgages previously sold:
Loans
Long-term debt
SUBSEQUENT EVENTS We have evaluated the effects of events
that have occurred subsequent to December 31, 2017, and there
have been no material events that would require recognition in
our 2017 consolidated financial statements or disclosure in the
Notes to the consolidated financial statements.
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. We also periodically
review existing businesses to ensure they remain strategically
aligned with our operating business model and risk profile.
Table 2.1: Business Combinations Activity
Name of acquisition
2017:
5,500
50,405
—
—
6,894
4,161
3,807
3,769
9,205
4,972
—
—
Business combinations completed in 2017, 2016 and 2015
are presented in Table 2.1. As of December 31, 2017, we had no
pending acquisitions.
Location
Type of business
Date
Total assets
(in millions)
Golden Capital Management, LLC
Charlotte, NC
Asset Management
July 1 $
83
2016:
GE Railcar Services
Chicago, IL
Railcar and locomotive leasing
January 1 $
4,339
GE Capital's Commercial Distribution Finance and
Vendor Finance Businesses
North America, Asia,
Australia / New Zealand and
EMEA
Specialty Lending
March 1, July
1, August 1 &
October 1
Analytic Investors, LLC
Los Angeles, CA
Asset Management
October 1
32,531
106
$
36,976
2015:
hs.Financial Products GmbH
Germany
Asset Management
November 30 $
3
We also completed one significant divestiture in 2017. On
November 30, 2017, we completed the divestiture of Wells Fargo
Insurance Services, USA. The transaction resulted in a pre-tax
gain for 2017 of $848 million.
Wells Fargo & Company
157
Note 3: Cash, Loan and Dividend Restrictions
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 large 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 the FRB’s 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 $0.39 per share as declared by
the Company’s Board of Directors on January 23, 2018, payable
on March 1, 2018.
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 $12.3 billion in
2017 and $10.7 billion in 2016.
Federal law restricts the amount and the terms of both
credit and non-credit transactions between a bank and its
nonbank affiliates. These covered transactions 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 27
(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 $20.9 billion at December 31, 2017. We have elected
to retain higher capital at our national and state-chartered
subsidiary banks in order to meet internal capital policy
minimums and regulatory requirements. 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. In addition, under
a Support Agreement dated June 28, 2017 among Wells Fargo &
Company, the parent holding company (the “Parent”), WFC
Holdings, LLC, an intermediate holding company and subsidiary
of the Parent (the “IHC”), and Wells Fargo Bank, N.A., Wells
Fargo Securities, LLC, and Wells Fargo Clearing Services, LLC,
each an indirect subsidiary of the Parent, the IHC may be
restricted from making dividend payments to the Parent if
certain liquidity and/or capital metrics fall below defined
triggers. Based on retained earnings at December 31, 2017, our
nonbank subsidiaries could have declared additional dividends
of $23.9 billion at December 31, 2017, without obtaining prior
approval.
158
Wells Fargo & Company
Note 4: Federal Funds Sold, Securities Purchased under Resale Agreements and Other
Short-Term Investments
We have classified securities purchased under long-term
resale agreements (generally one year or more), which totaled
$19.0 billion and $21.3 billion in loans at December 31, 2017 and
2016, respectively. 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 in Note 14 (Guarantees, Pledged Assets and
Collateral, and Other Commitments).
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. Substantially
all of the interest-earning deposits at December 31, 2017 and
2016 were held at Federal Reserve Banks.
Table 4.1: Fed Funds Sold and Other Short-Term Investments
(in millions)
Dec 31,
2017
Dec 31,
2016
Federal funds sold and securities
purchased under resale agreements $
78,999
58,215
Interest-earning deposits
192,580
200,671
Other short-term investments
1,026
7,152
Total
$ 272,605
266,038
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
$2.8 billion and $2.9 billion as of December 31, 2017 and 2016,
respectively.
Wells Fargo & Company
159
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, 2017
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:
$
6,425
50,733
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:
2
1,032
930
254
80
(108)
(439)
6,319
51,326
(1,272)
160,219
(2)
(2)
4,608
4,565
1,264
(1,276)
169,392
363
384
137
(40)
(3)
(5)
7,666
36,056
5,648
3,182
(1,871)
276,407
3
160
163
(9)
(8)
(17)
358
320
678
160,561
4,356
4,487
169,404
7,343
35,675
5,516
275,096
364
168
532
275,628
3,345
(1,888)
277,085
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Federal agency and other mortgage-backed securities (3)
Collateralized loan obligations
Other (2)
Total held-to-maturity securities
Total (4)
44,720
6,313
87,527
661
114
139,335
189
84
201
4
—
478
$
414,963
3,823
December 31, 2016
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 and other mortgage-backed securities (3)
Collateralized loan obligations
Other (2)
Total held-to-maturity securities
Total (4)
$
25,874
52,121
163,513
7,375
8,475
179,363
11,186
34,764
6,139
309,447
445
261
706
310,153
44,690
6,336
45,161
1,065
2,331
99,583
54
551
1,175
449
101
1,725
381
287
104
3,102
35
481
516
3,618
466
17
100
6
10
599
$
409,736
4,217
(103)
(43)
(682)
—
—
(828)
(2,716)
(109)
(1,571)
(3,458)
(8)
(74)
(3,540)
(110)
(31)
(35)
(5,396)
(11)
—
(11)
44,806
6,354
87,046
665
114
138,985
416,070
25,819
51,101
161,230
7,816
8,502
177,548
11,457
35,020
6,208
307,153
469
742
1,211
(5,407)
308,364
(77)
(144)
(804)
(1)
(1)
(1,027)
(6,434)
45,079
6,209
44,457
1,070
2,340
99,155
407,519
(1) The available-for-sale portfolio includes collateralized debt obligations (CDOs) with a cost basis and fair value of $887 million and $1.0 billion, respectively, at December 31,
2017, and $819 million and $847 million, respectively, at December 31, 2016.
(2) The “Other” category of available-for-sale securities largely includes asset-backed securities collateralized by student loans. Included in the “Other” category of held-to
maturity securities are asset-backed securities collateralized by automobile leases or loans and cash with a cost basis and fair value of $114 million each at December 31,
2017, and $1.3 billion each at December 31, 2016. 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 $0 billion each at December 31, 2017, and $1.1 billion each at December 31, 2016.
(3) Predominantly consists of federal agency mortgage-backed securities at December 31, 2017 and December 31, 2016.
(4) At December 31, 2017 and 2016, 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 stockholder's equity.
160
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, 2017
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
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
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 and other mortgage-backed
securities
Collateralized loan obligations
Other
Total held-to-maturity securities
Total
December 31, 2016
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
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 and other mortgage-backed securities
Collateralized loan obligations
Other
Total held-to-maturity securities
Total
$
(27)
(17)
(243)
(1)
(1)
(245)
(4)
(1)
(1)
(295)
(1)
(8)
(9)
(304)
4,065
6,179
52,559
47
101
52,707
239
373
37
63,600
62
53
115
63,715
(81)
(422)
2,209
11,766
(108)
(439)
6,274
17,945
(1,029)
(1)
(1)
(1,031)
(36)
(2)
(4)
(1,576)
(8)
—
(8)
(1,584)
44,691
58
133
44,882
503
146
483
59,989
78
—
78
60,067
(1,272)
(2)
(2)
(1,276)
(40)
(3)
(5)
(1,871)
(9)
(8)
(17)
(1,888)
97,250
105
234
97,589
742
519
520
123,589
140
53
193
123,782
(69)
(5)
11,255
500
(34)
(38)
1,490
1,683
(103)
(43)
12,745
2,183
(198)
29,713
(484)
28,244
(682)
57,957
—
—
(272)
(576)
—
—
41,468
105,183
—
—
(556)
(2,140)
—
—
31,417
91,484
—
—
(828)
(2,716)
—
—
72,885
196,667
(109)
(341)
10,816
17,412
(3,338)
(4)
(43)
(3,385)
(11)
(2)
(9)
(3,857)
(3)
—
(3)
(3,860)
(77)
(144)
(804)
—
—
(1,025)
(4,885)
120,735
527
1,459
122,721
946
1,899
971
154,765
41
—
41
154,806
6,351
4,871
40,095
—
—
51,317
206,123
—
(1,230)
(120)
(4)
(31)
(155)
(99)
(29)
(26)
(1,539)
(8)
—
(8)
(1,547)
—
—
—
(1)
(1)
(2)
(1,549)
—
16,213
3,481
245
1,690
5,416
1,229
3,197
1,262
27,317
45
—
45
27,362
—
—
—
266
633
899
28,261
(109)
(1,571)
(3,458)
(8)
(74)
(3,540)
(110)
(31)
(35)
(5,396)
(11)
—
(11)
(5,407)
(77)
(144)
(804)
(1)
(1)
(1,027)
(6,434)
10,816
33,625
124,216
772
3,149
128,137
2,175
5,096
2,233
182,082
86
—
86
182,168
6,351
4,871
40,095
266
633
52,216
234,384
Wells Fargo & Company
161
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 generally
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 usually 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 with
unrealized losses 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 generally 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 predominantly
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 predominantly backed
by commercial collateral. The unrealized losses are typically
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 usually 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.
162
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 $32 million and
$6.9 billion, respectively, at December 31, 2017, and $54 million
and $7.0 billion, respectively, at December 31, 2016. 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, 2017
Available-for-sale securities:
Investment grade
Non-investment grade
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
$
(108)
(412)
6,274
17,763
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
Securities of U.S. states and political subdivisions
Federal agency and other mortgage-backed securities
Collateralized loan obligations
Other
Total held-to-maturity securities
Total
December 31, 2016
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
Securities of U.S. states and political subdivisions
Federal agency and other mortgage-backed securities
Collateralized loan obligations
Other
Total held-to-maturity securities
Total
(1,272)
97,250
(1)
(1)
42
183
(1,274)
97,475
(13)
(3)
(2)
304
519
469
(1,812)
122,804
(8)
122
(1,820)
122,926
(103)
(43)
(680)
—
—
(826)
$
(2,646)
12,745
2,183
57,789
—
—
72,717
195,643
$
(109)
(1,517)
10,816
33,271
(3,458)
124,216
(1)
(15)
176
2,585
(3,474)
126,977
(31)
(31)
(30)
(5,192)
(10)
(5,202)
(77)
(144)
(803)
(1)
(1)
(1,026)
(6,228)
1,238
5,096
1,842
179,240
68
179,308
6,351
4,871
40,078
266
633
52,199
231,507
$
Wells Fargo & Company
—
(27)
—
(1)
(1)
(2)
(27)
—
(3)
(59)
(1)
(60)
—
—
(2)
—
—
(2)
(62)
—
(54)
—
(7)
(59)
(66)
(79)
—
(5)
(204)
(1)
(205)
—
—
(1)
—
—
(1)
—
182
—
63
51
114
438
—
51
785
18
803
—
—
168
—
—
168
971
—
354
—
596
564
1,160
937
—
391
2,842
18
2,860
—
—
17
—
—
17
(206)
2,877
163
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, 2017
Available-for-sale debt securities (1):
Fair value:
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
$
6,319
1.59% $
81
1.37% $ 6,189
1.59% $
49
1.89% $
—
—%
51,326
5.88
2,380
3.47
9,484
3.42
2,276
4.63
37,186
6.75
Federal agencies
Residential
Commercial
160,219
4,608
4,565
Total mortgage-backed securities
169,392
3.27
3.52
3.45
3.28
5.12
2.98
2.46
15
2.03
—
—
—
—
210
24
—
3.08
5.67
—
5,534
11
166
2.82
2.46
2.69
154,460
4,573
4,399
3.28
3.51
3.48
15
2.03
234
3.35
5,711
2.82
163,432
3.30
443
5.54
2,738
5.56
3,549
4.70
936
5.26
—
—
50
1.68
15,008
2.96
20,998
3.00
71
3.56
463
2.72
1,466
2.13
3,648
2.53
7,666
36,056
5,648
Corporate debt securities
Collateralized loan and other debt
obligations
Other
Total available-for-sale debt
securities at fair value
December 31, 2016
Available-for-sale debt securities (1):
Fair value:
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
fair value
$ 276,407
3.72% $ 2,990
3.70% $ 19,158
3.11% $ 28,059
3.24% $226,200
3.83%
$
25,819
1.44 % $
1,328
0.92 % $ 23,477
1.45 % $
1,014
1.80 % $
—
— %
51,101
5.65
2,990
1.69
9,299
2.74
2,391
4.71
36,421
6.78
161,230
7,816
8,502
177,548
11,457
35,020
6,208
3.09
3.84
4.58
3.19
4.81
2.70
2.18
—
—
—
—
—
—
—
—
128
25
—
153
2.98
5.21
—
3.34
5,363
35
30
5,428
3.16
4.34
3.13
3.16
155,739
7,756
8,472
171,967
3.09
3.83
4.59
3.19
2,043
2.90
3,374
5.89
4,741
4.71
1,299
5.38
—
57
—
3.06
168
971
1.34
2.35
16,482
1,146
2.66
2.04
18,370
4,034
2.74
2.17
$
307,153
3.44 % $
6,418
1.93 % $ 37,442
2.20 % $ 31,202
3.17 % $ 232,091
3.72 %
(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.
164
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, 2017
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 and other
mortgage-backed securities
Collateralized loan obligations
Other
$
44,720
2.12% $
6,313
6.02
87,527
661
114
3.11
2.86
1.83
Total held-to-maturity debt
securities at amortized cost
$
139,335
2.92% $
December 31, 2016
Held-to-maturity securities (1):
Amortized cost:
Securities of U.S. Treasury and federal
agencies
$
44,690
2.12 % $
Securities of U.S. states and political
subdivisions
Federal agency and other mortgage-
backed securities
Collateralized loan obligations
Other
Total held-to-maturity debt
securities at amortized cost
6,336
6.04
45,161
1,065
2,331
3.23
2.58
1.83
$
99,583
2.87 % $
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
—
—
—
—
—
—
—
—
—
—
—
—
—% $ 32,330
2.04% $ 12,390
2.32% $
—
—%
—
—
—
—
50
7.18
695
6.31
5,568
5.98
15
—
2.81
—
114
1.83
11
661
—
2.49
2.86
—
87,501
3.11
—
—
—
—
—% $ 32,509
2.05% $ 13,757
2.55% $ 93,069
3.28%
— % $ 31,956
2.05 % $ 12,734
2.30 % $
—
— %
—
—
—
—
24
8.20
436
6.76
5,876
5.98
—
—
1,683
—
—
1.81
—
1,065
648
—
2.58
1.89
45,161
3.23
—
—
—
—
— %
$ 33,663
2.04 %
$ 14,883
2.43 %
$ 51,037
3.55 %
(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, 2017
Held-to-maturity securities:
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
Securities of U.S. Treasury and federal
agencies
Securities of U.S. states and political
subdivisions
Federal agency and other mortgage-backed
securities
Collateralized loan obligations
Other
$
44,806
6,354
87,046
665
114
Total held-to-maturity debt securities at
fair value
$
138,985
December 31, 2016
Held-to-maturity securities:
Fair value:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
$
Federal agency and other mortgage-backed
securities
Collateralized loan obligations
Other
Total held-to-maturity debt securities at fair
value
$
45,079
6,209
44,457
1,070
2,340
99,155
—
—
—
—
—
—
—
—
—
—
—
—
Wells Fargo & Company
32,388
12,418
49
15
—
114
701
11
665
—
—
5,604
87,020
—
—
32,566
13,795
92,624
32,313
24
—
—
1,688
34,025
12,766
430
—
1,070
652
14,918
—
5,755
44,457
—
—
50,212
165
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
Year ended December 31,
2017
$ 1,409
(207)
(267)
935
812
2016
1,542
(106)
(194)
1,242
579
2015
1,775
(67)
(185)
1,523
1,659
3,182
Net realized gains from debt securities and equity investments
$ 1,747
1,821
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, 2017, 2016 or 2015.
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:
Residential
Commercial
Corporate debt securities
Other debt securities
Total debt securities
Equity securities:
Marketable equity securities:
Other marketable equity securities
Total marketable equity securities
Total investment securities (1)
Nonmarketable equity investments (1)
Total OTTI write-downs included in earnings (1)
Year ended December 31,
2017
2016
2015
$
150
11
80
21
—
63
34
14
72
6
262
189
5
5
267
339
$
606
5
5
194
448
642
18
54
4
105
2
183
2
2
185
374
559
(1) The years ended December 31, 2017, 2016 and 2015, include $86 million, $258 million and $287 million, respectively, in OTTI write-downs of oil and gas investments, of
which $24 million, $88 million and $104 million, respectively, related to investment securities and $62 million, $170 million and $183 million, respectively, related to
nonmarketable equity investments.
166
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
Other debt securities
Total changes to OCI for non-credit-related OTTI
Total OTTI losses recorded on debt securities
Year ended December 31,
2017
2016
2015
$
119
143
262
(5)
(1)
(51)
1
(1)
(57)
$
205
143
46
189
8
(3)
24
(13)
2
18
207
169
14
183
(1)
(42)
(16)
12
—
(47)
136
(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,
2017
$ 1,043
2016
1,092
2015
1,025
9
110
119
85
58
143
(414)
(184)
(6)
(8)
102
67
169
(93)
(9)
(420)
(192)
(102)
$
742
1,043
1,092
(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
167
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 $3.9 billion and $4.4 billion at
December 31, 2017 and 2016, 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
2017
2016
2015
2014
2013
December 31,
$
333,125
330,840
299,892
271,795
235,358
126,599
132,491
122,160
111,996
112,427
24,279
19,385
23,916
19,289
22,164
12,367
18,728
12,307
16,934
12,371
503,388
506,536
456,583
414,826
377,090
284,054
275,579
273,869
265,386
258,507
39,713
37,976
53,371
38,268
46,237
36,700
62,286
40,266
53,004
34,039
59,966
39,098
59,717
31,119
55,740
35,763
65,950
26,882
50,808
43,049
453,382
461,068
459,976
447,725
445,196
$
956,770
967,604
916,559
862,551
822,286
address is outside of the United States. Table 6.2 presents total
commercial foreign loans outstanding by class of financing
receivable.
2017
2016
2015
2014
2013
December 31,
$
60,106
8,033
655
1,126
55,396
8,541
375
972
49,049
8,350
444
274
44,707
4,776
218
336
41,547
5,328
187
338
Total commercial foreign loans
$
69,920
65,284
58,117
50,037
47,400
168
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, 2017 and 2016, 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. Real estate 1-4 family non-PCI
mortgage loans to borrowers in the state of California
represented 12% of total loans at December 31, 2017, compared
with 11% at December 31, 2016, and PCI loans were under 1% in
both years. These California loans are generally diversified
among the larger metropolitan areas in California, with no single
area consisting of more than 4% 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 4% of
total loans at December 31, 2017, and 7% at December 31, 2016.
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,
2017, approximately 1% 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 draw periods of 10, 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
Table 6.3: Loan Purchases, Sales, and Transfers
interest. During the draw period, the borrower has the option of
converting all or a portion of the line from a variable interest rate
to a fixed rate with terms including interest-only payments for a
fixed period between three to seven years or a fully amortizing
payment with a fixed period between five to 30 years. At the end
of the draw period, a line of credit generally converts to an
amortizing payment schedule with repayment terms of up to
30 years based on the balance at time of conversion. At
December 31, 2017, our lines of credit portfolio had an
outstanding balance of $49.9 billion, of which $12.3 billion, or
25%, is in its amortization period, another $3.0 billion, or 6%, of
our total outstanding balance, will reach their end of draw period
during 2018 through 2019, $9.3 billion, or 19%, during 2020
through 2022, and $25.3 billion, or 50%, will convert in
subsequent years. This portfolio had unfunded credit
commitments of $62.3 billion at December 31, 2017. The lines
that enter their amortization period may experience higher
delinquencies and higher loss rates than the lines in their draw
period. At December 31, 2017, $575 million, or 5%, of
outstanding lines of credit that are in their amortization period
were 30 or more days past due, compared with $690 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
Sales
Transfers to MHFS/LHFS
Commercial
Consumer (1)
2017
Total
Commercial (2)
Consumer (1)
$
3,675
(2,066)
(736)
2
3,677
(425)
(2,491)
(2)
(738)
32,710
(1,334)
(306)
5
(1,486)
(6)
2016
Total
32,715
(2,820)
(312)
(1) Excludes 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.
(2) Purchases include loans and capital leases from the 2016 GE Capital business acquisitions.
Year ended December 31,
Wells Fargo & Company
169
Note 6: Loans and Allowance for Credit Losses (continued)
Commitments to Lend
A commitment to lend is a legally binding agreement to lend
funds to a customer, usually at a stated interest rate, if funded,
and for specific purposes and time periods. We generally require
a fee to extend such commitments. Certain commitments are
subject to loan agreements with covenants regarding the
financial performance of the customer or borrowing base
formulas on an ongoing basis that must be met before we are
required to fund the commitment. We may reduce or cancel
consumer commitments, including home equity lines and credit
card lines, in accordance with the contracts and applicable law.
We may, as a representative for other lenders, advance
funds or provide for the issuance of letters of credit under
syndicated loan or letter of credit agreements. Any advances are
generally repaid in less than a week and would normally require
default of both the customer and another lender to expose us to
loss. These temporary advance arrangements totaled
approximately $85 billion at December 31, 2017, and $77 billion
at December 31, 2016.
We issue commercial letters of credit to assist customers in
purchasing goods or services, typically for international trade. At
December 31, 2017 and 2016, we had $982 million and
$1.1 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, and Other Commitments) 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,
automobiles, 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 issued
standby and commercial letters of credit and temporary advance
arrangements described above.
Table 6.4: Unfunded Credit Commitments
(in millions)
Commercial:
Dec 31,
2017
Dec 31,
2016
Commercial and industrial
$ 326,626
319,662
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
7,485
7,833
16,621
18,840
—
16
350,732
346,351
Real estate 1-4 family first mortgage
29,876
33,498
Real estate 1-4 family
junior lien mortgage
Credit card
38,897
41,431
108,465
101,895
Other revolving credit and installment
27,541
28,349
Total consumer
204,779
205,173
Total unfunded
credit commitments
$ 555,511
551,524
170
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
Net loan charge-offs
Other
Balance, end of year
Components:
Allowance for loan losses
Allowance for unfunded credit commitments
Allowance for credit losses
Net loan charge-offs as a percentage of average total loans
Allowance for loan losses as a percentage of total loans
Allowance for credit losses as a percentage of total loans
Year ended December 31,
2017
2016
2015
2014
2013
$ 12,540
12,512
13,169
14,971
17,477
2,528
(186)
3,770
(205)
2,442
(198)
1,395
(211)
2,309
(264)
(789)
(38)
—
(45)
(872)
(240)
(279)
(1,481)
(1,002)
(713)
(3,715)
(4,587)
297
82
30
17
426
288
266
239
319
121
(1,419)
(734)
(627)
(27)
(1)
(41)
(59)
(4)
(14)
(66)
(9)
(15)
(1,488)
(811)
(717)
(452)
(495)
(507)
(635)
(721)
(864)
(1,259)
(1,116)
(1,025)
(845)
(708)
(742)
(643)
(729)
(668)
(739)
(190)
(28)
(34)
(991)
(1,439)
(1,579)
(1,022)
(625)
(754)
(3,759)
(3,643)
(4,007)
(5,419)
(5,247)
(4,454)
(4,724)
(6,410)
263
116
38
11
428
373
266
207
325
128
252
127
37
8
424
245
259
175
325
134
369
160
136
8
673
212
238
161
349
146
396
226
137
17
776
246
269
127
322
161
1,233
1,659
1,299
1,727
1,138
1,562
1,106
1,779
1,125
1,901
(2,928)
(3,520)
(2,892)
(2,945)
(4,509)
6
(17)
(9)
(41)
(42)
$ 11,960
12,540
12,512
13,169
14,971
$ 11,004
956
$ 11,960
0.31%
1.15
1.25
11,419
1,121
12,540
0.37
1.18
1.30
11,545
12,319
14,502
967
850
469
12,512
13,169
14,971
0.33
1.26
1.37
0.35
1.43
1.53
0.56
1.76
1.82
(1) Certain impaired loans with an allowance calculated by discounting expected cash flows using the loan’s effective interest rate over the remaining life of the loan recognize
changes in allowance attributable to the passage of time as interest income.
Wells Fargo & Company
171
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 (reversal of 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
2017
$
7,394
(261)
(59)
5,146
2,789
12,540
2,528
6,872
1,644
5,640
2,126
(127)
(186)
(45)
(160)
(205)
2016
Total
12,512
3,770
(872)
(3,715)
(4,587)
(1,488)
(3,759)
(5,247)
426
1,233
1,659
428
1,299
1,727
(446)
(2,482)
(2,928)
(1,060)
(2,460)
(3,520)
4
2
6
(17)
—
(17)
$
6,632
5,328
11,960
7,394
5,146
12,540
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, 2017
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
December 31, 2016
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
Allowance for credit losses
Recorded investment in loans
Commercial
Consumer
Total
Commercial
Consumer
Total
$
5,927
705
—
4,143
1,185
—
10,070
499,342
425,919
925,261
1,890
—
3,960
14,714
18,674
86
12,749
12,835
$
6,632
5,328
11,960
503,388
453,382
956,770
$
6,392
1,000
2
3,553
1,593
—
9,945
2,593
2
500,487
428,009
928,496
5,372
677
17,005
16,054
22,377
16,731
$
7,394
5,146
12,540
506,536
461,068
967,604
(1) Represents loans collectively evaluated for impairment in accordance with Accounting Standards Codification (ASC) 450-20, Loss Contingencies (formerly FAS 5), and
pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.
(2) Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20
regarding allowance for impaired loans.
(3) Represents the allowance and related loan carrying value determined in accordance with ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated
Credit Quality (formerly SOP 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). We obtain FICO scores at loan
origination and the scores are generally updated at least
quarterly, except in limited circumstances, including compliance
with the Fair Credit Reporting Act (FCRA). Generally, the LTV
and CLTV indicators are updated in the second month of each
quarter, with updates no older than September 30, 2017. See the
“Purchased Credit-Impaired Loans” section in 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 $16.6 billion in criticized
commercial and industrial loans and $4.6 billion in criticized
commercial real estate (CRE) loans at December 31, 2017,
$1.9 billion and $665 million, respectively, have been placed on
nonaccrual status and written down to net realizable collateral
value.
172
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, 2017
By risk category:
Pass
Criticized
$
316,431
122,312
23,981
16,608
4,287
298
18,162
1,223
19,385
—
480,886
22,416
503,302
86
Total commercial loans (excluding PCI)
333,039
126,599
24,279
Total commercial PCI loans (carrying value)
86
—
—
Total commercial loans
$
333,125
126,599
24,279
19,385
503,388
December 31, 2016
By risk category:
Pass
Criticized
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
$
308,166
126,793
22,437
5,315
330,603
132,108
237
383
23,408
451
23,859
57
17,899
1,390
19,289
—
476,266
29,593
505,859
677
Total commercial loans
$
330,840
132,491
23,916
19,289
506,536
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, 2017
By delinquency status:
Commercial
and industrial
Real estate
mortgage
Real estate
construction
Lease
financing
Total
Current-29 days past due (DPD) and still accruing
$
330,319
125,642
24,107
19,148
499,216
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
795
26
1,899
306
23
628
135
—
37
161
—
76
1,397
49
2,640
Total commercial loans (excluding PCI)
333,039
126,599
24,279
19,385
503,302
Total commercial PCI loans (carrying value)
86
—
—
—
86
Total commercial loans
$
333,125
126,599
24,279
19,385
503,388
December 31, 2016
By delinquency status:
Current-29 DPD and still accruing
$
326,765
131,165
23,776
19,042
500,748
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
594
28
3,216
222
36
685
40
—
43
132
—
115
988
64
4,059
Total commercial loans (excluding PCI)
330,603
132,108
23,859
19,289
505,859
Total commercial PCI loans (carrying value)
237
383
57
—
677
Total commercial loans
$
330,840
132,491
23,916
19,289
506,536
Wells Fargo & Company
173
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, 2017
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
$ 251,786
38,746
36,996
51,445
37,885
416,858
1,893
742
369
308
1,091
15,143
336
163
103
95
243
—
287
201
192
298
2
—
1,385
155
392
146
3
—
—
93
80
30
25
—
4,056
1,591
890
734
1,361
15,143
Total consumer loans (excluding PCI)
271,332
39,686
37,976
53,371
38,268
440,633
Total consumer PCI loans (carrying value)
12,722
27
—
—
—
12,749
Total consumer loans
$ 284,054
39,713
37,976
53,371
38,268
453,382
December 31, 2016
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)
$ 239,061
45,238
35,773
1,904
700
307
323
1,661
15,605
259,561
16,018
296
160
102
108
297
—
275
200
169
279
4
—
60,572
1,262
330
116
5
1
—
39,833
420,477
177
111
93
30
22
—
3,914
1,501
787
745
1,985
15,605
46,201
36,700
62,286
40,266
445,014
36
—
—
—
16,054
Total consumer loans
$ 275,579
46,237
36,700
62,286
40,266
461,068
(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
$10.5 billion at December 31, 2017, compared with $10.1 billion at December 31, 2016.
Of the $3.0 billion of consumer loans not government
insured/guaranteed that are 90 days or more past due at
December 31, 2017, $1.0 billion was accruing, compared with
$3.5 billion past due and $908 million accruing at December 31,
2016.
Real estate 1-4 family first mortgage loans 180 days or more
past due totaled $1.1 billion, or 0.4% of total first mortgages
(excluding PCI), at December 31, 2017, compared with
$1.7 billion, or 0.6%, at December 31, 2016.
Table 6.11 provides a breakdown of our consumer portfolio
by FICO. The December 31, 2017, FICO scores for real estate 1-4
family first and junior lien mortgages reflect a new FICO score
version we adopted in first quarter 2017 to monitor and manage
those portfolios. In general, the impact for us is a shift to higher
scores, particularly to the 800+ level, as the new FICO score
version utilizes a more refined approach that better distinguishes
borrower credit risk. Most of the scored consumer portfolio has
an updated FICO of 680 and above, reflecting a strong current
borrower credit profile. FICO is not available for certain loan
types, or may not be required if we deem it unnecessary due to
strong collateral and other borrower attributes. Substantially all
loans not requiring a FICO score are securities-based loans
originated through retail brokerage, and totaled $8.5 billion at
December 31, 2017, and $8.0 billion at December 31, 2016.
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Wells Fargo & Company
Table 6.11: Consumer Loans by FICO
(in millions)
December 31, 2017
By FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
FICO not required
Real estate 1-4
family first
mortgage (1)
Real estate
1-4 family
junior lien
mortgage (1)
Credit card
Automobile
Other revolving
credit and
installment (1)
Total
$
5,145
3,487
6,789
14,977
27,926
55,590
136,729
5,546
—
1,768
1,253
2,387
4,797
6,246
7,323
15,144
768
—
—
3,525
3,101
5,690
7,628
8,097
6,372
2,994
569
—
—
8,858
5,615
7,696
8,825
7,806
6,468
7,845
258
—
—
863
904
1,959
3,582
5,089
6,257
8,455
2,648
8,511
20,159
14,360
24,521
39,809
55,164
82,010
171,167
9,789
8,511
—
15,143
Government insured/guaranteed loans (2)
15,143
Total consumer loans (excluding PCI)
271,332
39,686
37,976
53,371
38,268
440,633
Total consumer PCI loans (carrying value)
12,722
27
—
—
—
12,749
Total consumer loans
$
284,054
39,713
37,976
53,371
38,268
453,382
December 31, 2016
By FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
FICO not required
Government insured/guaranteed loans (2)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
$
6,720
5,400
10,975
23,300
38,832
103,608
49,508
5,613
—
15,605
259,561
16,018
2,591
1,917
3,747
6,432
9,413
14,929
6,391
781
—
—
3,475
3,109
5,678
7,382
7,632
6,191
2,868
365
—
—
9,934
6,705
10,204
11,233
8,769
8,164
6,856
421
—
—
976
1,056
2,333
4,302
5,869
8,348
6,434
2,906
8,042
—
23,696
18,187
32,937
52,649
70,515
141,240
72,057
10,086
8,042
15,605
46,201
36,700
62,286
40,266
445,014
36
—
—
—
16,054
Total consumer loans
$
275,579
46,237
36,700
62,286
40,266
461,068
(1) The December 31, 2017, amounts reflect updated FICO score version implemented in first quarter 2017.
(2) 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 due to industry
data availability and portfolios acquired from or serviced by
other institutions.
Wells Fargo & Company
175
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.12: Consumer Loans by LTV/CLTV
December 31, 2017
December 31, 2016
(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
$ 133,902
16,301
150,203
104,639
12,918
117,557
13,924
1,868
783
1,073
15,143
6,580
2,427
1,008
452
—
20,504
4,295
1,791
1,525
121,430
101,726
15,795
2,644
1,066
1,295
15,143
15,605
16,464
15,262
8,765
3,589
1,613
508
—
Total
137,894
116,988
24,560
6,233
2,679
1,803
15,605
Total consumer loans (excluding PCI)
271,332
39,686
311,018
259,561
46,201
305,762
Total consumer PCI loans (carrying value)
12,722
27
12,749
16,018
36
16,054
Total consumer loans
$ 284,054
39,713
323,767
275,579
46,237
321,816
(1) Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess of
100% LTV/CLTV.
(2) Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.
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 $6.3 billion and $8.1 billion at December 31, 2017 and 2016,
respectively, which included $4.0 billion and $4.8 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:
Dec 31,
Dec 31,
2017
2016
Commercial and industrial
$
1,899
3,216
Real estate mortgage
Real estate construction
Lease financing
Total commercial
Consumer:
628
37
76
685
43
115
2,640
4,059
Real estate 1-4 family first mortgage (1)
4,122
4,962
Real estate 1-4 family junior lien
mortgage
Automobile
Other revolving credit and installment
Total consumer
Total nonaccrual loans
(excluding PCI)
1,086
1,206
130
58
106
51
5,396
6,325
$
8,036
10,384
(1)
Includes MHFS of $136 million and $149 million at December 31, 2017 and
2016, respectively.
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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 $1.4 billion at December 31, 2017, and
$2.0 billion at December 31, 2016, 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)
Dec 31,
Dec 31,
2017
2016
Total (excluding PCI):
$ 11,997
11,858
Less: FHA insured/guaranteed by the VA
(1)(2)
10,934
10,883
Less: Student loans guaranteed under
the Federal Family Education Loan
Program (FFELP) (3)
—
3
Total, not government
insured/guaranteed
$
1,063
972
By segment and class, not government
insured/guaranteed:
Commercial:
Commercial and industrial
$
Real estate mortgage
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
26
23
49
219
60
492
143
100
Total consumer
Total, not government
insured/guaranteed
1,014
$
1,063
28
36
64
175
56
452
112
113
908
972
(1) Represents loans whose repayments are predominantly insured by the FHA or
(2)
guaranteed by the VA.
Includes mortgage loans held for sale 90 days or more past due and still
accruing.
(3) Represents loans whose repayments are largely guaranteed by agencies on
behalf of the U.S. Department of Education under the FFELP. All remaining
student loans guaranteed under the FFELP were sold as of March 31, 2017.
Wells Fargo & Company
177
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 $194 million at December 31, 2017, and $299 million at
December 31, 2016.
For additional information on our impaired loans and
allowance for credit losses, see Note 1 (Summary of Significant
Accounting Policies).
(in millions)
December 31, 2017
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, 2016
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
$
3,577
1,502
95
132
2,568
1,239
54
99
2,310
1,207
45
89
5,306
3,960
3,651
14,020
2,135
356
157
136
16,804
$
22,110
$
5,058
1,777
167
146
7,148
16,438
2,399
300
153
109
19,399
$
26,547
12,225
1,918
356
87
128
14,714
18,674
3,742
1,418
93
119
5,372
14,362
2,156
300
85
102
17,005
22,377
6,060
1,421
356
34
117
7,988
11,639
3,418
1,396
93
119
5,026
9,475
1,681
300
31
91
11,578
16,604
462
211
9
23
705
770
245
136
5
29
1,185
1,890
675
280
22
23
1,000
1,117
350
104
5
17
1,593
2,593
(1) Excludes the unpaid principal balance for loans that have been fully charged off or otherwise have zero recorded investment.
(2)
Includes the recorded investment of $1.4 billion and $1.5 billion at December 31, 2017 and 2016, 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.
178
Wells Fargo & Company
Commitments to lend additional funds on loans whose
terms have been modified in a TDR amounted to $579 million
and $403 million at December 31, 2017 and 2016, 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:
2017
2016
2015
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
3,241
1,328
66
105
4,740
13,326
2,041
323
86
117
15,893
Total impaired loans (excluding PCI)
$
20,633
118
91
14
1
224
730
121
36
11
8
906
1,130
3,408
1,636
115
88
5,247
15,857
2,294
295
93
89
18,628
23,875
Interest income:
Cash basis of accounting
Other (1)
Total interest income
$
$
299
831
1,130
101
128
11
—
240
828
132
34
11
6
1,011
1,251
353
898
1,251
1,240
2,128
246
26
3,640
17,924
2,480
317
115
61
20,897
24,537
80
140
25
—
245
921
137
39
13
5
1,115
1,360
412
948
1,360
(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.
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.
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, the balance of
which totaled $17.8 billion and $20.8 billion at December 31,
2017 and 2016, respectively. We do not consider loan resolutions
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.
Wells Fargo & Company
179
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.17: TDR Modifications
(in millions)
Year ended December 31, 2017
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
Trial modifications (6)
Total consumer
Total
Year ended December 31, 2016
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
Trial modifications (6)
Total consumer
Total
Year ended 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
Trial modifications (6)
Total consumer
Total
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)
$
$
$
$
$
$
24
5
—
—
29
231
25
—
2
—
—
258
287
42
2
—
—
44
338
23
—
2
1
—
364
408
10
14
11
—
35
400
34
—
1
—
—
435
470
45
59
1
—
105
140
82
257
15
47
—
541
646
130
105
27
—
262
288
109
180
16
33
—
626
888
33
133
15
—
181
339
99
166
5
27
—
636
817
2,912
507
26
37
2,981
571
27
37
3,482
3,616
1,035
1,406
81
—
67
8
(28)
1,163
4,645
3,154
560
72
8
188
257
84
55
(28)
1,962
5,578
3,326
667
99
8
3,794
4,100
1,411
106
—
57
10
44
1,628
5,422
1,806
904
72
—
2,782
1,892
172
—
87
8
44
2,203
4,985
2,037
238
180
75
44
44
2,618
6,718
1,849
1,051
98
—
2,998
2,631
305
166
93
35
44
3,274
6,272
173
20
—
—
193
15
14
—
39
1
—
69
0.64% $
1.28
0.69
—
1.00
2.57
3.26
11.98
5.89
7.47
—
6.70
262
5.92% $
45
59
1
—
105
257
93
257
15
47
—
669
774
130
105
27
—
262
507
130
180
16
33
—
866
1.91 % $
1.15
1.02
—
1.51
2.69
3.07
12.09
6.07
6.83
—
4.92
4.13 % $
1,128
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
360
1
—
—
361
49
37
—
36
2
—
124
485
62
1
—
—
63
53
43
—
38
1
—
135
198
(1) Amounts represent the recorded investment in loans after recognizing the effects of the TDR, if any. TDRs may have multiple types of concessions, but are presented only
once in the first modification type based on the order presented in the table above. The reported amounts include loans remodified of $2.1 billion, $1.6 billion and
$2.1 billion, for the years ended December 31, 2017, 2016, and 2015, respectively.
(2) Principal modifications include principal forgiveness at the time of the modification, contingent principal forgiveness granted over the life of the loan based on borrower
performance, and principal that has been legally separated and deferred to the end of the loan, with a zero percent contractual interest rate.
(3) Other concessions include loans discharged in bankruptcy, loan renewals, term extensions and other interest and noninterest adjustments, but exclude modifications that
also forgive principal and/or reduce the contractual interest rate.
(4) Charge-offs include write-downs of the investment in the loan in the period it is contractually modified. The amount of charge-off will differ from the modification terms if
the loan has been charged down prior to the modification based on our policies. In addition, there may be cases where we have a charge-off/down with no legal principal
modification. Modifications resulted in legally forgiving principal (actual, contingent or deferred) of $32 million, $67 million and $100 million for the years ended
December 31, 2017, 2016, and 2015, respectively.
(5) 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.
(6) Trial modifications are granted a delay in payments due under the original terms during the trial payment period. However, these loans continue to advance through
delinquency status and accrue interest according to their original terms. Any subsequent permanent modification generally includes interest rate related concessions;
however, the exact concession type and resulting financial effect are usually not known until the loan is permanently modified. Trial modifications for the period are
presented net of previously reported trial modifications that became permanent in the current period.
180
Wells Fargo & Company
Recorded investment of defaults
Year ended December 31,
2017
2016
2015
$
$
173
61
4
1
239
114
19
74
15
5
227
466
124
66
3
—
193
138
20
56
13
4
231
424
66
104
4
—
174
187
17
52
13
3
272
446
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
for the commercial portfolio segment and 60 days past due for
the consumer portfolio segment.
Table 6.18: Defaulted TDRs
(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
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,
2017
2016
86
—
—
86
237
383
57
677
Real estate 1-4 family first mortgage
12,722
16,018
Real estate 1-4 family junior lien
mortgage
Total consumer
27
36
12,749
16,054
Total PCI loans (carrying value)
$ 12,835
16,731
Total PCI loans (unpaid principal balance)
$ 18,975
24,136
Wells Fargo & Company
181
Note 6: Loans and Allowance for Credit Losses (continued)
ACCRETABLE YIELD The excess of cash flows expected to be
collected over the carrying value of PCI loans is referred to as
the accretable yield and is recognized in interest income using an
effective yield method over the remaining life of the loan, or
pools of loans. The accretable yield is affected by:
•
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. Changes
during 2017 reflected an expectation, as a result of our quarterly
evaluation of PCI cash flows, that prepayment of modified Pick
a-Pay loans will continue to increase over their estimated
weighted-average life and that expected loss has decreased as a
result of continued reductions in loan to value ratios and
sustained higher housing prices. Changes during 2017 also
reflect a $309 million gain on the sale of $569 million Pick-a-Pay
PCI loans in second quarter 2017.
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)
2017
2016
2015
2009-2014
$ 11,216
16,301
17,790
10,447
2
27
—
132
(1,406)
(1,365)
(1,429)
(12,783)
(334)
(9)
(28)
(430)
Reclassification from nonaccretable difference for loans with improving credit-related
cash flows
642
1,221
1,166
Changes in expected cash flows that do not affect nonaccretable difference (3)
(1,233)
(4,959)
(1,198)
Total, end of period
$
8,887
11,216
16,301
8,568
11,856
17,790
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.
(1)
(2)
(3) Represents changes in cash flows expected to be collected due to the impact of modifications, changes in prepayment assumptions, changes in interest rates on variable
rate PCI loans and sales to third parties.
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, 2017
By risk category:
Pass
Criticized
Total commercial PCI loans
December 31, 2016
By risk category:
Pass
Criticized
Total commercial PCI loans
Commercial
and
industrial
Real estate
mortgage
Real estate
construction
Total
$
$
$
$
8
78
86
92
145
237
—
—
—
263
120
383
—
—
—
47
10
57
8
78
86
402
275
677
182
Wells Fargo & Company
Table 6.22 provides past due information for commercial
PCI loans.
Table 6.22: Commercial PCI Loans by Delinquency Status
(in millions)
December 31, 2017
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, 2016
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
$
$
86
—
—
86
$
235
2
—
$
237
—
—
—
—
353
10
20
383
—
—
—
—
48
—
9
57
86
—
—
86
636
12
29
677
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
December 31, 2017
December 31, 2016
(in millions)
By delinquency status:
Real estate
1-4 family
first
mortgage
Real estate
1-4 family
junior lien
mortgage
Real estate
1-4 family
first
mortgage
Real estate
1-4 family
junior lien
mortgage
Total
Current-29 DPD and still accruing
$
13,127
138
13,265
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
1,317
622
293
219
1,310
8
3
2
2
4
1,325
625
295
221
16,095
1,488
668
233
238
1,314
2,081
Total consumer PCI loans (adjusted unpaid
principal balance)
Total consumer PCI loans (carrying value)
$
$
16,888
12,722
157
17,045
20,803
27
12,749
16,018
Total
16,266
1,495
670
235
240
2,089
20,995
16,054
171
7
2
2
2
8
192
36
Wells Fargo & Company
183
Note 6: Loans and Allowance for Credit Losses (continued)
Table 6.24 provides FICO scores for consumer PCI loans.
Table 6.24: Consumer PCI Loans by FICO
December 31, 2017 (1)
December 31, 2016
(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)
Real estate
1-4 family
first
mortgage
Real estate
1-4 family
junior lien
mortgage
Real estate Real estate
1-4 family
junior lien
mortgage
1-4 family
first
mortgage
$
4,014
2,086
2,393
2,242
1,779
933
468
2,973
37
20
24
29
23
12
6
6
Total
4,051
2,106
2,417
2,271
1,802
945
474
4,292
3,001
3,972
3,170
1,767
962
254
2,979
3,385
Total
4,338
3,027
4,007
3,207
1,791
977
258
3,390
$
$
16,888
12,722
157
17,045
20,803
27
12,749
16,018
192
36
20,995
16,054
(1) December 31, 2017 amounts reflect updated FICO score version implemented in first quarter 2017.
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, 2017
December 31, 2016
(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
$
8,010
6,510
1,975
319
73
1
45
63
35
10
3
1
Total
8,055
6,573
2,010
329
76
2
7,513
9,000
3,458
669
161
2
Total consumer PCI loans (adjusted unpaid
principal balance)
Total consumer PCI loans (carrying value)
$
$
16,888
12,722
157
17,045
20,803
27
12,749
16,018
Real estate
1-4 family
first
mortgage
by LTV
Real estate
1-4 family
junior lien
mortgage
by CLTV
Total
7,551
9,076
3,512
687
166
3
20,995
16,054
(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.
184
Wells Fargo & Company
46
26
35
37
24
15
4
5
38
76
54
18
5
1
192
36
Note 7: Premises, Equipment, Lease Commitments and Other Assets
Table 7.1: Premises and Equipment
Table 7.3 presents the components of other assets.
(in millions)
Land
Buildings
Furniture and equipment
Leasehold improvements
Dec 31,
2017
Dec 31,
2016
Table 7.3: Other Assets
$
1,799
8,865
7,089
2,291
1,726
8,584
6,606
2,199
(in millions)
Nonmarketable equity investments:
Cost method:
Premises and equipment leased under
capital leases
103
70
Total premises and equipment
20,147
19,185
Less: Accumulated depreciation and
amortization
11,300
10,852
Net book value, premises and
equipment
$
8,847
8,333
Depreciation and amortization expense for premises and
equipment was $1.2 billion for the years 2017, 2016 and 2015.
Dispositions of premises and equipment resulted in net
gains of $128 million, $44 million and $75 million in 2017, 2016
and 2015, respectively, included in other noninterest expense.
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 of noncancelable
operating leases, net of sublease income, with terms greater than
one year as of December 31, 2017.
Table 7.2: Minimum Lease Payments of Operating Leases
(in millions)
Year ended December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
1,172
1,095
961
776
605
1,976
$
6,585
Total minimum lease payments for operating leases above
are net of $469 million of noncancelable sublease income.
Operating lease rental expense (predominantly for premises)
was $1.3 billion for the years 2017, 2016 and 2015, net of
sublease income of $76 million, $86 million and $103 million for
the same years, respectively.
Federal bank stock
Private equity
Auction rate securities
Total cost method
Equity method:
LIHTC (1)
Private equity
Tax-advantaged renewable energy
New market tax credit and other
Dec 31,
2017
Dec 31,
2016
$
5,369
1,394
400
7,163
10,269
3,839
1,950
294
6,407
1,465
525
8,397
9,714
3,635
2,054
305
Total equity method
16,352
15,708
Fair value (2)
4,867
3,275
Total nonmarketable equity
investments
Corporate/bank-owned life insurance
Accounts receivable (3)
Interest receivable
Core deposit intangibles
Customer relationship and other amortized
intangibles
Foreclosed assets:
Residential real estate:
Government insured/guaranteed (3)
Non-government insured/guaranteed
Non-residential real estate
Operating lease assets
Due from customers on acceptances
Other
28,382
19,549
39,127
5,688
769
27,380
19,325
31,056
5,339
1,620
841
1,089
120
252
270
197
378
403
9,666
10,089
177
196
13,540
17,469
Total other assets
$ 118,381
114,541
(1) Represents low income housing tax credit investments.
(2) Represents nonmarketable equity investments for which we have elected the
fair value option. See Note 17 (Fair Values of Assets and Liabilities) for
additional information.
(3) 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. For more
information on the classification of certain government-guaranteed mortgage
loans upon foreclosure, see Note 1 (Summary of Significant Accounting
Policies).
Wells Fargo & Company
185
Note 7: Premises, Equipment, Lease Commitments and Other Assets (continued)
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,
2017
2016
2015
nonmarketable equity investments $
812
579
1,659
All other
Total
(1,042)
(508)
(743)
$
(230)
71
916
Low Income Housing Tax Credit Investments We invest
in affordable housing projects that qualify for the low income
housing tax credit (LIHTC), which is designed to promote
private development of low income housing. These investments
generate a return primarily through realization of federal tax
credits.
Total LIHTC investments were $10.3 billion and $9.7 billion
at December 31, 2017 and 2016, respectively. In 2017, we
recognized pre-tax losses of $1.2 billion related to our LIHTC
investments, compared with $816 million in 2016. We also
recognized total tax benefits of $1.5 billion in 2017, which
included tax credits recorded in income taxes of $1.1 billion. In
2016, total tax benefits were $1.2 billion, which included tax
credits of $939 million. We are periodically required to provide
additional financial support during the investment period. Our
liability for these unfunded commitments was $3.6 billion at
December 31, 2017 and 2016. Predominantly all of this liability is
expected to be paid over the next three years. This liability is
included in long-term debt.
186
Wells Fargo & Company
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, limited liability companies 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.
Wells Fargo & Company
187
Note 8: Securitizations and Variable Interest Entities (continued)
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, 2017
Cash
Federal funds sold, securities purchased under resale agreements and other
short-term investments
Trading assets
Investment securities (1)
Loans
Mortgage servicing rights
Derivative assets
Other assets
Total assets
Short-term borrowings
Derivative liabilities
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Noncontrolling interests
Net assets
December 31, 2016
Cash
Federal funds sold, securities purchased under resale agreements and other short-term
investments
Trading assets
Investment securities (1)
Loans
Mortgage servicing rights
Derivative assets
Other assets
Total assets
Short-term borrowings
Derivative liabilities
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
$
—
—
1,305
3,773
4,274
13,628
44
10,740
116
376
294
—
12,482
—
—
349
33,764
13,617
—
106
244
3,590
3,940
—
—
5 (2)
132 (2)
1,479 (2)
1,616
283
$ 29,824
11,718
$
—
—
2,034
8,530
6,698
13,386
91
10,281
41,020
—
59
306
3,598
3,963
—
$
37,057
168
74
130
—
12,589
—
1
452
13,414
—
33 (2)
107 (2)
3,694 (2)
3,834
138
9,442
—
—
201
358
110
—
—
6
675
522
—
10
111
643
—
32
—
—
201
786
138
—
—
11
1,136
905
—
2
136
1,043
—
93
Total
116
376
1,800
4,131
16,866
13,628
44
11,095
48,056
522
111
386
5,180
6,199
283
41,574
168
74
2,365
9,316
19,425
13,386
92
10,744
55,570
905
92
415
7,428
8,840
138
46,592
(1) Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and
GNMA.
(2) 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 unconsolidated VIEs include
securitizations of residential mortgage loans, CRE loans, student
loans, automobile loans and leases, certain 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 in
trading assets, investment securities, loans, MSRs, derivative
assets and liabilities, 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.
188
Wells Fargo & Company
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
Table 8.2: Unconsolidated VIEs
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
borrowing transactions with unconsolidated VIEs (for
information on these transactions, see the Transactions with
Consolidated VIEs and Secured Borrowings section in this Note).
(in millions)
December 31, 2017
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
assets
Derivatives
Other
commitments
and
guarantees Net assets
Carrying value – asset (liability)
$ 1,169,410
2,100
12,665
14,175
144,650
1,031
1,481
2,333
598
2,198
—
1,443
1,867
31,852
11,258
23
225
2,257
1
50
577
73
890
—
—
—
—
—
—
—
$ 1,367,437
20,092
13,628
—
—
28
5
—
—
—
—
—
(95)
(62)
Debt and
equity
interests (1)
Servicing
assets
Derivatives
(190)
14,575
—
(34)
671
3,082
(20)
(15)
—
—
(3,590)
—
—
—
1,443
1,867
7,668
1
50
482
(3,834)
29,824
Maximum exposure to loss
Other
commitments
and
guarantees
Total
exposure
$
2,100
12,665
598
2,198
—
1,443
1,867
11,258
1
50
577
73
890
—
—
—
—
—
—
—
$
20,092
13,628
—
—
42
5
—
—
—
—
—
120
167
1,137
15,902
—
671
10,202
13,332
20
—
71
25
1,443
1,938
1,175
12,433
—
—
157
1
50
854
12,762
46,649
Wells Fargo & Company
189
Note 8: Securitizations and Variable Interest Entities (continued)
(continued from previous page)
(in millions)
December 31, 2016
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
$ 1,166,296
18,805
166,596
1,472
1,545
9,152
3,026
873
4,258
—
1,507
6,522
29,713
10,669
78
214
1,733
10
48
630
12,434
109
843
—
—
—
—
—
—
—
$ 1,395,604
27,543
13,386
—
—
87
—
—
—
—
—
—
(56)
31
Debt and
equity
interests (1)
Servicing
assets
Derivatives
(232)
15,228
(2)
(35)
(25)
—
—
(3,609)
—
—
—
980
5,153
(25)
1,507
6,522
7,060
10
48
574
(3,903)
37,057
Maximum exposure to loss
Other
commitments
and
guarantees
Total
exposure
$
3,026
12,434
873
4,258
—
1,507
6,522
10,669
10
48
630
109
843
—
—
—
—
—
—
—
$
27,543
13,386
—
—
94
—
—
—
—
—
—
93
187
979
2
16,439
984
9,566
14,761
25
—
72
25
1,507
6,594
1,104
11,773
—
—
—
10
48
723
11,748
52,864
(1)
Includes total equity interests of $10.7 billion and $10.3 billion at December 31, 2017 and 2016, 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.
(2) Excludes assets and related liabilities with a recorded carrying value on our balance sheet of $2.2 billion and $1.2 billion at December 31, 2017 and 2016, respectively, for
certain delinquent loans that are eligible for repurchase 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.
(3) Represents senior loans to trusts that are collateralized by asset-backed securities. The trusts invest predominantly in senior tranches from a diversified pool of U.S. asset
securitizations, of which all are current and 100% were rated as investment grade by the primary rating agencies at both December 31, 2017 and 2016. 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.
(4)
In Table 8.2, “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
190
Wells Fargo & Company
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,
automobile 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.
For example, we have investments in asset-backed securities
that are collateralized by automobile 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 automobile financing
institutions primarily because they require a source of liquidity
to fund ongoing vehicle sales operations. The third party
automobile financing institutions manage the collateral in the
VIEs, which is indicative of power in them and we therefore do
not consolidate these VIEs.
TAX CREDIT STRUCTURES We co-sponsor and make
investments in affordable housing and sustainable energy
projects that are designed to generate a return primarily through
the realization of federal tax credits. In some instances, our
investments in these structures may require that we fund future
capital commitments at the discretion of the project sponsors.
While the size of our investment in a single entity may at times
exceed 50% of the outstanding equity interests, we do not
consolidate these structures due to the project sponsor’s ability
to manage the projects, which is indicative of power in them.
Wells Fargo & Company
191
Note 8: Securitizations and Variable Interest Entities (continued)
INVESTMENT FUNDS Subsequent to adopting ASU 2015-02
(Amendments to the Consolidation Analysis) in first quarter
2016, we do not consolidate these investment funds because we
do not hold variable interests that are considered significant to
the funds.
We voluntarily waived a portion of our management fees for
certain money market funds that are exempt from the
consolidation analysis to ensure the funds maintained a
minimum level of daily net investment income. The amount of
fees waived in 2017 and 2016 was $53 million and $109 million,
respectively.
OTHER TRANSACTIONS WITH VIEs Other VIEs include
certain 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, 2017, we held $400 million of ARS issued by VIEs
compared with $453 million at December 31, 2016. 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’
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
Table 8.3: Cash Flows From Sales and Securitization Activity
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, 2017 and 2016, we
reported the debt securities issued to the VIEs as long-term
junior subordinated debt with a carrying value of $2.0 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 2017, we redeemed $150 million of trust preferred
securities which were partially included in Tier 2 capital (50%
credit in 2017) in the transitional framework and were not
included under the fully-phased framework under 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)
2017
Other
financial
assets
Mortgage
loans
Proceeds from securitizations and whole loan sales
$ 228,282
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
3,352
2,218
12
92
(269)
25
—
1
—
—
—
Year ended December 31,
2016
Other
financial
assets
Mortgage
loans
347
202,335
—
1
—
—
—
3,675
1,297
14
300
(764)
2015
Other
financial
assets
531
5
38
—
—
—
Mortgage
loans
252,723
3,492
2,898
26
133
(218)
(1) Cash flows from other interests held include principal and interest payments received on retained bonds and excess cash flows received on interest-only strips.
(2) 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 2017, we paid nothing to third-party investors to settle repurchase liabilities on pools of loans, compared with $11 million and $19 million in 2016 and 2015,
respectively.
(3) Represent loans repurchased from GNMA, FNMA, and FHLMC under representation and warranty provisions included in our loan sales contracts. Excludes $8.6 billion in
delinquent insured/guaranteed loans that we service and have exercised our option to purchase out of GNMA pools in 2017, compared with $9.9 billion and $11.3 billion in
2016 and 2015, respectively. These loans are predominantly insured by the FHA or guaranteed by the VA.
192
Wells Fargo & Company
In 2017, 2016, and 2015, we recognized net gains of
During 2017, 2016 and 2015, we transferred $16.7 billion,
$18.3 billion and $17.3 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 $359 million in 2017, $429 million in 2016
and $338 million in 2015, respectively, because the loans were
carried at lower of cost or market value (LOCOM). In connection
with these transfers, in 2017 we recorded a servicing asset of
$166 million, initially measured at fair value using a Level 3
measurement technique, and securities of $65 million, classified
as Level 2. In 2016, we recorded a servicing asset of $270 million
and securities of $258 million. In 2015, we recorded a servicing
asset of $180 million and securities of $241 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 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.
$701 million, $524 million and $506 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 2017, 2016 and
2015 largely 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 2017, 2016 and 2015 we
transferred $213.6 billion, $236.6 billion and $186.6 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 2017 we
recorded a $2.1 billion servicing asset, measured at fair value
using a Level 3 measurement technique, securities of
$1.4 billion, classified as Level 2, and a $24 million liability for
repurchase losses which reflects management’s estimate of
probable losses related to various representations and
warranties for the loans transferred, initially measured at fair
value. In 2016, we recorded a $2.1 billion servicing asset,
securities of $4.4 billion and a $36 million liability. In 2015, we
recorded a $1.6 billion servicing asset, securities of $1.9 billion
and a $43 million liability.
Table 8.4 presents the key weighted-average assumptions
we used to measure residential mortgage servicing rights at the
date of securitization.
Table 8.4: Residential Mortgage Servicing Rights
Residential mortgage servicing rights
2017
2016
2015
Year ended December 31,
Prepayment speed (1)
Discount rate
Cost to service ($ per loan) (2) $
11.5%
7.0
132
11.7
6.5
132
12.1
7.3
223
(1) The prepayment speed assumption for residential mortgage servicing rights
includes a blend of prepayment speeds and default rates. Prepayment speed
assumptions are influenced by mortgage interest rate inputs as well as our
estimation of drivers of borrower behavior.
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.
(2)
Wells Fargo & Company
193
Note 8: Securitizations and Variable Interest Entities (continued)
Table 8.5: Retained Interests from Unconsolidated VIEs
($ in millions, except cost to service amounts)
Residential
mortgage
servicing
rights (1)
Interest-only
strips
Subordinated
bonds
Subordinated
bonds
Consumer
Commercial (2)
Other interests held
Senior
bonds
468
5.2
596
6.7
Fair value of interests held at December 31, 2017
$ 13,625
Expected weighted-average life (in years)
6.2
19
3.3
Key economic assumptions:
Prepayment speed assumption (3)
10.5%
20.0
Decrease in fair value from:
10% adverse change
25% adverse change
$
565
1,337
1
2
Discount rate assumption
6.9%
14.8
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
$
652
1,246
143
467
1,169
Fair value of interests held at December 31, 2016
$ 12,959
Expected weighted-average life (in years)
6.3
—
1
$
28
3.9
—
0.0
—
—
—
—
—
—
—%
—
—
1
8.3
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
10.3 %
17.4
13.5
$
583
1,385
1
2
—
—
6.8 %
13.3
10.7
$
649
1,239
155
515
1,282
1
1
—
—
$
3.0 %
—
—
4.1
3.1
32
61
20
39
1.8
—
—
249
3.1
5.2
7
12
4.7
—
—
—
—
—
552
5.1
2.7
23
45
—
—
—
(1) See narrative following this table for a discussion of commercial mortgage servicing rights.
(2) Prepayment speed assumptions do not significantly impact the value of commercial mortgage securitization bonds as the underlying commercial mortgage loans experience
significantly lower prepayments due to certain contractual restrictions, impacting the borrower’s ability to prepay the mortgage.
(3) The prepayment speed assumption for residential mortgage servicing rights includes a blend of prepayment speeds and default rates. Prepayment speed assumptions are
influenced by mortgage interest rate inputs as well as our estimation of drivers of borrower behavior.
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Wells Fargo & Company
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 $2.0 billion at both
December 31, 2017 and 2016. 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
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, 2017, and 2016, results in a decrease in
fair value of $278 million and $259 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,
2017 and 2016. The carrying amount of the loan at December 31,
2017 and 2016, was $1.3 billion and $3.2 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
$25 million and $154 million at December 31, 2017 and 2016,
respectively.
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 (including 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,
2017
2016
2017
2016
2017
2016
$
100,875
106,745
100,875
106,745
2,839
2,839
3,325
3,325
1,027
1,027
279
279
1,011
1,011
1,290
Real estate 1-4 family first mortgage
1,126,208
1,160,191
13,393
16,453
Total consumer
1,126,208
1,160,191
13,393
16,453
735
735
Total off-balance sheet sold or securitized loans (2)
$ 1,227,083
1,266,936
16,232
19,778
1,762
(1)
Includes $1.2 billion and $1.7 billion of commercial foreclosed assets and $879 million and $1.8 billion of consumer foreclosed assets at December 31, 2017 and 2016,
respectively.
(2) At December 31, 2017 and 2016, the table includes total loans of $1.1 trillion and $1.2 trillion, delinquent loans of $9.1 billion and $9.8 billion, and foreclosed assets of
$619 million and $1.3 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.
Wells Fargo & Company
195
Note 8: Securitizations and Variable Interest Entities (continued)
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. Carrying values of
“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, 2017
Secured borrowings:
Municipal tender option bond securitizations
$
Residential mortgage securitizations
Total secured borrowings
Consolidated VIEs:
Commercial and industrial loans and leases
Nonconforming residential mortgage loan securitizations
Commercial real estate loans
Structured asset finance
Investment funds
Other
Total VIE
assets
Assets
Liabilities
Noncontrolling
interests
Net assets
Carrying value
658
113
771
9,116
2,515
2,378
10
305
100
565
110
675
8,626
2,212
2,378
6
305
90
(532)
(111)
(643)
(915)
(694)
—
(4)
(2)
(1)
—
—
—
(29)
—
—
—
(230)
(24)
33
(1)
32
7,682
1,518
2,378
2
73
65
Total consolidated VIEs
14,424
13,617
(1,616)
(283)
11,718
Total secured borrowings and consolidated VIEs
$ 15,195
14,292
(2,259)
(283)
11,750
December 31, 2016
Secured borrowings:
Municipal tender option bond securitizations
$
1,473
Residential mortgage securitizations
Total secured borrowings
Consolidated VIEs:
Commercial and industrial loans and leases
Nonconforming residential mortgage loan securitizations
Commercial real estate loans
Structured asset finance
Investment funds
Other
Total consolidated VIEs
Total secured borrowings and consolidated VIEs
In addition to the structure types included in the previous
table, at December 31, 2016, we had approximately $6.0 billion
of private placement debt financing issued through a
consolidated VIE. The issuance was classified as long-term debt
in our consolidated financial statements. At December 31, 2016,
we pledged approximately $434 million in loans (principal and
interest eligible to be capitalized), and $6.1 billion in available-
for-sale securities to collateralize the VIE’s borrowings. These
assets were not transferred to the VIE, and accordingly, we have
excluded the VIE from the previous table. During 2017, the
private placement debt financing was repaid, and the entity was
no longer considered a VIE.
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
139
1,612
8,821
3,349
1,516
23
142
166
14,017
$
15,629
998
138
(907)
(136)
1,136
(1,043)
8,623
2,974
1,516
13
142
146
13,414
14,550
(2,819)
(1,003)
—
(9)
(2)
(1)
(3,834)
(4,877)
—
—
—
(14)
—
—
—
(67)
(57)
(138)
(138)
91
2
93
5,790
1,971
1,516
4
73
88
9,442
9,535
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
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Wells Fargo & Company
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 Subsequent to adopting ASU 2015-02
(Amendments to the Consolidation Analysis) in first quarter
2016, we consolidate certain investment funds because we have
both the power to manage fund assets and hold variable interests
that are considered significant.
entitled to a small portion of any unrealized gain on the
underlying assets. We may serve as remarketing agent and/or
liquidity provider for the trusts. The floating-rate investors have
the right to tender the certificates at specified dates, often with
as little as seven days’ notice. Should we be unable to remarket
the tendered certificates, we are generally obligated to purchase
them at par under standby liquidity facilities unless the bond’s
credit rating has declined below investment grade or there has
been an event of default or bankruptcy of the issuer and insurer.
COMMERCIAL AND INDUSTRIAL LOANS AND LEASES In
conjunction with the GE Capital business acquisitions, on March
1, 2016, we acquired certain consolidated SPE entities. The most
significant of these SPEs is a revolving master trust entity that
purchases dealer floorplan loans and issues senior and
subordinated notes. The senior notes are held by third parties
and the subordinated notes and residual equity interests are held
by us. At December 31, 2017 and 2016, total assets held by the
master trust were $7.6 billion and $7.5 billion, respectively, and
the outstanding senior notes were $773 million and $2.7 billion,
respectively. The other SPEs acquired include securitization
term trust entities, which purchase vendor finance lease and
loan assets and issue notes to investors, and an SPE that engages
in leasing activities to specific vendors. As of December 31, 2016,
all outstanding third party debt of the securitization term trust
entities was repaid in accordance with the agreements, and the
remaining assets were repurchased by Wells Fargo. The
securitization term trusts were dissolved during 2017. The
remaining other SPE held $1.4 billion and $1.2 billion in total
assets at December 31, 2017 and 2016, respectively. We are the
primary beneficiary of these acquired SPEs due to our ability to
direct the significant activities of the SPEs, such as our role as
servicer, and because we hold variable interests that are
considered significant.
Wells Fargo & Company
197
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
Purchases
Servicing from securitizations or asset transfers (1)
Sales and other (2)
Net additions
Changes in fair value:
Due to changes in valuation model inputs or assumptions:
Mortgage interest rates (3)
Servicing and foreclosure costs (4)
Discount rates (5)
Prepayment estimates and other (6)
Net changes in valuation model inputs or assumptions
Changes due to collection/realization of expected cash flows over time
Total changes in fair value
Fair value, end of year
Year ended December 31,
2017
2016
2015
$ 12,959
12,415
12,738
541
—
—
2,263
2,204
1,556
(23)
(65)
(9)
2,781
2,139
1,547
(103)
96
13
(132)
(126)
543
106
—
(84)
565
247
(83)
—
50
214
(1,989)
(2,160)
(2,084)
(2,115)
(1,595)
(1,870)
$ 13,625
12,959
12,415
(1)
(2)
(3)
Includes impacts associated with exercising our right to repurchase delinquent loans from GNMA loan securitization pools.
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 or
portfolios with servicing liabilities.
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.
(4)
(5) Reflects discount rate assumption change, excluding portion attributable to changes in mortgage interest rates.
(6) 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.
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,
2017
$
1,406
115
166
2016
1,308
97
270
2015
1,242
144
180
(263)
(269)
(258)
$
1,424
1,406
1,308
$
1,956
2,025
1,680
1,956
1,637
1,680
(1) Commercial amortized MSRs are evaluated for impairment purposes by the following risk strata: agency (GSEs) for multi-family properties and non-agency. There was no
valuation allowance recorded for the periods presented on the commercial amortized MSRs.
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Wells Fargo & Company
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,
2017
Dec 31,
2016
$ 1,209
1,205
342
3
347
8
1,554
1,560
495
127
9
631
$ 2,185
$ 1,704
0.88%
479
132
8
619
2,179
1,684
0.85
Year ended December 31,
2017
2016
2015
$
3,603
3,778
4,037
172
199
180
229
198
288
(582)
(819)
(625)
3,392
3,368
3,898
Due to changes in valuation model inputs or assumptions (2)
(A)
(126)
565
214
Changes due to collection/realization of expected cash flows over time
Total changes in fair value of MSRs carried at fair value
Amortization
Net derivative gains from economic hedges (3)
(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)(3)
(A)+(B)
(1,989)
(2,160)
(2,084)
(2,115)
(1,595)
(1,870)
(263)
413
1,427
2,923
4,350
287
$
$
(269)
261
1,765
4,331
6,096
826
(258)
671
2,441
4,060
6,501
885
Includes costs associated with foreclosures, unreimbursed interest advances to investors, and other interest costs.
(1)
(2) Refer to the analysis of changes in fair value MSRs presented in Table 9.1 in this Note for more detail.
(3) 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.
Wells Fargo & Company
199
Table 9.5: Analysis of Changes in Liability for Mortgage Loan
Repurchase Losses
(in millions)
Year ended December 31,
2017
2016
2015
Balance, beginning of year
$ 229
Assumed with MSR purchases (1)
10
378
—
615
—
Provision for repurchase losses:
Loan sales
Change in estimate (2)
Net reductions to provision
Losses
24
(63)
(39)
(19)
Balance, end of year
$ 181
36
43
(139)
(202)
(103)
(159)
(46)
229
(78)
378
(1) Represents repurchase liability associated with portfolio of loans underlying
mortgage servicing rights acquired during the period.
(2) Results from changes in investor demand and mortgage insurer practices,
credit deterioration and changes in the financial stability of correspondent
lenders.
Note 9: Mortgage Banking Activities (continued)
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 adjustments to the repurchase liability are recorded in 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.
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 $136 million at
December 31, 2017, 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.
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Wells Fargo & Company
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, 2017
December 31, 2016
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
$
3,876
(2,452)
1,424
12,834
3,994
(12,065)
(3,153)
769
841
Total amortized intangible assets
$
20,704
(17,670)
3,034
Unamortized intangible assets:
MSRs (carried at fair value) (2)
$
13,625
Goodwill
Trademark
26,587
14
(1) Excludes fully amortized intangible assets.
(2) See Note 9 (Mortgage Banking Activities) for additional information on MSRs.
(2,189)
(11,214)
(2,839)
(16,242)
1,406
1,620
1,089
4,115
3,595
12,834
3,928
20,357
12,959
26,693
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, 2017. Future amortization
expense may vary from these projections.
Table 10.2: Amortization Expense for Intangible Assets
(in millions)
Year ended December 31, 2017 (actual)
Estimate for year ended December 31,
2018
2019
2020
2021
2022
Amortized MSRs
Core deposit
intangibles
Customer
relationship and
other
intangibles (1)
$
$
263
255
223
200
172
152
851
769
—
—
—
—
314
299
116
96
82
68
Total
1,428
1,323
339
296
254
220
(1) The year ended December 31, 2017 balance includes $13 million for lease intangible amortization.
Wells Fargo & Company
201
Note 10: Intangible Assets (continued)
Table 10.3 shows the allocation of goodwill to our reportable
operating segments.
Table 10.3: Goodwill
(in millions)
December 31, 2015
Reduction in goodwill related to divested businesses and other
Goodwill from business combinations
December 31, 2016
$
16,849
Reclassification of goodwill held for sale to Other Assets (1)
Reduction in goodwill related to divested businesses and other
Goodwill from business combinations
—
—
—
December 31, 2017 (1)
$
16,849
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Consolidated
Company
$
16,849
—
—
7,475
(88)
1,198
8,585
(13)
(117)
—
8,455
1,205
(2)
56
1,259
—
—
24
25,529
(90)
1,254
26,693
(13)
(117)
24
1,283
26,587
(1) Goodwill reclassified to held-for-sale in other assets of $13 million for the year ended December 31, 2017, relates to the sales agreement for Wells Fargo Shareowner
Services. No goodwill was classified as held-for-sale in other assets at December 31, 2016 and 2015.
We assess goodwill for impairment at a reporting unit level,
which is one level below the operating segments. Our goodwill
was not impaired at December 31, 2017 and 2016. The fair values
exceeded the carrying amount of our respective reporting units
by approximately 32% to 635% at December 31, 2017. See
Note 25 (Operating Segments) for further information on
management reporting.
202
Wells Fargo & Company
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 Deposits and Other Time
Deposits
Table 11.3: Contractual Maturities of Domestic Time Deposits
(in millions)
Three months or less
After three months through six months
After six months through twelve months
After twelve months
Total
2017
$
17,664
14,413
17,390
3,232
$
52,699
Demand deposit overdrafts of $371 million and
$548 million were included as loan balances at December 31,
2017 and 2016, respectively.
(in billions)
Dec 31,
Dec 31,
2017
2016
Total domestic and foreign
$
128.6
107.9
Domestic:
$100,000 or more
$250,000 or more
Foreign:
$100,000 or more
$250,000 or more
52.7
46.9
13.4
13.4
46.7
42.0
11.6
11.6
Substantially all CDs and other time deposits issued by
domestic and foreign offices were interest bearing and a
significant portion of our foreign time deposits with a
denomination of $100,000 or more have maturities of less than
7 days.
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)
2018
2019
2020
2021
2022
Thereafter
Total
December 31, 2017
$
106,089
8,432
3,556
2,864
2,138
5,515
$
128,594
Wells Fargo & Company
203
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, and Other
Commitments).
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
Federal funds purchased and securities sold under agreements to
repurchase
Commercial paper
Other short-term borrowings (1)
Total
Maximum month-end balance
Amount
2017
Rate
Amount
2016
Rate
Amount
2015
Rate
$
88,684
1.30% $
78,124
0.17% $
82,948
0.21%
—
—
120
14,572
0.72
18,537
0.93
0.28
334
0.81
14,246
(0.10)
$ 103,256
1.22
$
96,781
0.19
$
97,528
0.17
$
82,507
0.90
$
99,955
0.33
$
75,021
16
16,399
0.95
0.13
256
14,976
0.86
0.02
1,583
0.09
0.36
10,861
(0.08)
$
98,922
0.77
$ 115,187
0.29
$
87,465
0.07
Federal funds purchased and securities sold under agreements to
repurchase (2)
Commercial paper (3)
Other short-term borrowings (4)
$
91,604
N/A $ 109,645
N/A $
89,800
78
19,439
N/A
N/A
519
18,537
N/A
N/A
3,552
14,246
N/A
N/A
N/A
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) Highest month-end balance in each of the last three years was November 2017, October 2016 and October 2015.
(3) Highest month-end balance in each of the last three years was January 2017, March 2016 and March 2015.
(4) Highest month-end balance in each of the last three years was February 2017, December 2016 and December 2015.
204
Wells Fargo & Company
Note 13: Long-Term Debt
We issue long-term debt denominated in multiple currencies,
largely 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 majority 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, 2017. 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,
2017
2016
Senior
Fixed-rate notes
Floating-rate notes
FixFloat notes
Structured notes (1)
Total senior debt - Parent
Subordinated
Fixed-rate notes (2)
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
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)
2018-2045
2018-2048
2028
2018-2056
0.375-6.75%
$
84,652
0.090-3.010%
22,463
3.58%
0.090-5.9%
2,961
7,442
79,767
19,011
—
6,858
117,518
105,636
2018-2046
3.45-7.57%
2029-2036
2027
5.95-7.95%
1.86-2.36%
27,132
27,132
26,794
26,794
1,369
299
1,668
1,362
290
1,652
146,318
134,082
2018-2019
2018-2053
2018-2031
2018-2021
2018-2037
2018-2029
1.65-2.15%
1.13-2.16%
3.83-7.50%
7,732
4,317
—
62
1.35-2.04%
47,825
1.5-7.15%
2.870-17.775%
743
39
7,758
7,168
68
79
77,075
1,238
7
60,718
93,393
2023-2038
5.25-7.74%
5,408
2027
1.990-2.010%
2020-2047
2018-2047
2018-2051
0.00-6.00%
1.645-15.737%
0.2-9.25%
—
5,408
342
342
268
1,211
7,291
6,500
167
6,667
332
332
371
3,323
12,333
75,238
116,419
Wells Fargo & Company
205
Note 13: Long-Term Debt (continued)
(continued from previous page)
(in millions)
Other consolidated subsidiaries
Senior
Fixed-rate notes
Structured notes (1)
Total senior debt - Other consolidated subsidiaries
Junior subordinated
Floating-rate notes
Total junior subordinated debt - Other consolidated
subsidiaries (3)
Maturity date(s)
Stated interest rate(s)
December 31,
2017
2016
2018-2023
2021
2.78-3.46%
3,390
4,346
0.00-1.16%
1
1
3,391
4,347
—
—
73
155
155
74
3,464
4,576
$ 225,020
255,077
Mortgage notes and other (7)
2018
3.0-4.0%
Total long-term debt - Other consolidated subsidiaries
Total long-term debt
(2)
(1) 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 $133 million and $135 million in 2017 and 2016, respectively, to effect a modification of
Wells Fargo Bank, NA notes. These subordinated notes are carried at their par amount on the balance sheet of the Parent presented in Note 26 (Parent-Only Financial
Statements). In addition, Parent long-term debt also includes debt issuance costs of $2 million in both 2017 and 2016, and affiliate related issuance costs of $323 million
and $299 million in 2017 and 2016, respectively.
(3) 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.
(4) Represents floating-rate extendible notes where holders of the notes may elect to extend the contractual maturity of all or a portion of the principal amount on a periodic
basis.
(5) At December 31, 2017 and 2016, FHLB advances were secured by residential loan collateral.
(6) For additional information on VIEs, see Note 8 (Securitizations and Variable Interest Entities).
(7) A major portion related to securitizations and secured borrowings, see Note 8 (Securitizations and Variable Interest Entities).
We issue long-term debt in a variety of maturities and
currencies to achieve cost-efficient funding and to maintain an
appropriate maturity profile. Long-term debt of $225.0 billion at
December 31, 2017, decreased $30.1 billion from December 31,
2016.
The aggregate carrying value of long-term debt that matures
(based on contractual payment dates) as of December 31, 2017,
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)
2018
2019
2020
2021
2022
Thereafter
Total
December 31, 2017
Wells Fargo & Company (Parent Only)
Senior notes
Subordinated notes
Junior subordinated notes
$
7,987
6,816
13,323
18,027
18,284
53,081
117,518
613
—
—
—
—
—
—
—
—
—
26,519
27,132
1,668
1,668
Total long-term debt - Parent
$
8,600
6,816
13,323
18,027
18,284
81,268
146,318
Wells Fargo Bank, N.A. and other bank entities (Bank)
Senior notes
Subordinated notes
Junior subordinated notes
Securitizations and other bank debt
Total long-term debt - Bank
Other consolidated subsidiaries
Senior notes
Junior subordinated notes
Securitizations and other bank debt
$ 27,612
22,369
2,011
8,487
—
—
—
—
2,742
1,012
$ 30,354
23,381
—
—
1,009
3,020
$
799
1,190
—
73
—
—
—
—
—
—
—
—
228
8,715
1,003
—
—
1,003
42
—
—
151
193
—
—
—
—
197
60,718
5,408
5,408
342
342
3,628
8,770
9,575
75,238
399
3,391
—
—
—
73
399
3,464
Total long-term debt - Other consolidated subsidiaries
$
872
1,190
Total long-term debt
$ 39,826
31,387
16,343
27,745
18,477
91,242
225,020
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, 2017, we were in compliance with all the
covenants.
206
Wells Fargo & Company
Note 14: Guarantees, Pledged Assets and Collateral, and Other Commitments
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
(in millions)
December 31, 2017
Carrying
value of
obligation
(asset)
Expires in
one year
or less
Expires
after one
Expires
year after three
years
through
five years
through
three
years
Maximum exposure to loss
Expires
after five
years
Non-
investment
grade
Total
Standby letters of credit (1)
$
39
15,357
7,908
3,068
645
26,978
8,773
Securities lending and other
indemnifications (2)
—
—
—
Written put options (3)
(455)
14,758
12,706
Loans and MHFS sold with recourse (4)
Factoring guarantees
Other guarantees
51
—
1
165
747
7
533
—
—
2
3,890
934
—
2
809
1,038
9,385
—
4,175
811
32,392
11,017
747
4,184
2
19,087
8,155
668
7
Total guarantees
$
(364)
31,034
21,147
7,896
16,052
76,129
36,692
December 31, 2016
Standby letters of credit (1)
$
Securities lending and other
indemnifications (2)
Written put options (3)
Loans and MHFS sold with recourse (4)
Factoring guarantees
Other guarantees
Total guarantees
38
—
37
55
—
6
16,050
8,727
3,194
658
28,629
9,898
—
—
10,427
10,805
84
1,109
19
637
—
21
1
4,573
947
—
17
1,166
1,216
8,592
—
3,580
1,167
27,021
10,260
1,109
3,637
2
15,915
7,228
1,109
15
$
136
27,689
20,190
8,732
15,212
71,823
34,167
(1) Total maximum exposure to loss includes direct pay letters of credit (DPLCs) of $8.1 billion and $9.2 billion at December 31, 2017 and 2016, 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.
Includes indemnifications provided to certain third-party clearing agents. Outstanding customer obligations under these arrangements were $92 million and $175 million
with related collateral of $717 million and $991 million at December 31, 2017 and 2016, respectively. Estimated maximum exposure to loss was $809 million at
December 31, 2017, and $1.2 billion at December 31, 2016.
(2)
(3) Written put options, which are in the form of derivatives, are also included in the derivative disclosure in Note 16 (Derivatives). Carrying value net asset position is a result
of certain deferred premium option trades.
(4) Represent recourse provided, predominantly to the GSEs, on loans sold under various programs and arrangements. Under these arrangements, we repurchased $5 million
of loans associated with these agreements during both 2017 and 2016.
“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. Credit quality indicators we
usually consider in evaluating risk of payments or performance
are 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 a remote possibility,
where the value of our interests and any associated collateral
declines to zero. Maximum exposure to loss estimates in Table
14.1 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.
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
Wells Fargo & Company
207
Note 14: Guarantees, Pledged Assets and Collateral, and Other Commitments (continued)
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.
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.
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 market risk related to put options written to customers
with cash securities or other offsetting derivative transactions.
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 GSEs, on loans sold under various
programs and arrangements. Substantially 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 Table 14.1 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. 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 Table 14.1 because we believe the likelihood of loss
is remote.
We also have contingent performance arrangements related
to various customer relationships and lease transactions. We are
required to pay the counterparties to these agreements if third
parties default on certain obligations.
208
Wells Fargo & Company
Pledged Assets
As part of our liquidity management strategy, we pledge various
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 and pledged
off-balance sheet securities for securities financings. The table
excludes pledged consolidated VIE assets of $13.6 billion and
$13.4 billion at December 31, 2017 and 2016, respectively, which
can only be used to settle the liabilities of those entities. The
table also excludes $675 million and $1.1 billion in assets
pledged in transactions with VIE’s accounted for as secured
borrowings at December 31, 2017 and 2016, 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,
2017
$
109,279
73,467
469,554
$
652,300
Dec 31,
2016
84,603
90,946
516,112
691,661
(2)
(1) Consists of trading assets of $42.0 billion and $33.2 billion at December 31, 2017 and 2016, respectively and off-balance sheet securities of $67.3 billion and $51.4 billion
as of the same dates, respectively, that are pledged as collateral for repurchase agreements and other securities financings. Total trading assets and other includes
$109.1 billion and $84.2 billion at December 31, 2017 and 2016, respectively, that permit the secured parties to sell or repledge the collateral.
Includes carrying value of $5.0 billion and $6.2 billion (fair value of $5.0 billion and $6.2 billion) in collateral for repurchase agreements at December 31, 2017 and 2016,
respectively, which are pledged under agreements that do not permit the secured parties to sell or repledge the collateral. Also includes $64 million and $617 million in
collateral pledged under repurchase agreements at December 31, 2017 and 2016, respectively, that permit the secured parties to sell or repledge the collateral. 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 $2.6 billion and $15.8 billion at December 31, 2017 and 2016, respectively. Substantially all of the total mortgages held for sale and
loans are pledged under agreements that do not permit the secured parties to sell or repledge the collateral. Amounts exclude $2.2 billion and $1.2 billion at December 31,
2017 and 2016, respectively, of pledged loans recorded on our balance sheet representing certain delinquent loans that are eligible for repurchase from GNMA loan
securitizations.
(3)
Wells Fargo & Company
209
Note 14: Guarantees, Pledged Assets and Collateral, and Other Commitments (continued)
Securities Financing Activities
We enter into resale and repurchase agreements and securities
borrowing and lending agreements (collectively, “securities
financing activities”) typically to finance trading positions
(including securities and derivatives), 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. Most 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 reported
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,
2017
Dec 31,
2016
$
121,135
(23,188)
97,947
(96,829)
$
1,118
$
111,488
(23,188)
88,300
(87,918)
$
382
91,123
(11,680)
79,443
(78,837)
606
89,111
(11,680)
77,431
(77,184)
247
(1) Represents recognized amount of resale and repurchase agreements with counterparties subject to enforceable MRAs that have been offset in the consolidated balance
sheet.
(2) At December 31, 2017 and 2016, includes $78.9 billion and $58.1 billion, respectively, classified on our consolidated balance sheet in federal funds sold, securities
purchased under resale agreements and other short-term investments and $19.0 billion and $21.3 billion, respectively, in loans.
(3) 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, 2017 and 2016, we have received total collateral with a fair value of $130.8 billion and $102.3 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 $66.3 billion at December 31, 2017,
and $50.0 billion at December 31, 2016.
(4) Represents the amount of our exposure that is not collateralized and/or is not subject to an enforceable MRA or MSLA.
(5) For additional information on underlying collateral and contractual maturities, see the “Repurchase and Securities Lending Agreements” section in this Note.
(6) Amount is classified in short-term borrowings on our consolidated balance sheet.
(7) 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, 2017 and 2016, we have pledged total collateral with a fair value of $113.6 billion and $91.4 billion, respectively, of
which the counterparty does not have the right to sell or repledge $5.2 billion as of December 31, 2017, and $6.6 billion as of December 31, 2016.
(8) Represents the amount of our obligation that is not covered by pledged collateral and/or is not subject to an enforceable MRA or MSLA.
210
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 most 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
Non-agency mortgage-backed securities
Corporate debt securities
Equity securities (1)
Total securities lending
Dec 31,
2017
$
51,144
92
35,386
1,324
7,152
2,034
838
1,783
Dec 31,
2016
34,335
81
32,669
2,167
6,829
3,010
1,309
1,704
99,753
82,104
186
—
—
619
10,930
11,735
152
104
1
653
6,097
7,007
Total repurchases and securities lending
$
111,488 $
89,111
(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
Overnight/
continuous
Up to 30
days
30-90 days
>90 days
Total gross
obligation
(in millions)
December 31, 2017
Repurchase agreements
Securities lending
$
83,780
9,634
Total repurchases and securities lending (1)
$
93,414
December 31, 2016
Repurchase agreements
Securities lending
Total repurchases and securities lending (1)
$
$
60,516
5,565
66,081
7,922
584
8,506
9,598
167
9,765
3,286
1,363
4,649
6,762
1,275
8,037
4,765
154
4,919
5,228
—
5,228
99,753
11,735
111,488
82,104
7,007
89,111
(1) Securities lending is executed under agreements that allow either party to terminate the transaction without notice, while repurchase agreements have a term structure to
them that technically matures at a point in time. The overnight/continuous repurchase agreements require election of both parties to roll the trade rather than the election
to terminate the arrangement as in securities lending.
OTHER COMMITMENTS To meet the financing needs of our
customers, we may enter into commitments to purchase debt
and equity securities to provide capital for their funding,
liquidity or other future needs. As of December 31, 2017 and
2016, we had commitments to purchase debt securities of
$194 million and $638 million, and commitments to purchase
equity securities of $2.2 billion and $2.0 billion, respectively.
Wells Fargo & Company
211
Note 15: Legal Actions
Wells Fargo and certain of our subsidiaries are involved in a
number of judicial, regulatory, arbitration, and other
proceedings concerning matters arising from the conduct of our
business activities, and many of those proceedings expose Wells
Fargo to potential financial loss. 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 legal actions pending against us,
including the matters described below, and we intend to defend
vigorously each case, other than matters we describe as having
settled. We establish accruals for legal actions when potential
losses associated with the actions become probable and the costs
can be reasonably estimated. For such accruals, we record the
amount we consider to be the best estimate within a range of
potential losses that are both probable and estimable; however,
if we cannot determine a best estimate, then we record the low
end of the range of those potential losses. The actual costs of
resolving legal actions may be substantially higher or lower than
the amounts accrued for those actions.
ATM ACCESS FEE LITIGATION In October 2011, plaintiffs filed
a putative class action, Mackmin, et al. v. Visa, Inc. et al.,
against Wells Fargo & Company, Wells Fargo Bank, N.A., Visa,
MasterCard, and several other banks in the United States
District Court for the District of Columbia. Plaintiffs allege that
the Visa and MasterCard requirement that if an ATM operator
charges an access fee on Visa and MasterCard transactions, then
that fee cannot be greater than the access fee charged for
transactions on other networks violates antitrust rules. Plaintiffs
seek treble damages, restitution, injunctive relief, and attorneys’
fees where available under federal and state law. Two other
antitrust cases which make similar allegations were filed in the
same court, but these cases did not name Wells Fargo as a
defendant. On February 13, 2013, the district court granted
defendants’ motions to dismiss the three actions. Plaintiffs
appealed the dismissals and, on August 4, 2015, the United
States Court of Appeals for the District of Columbia Circuit
vacated the district court’s decisions and remanded the three
cases to the district court for further proceedings. On June 28,
2016, the United States Supreme Court granted defendants’
petitions for writ of certiorari to review the decisions of the
United States Court of Appeals for the District of Columbia. On
November 17, 2016, the United States Supreme Court dismissed
the petitions as improvidently granted, and the three cases
returned to the district court for further proceedings.
AUTOMOBILE LENDING MATTERS As the Company
centralizes operations in its automobile lending business and
tightens controls and oversight of third-party risk management,
the Company anticipates it may continue to identify and
remediate issues related to historical practices concerning the
origination, servicing, and/or collection of consumer automobile
loans, including related insurance products. For example, in July
2017, the Company announced a plan to remediate customers
who may have been financially harmed due to issues related to
automobile collateral protection insurance (CPI) policies
purchased through a third-party vendor on their behalf. The
Company determined that certain external vendor processes and
operational controls were inadequate and, as a result, customers
may have been charged premiums for CPI even if they were
paying for their own vehicle insurance, as required, and in some
cases the CPI premiums may have contributed to a default that
led to their vehicle’s repossession. The Company discontinued
the practice of placing CPI in September 2016. Multiple putative
class action cases alleging, among other things, unfair and
deceptive practices relating to these CPI policies, have been filed
against the Company and consolidated into one multi-district
litigation in the United States District Court for the Central
District of California. Further, a former team member has
alleged retaliation for raising concerns regarding automobile
lending practices. In addition, the Company has identified
certain issues related to the unused portion of guaranteed
automobile protection (GAP) waiver or insurance agreements
between the dealer and, by assignment, the lender, which may
result in refunds to customers in certain states. Allegations
related to both the CPI and GAP programs are among the
subjects of two shareholder derivative lawsuits, which were
consolidated into one lawsuit in California state court. These and
other issues related to the origination, servicing and/or
collection of consumer automobile loans, including related
insurance products, have also subjected the Company to formal
or informal inquiries, investigations or examinations from
federal and state government agencies.
CONSUMER DEPOSIT ACCOUNT RELATED REGULATORY
INVESTIGATION The Consumer Financial Protection Bureau
(the “CFPB”) is conducting an investigation into whether
customers were unduly harmed by the Company’s procedures
regarding the freezing (and, in many cases, closing) of consumer
deposit accounts after the Company detected suspected
fraudulent activity (by third-parties or account holders) that
affected those accounts.
INADVERTENT CLIENT INFORMATION DISCLOSURE In
July 2017, the Company inadvertently provided certain client
information in response to a third-party subpoena issued in a
civil litigation. The Company obtained permanent injunctions in
New Jersey and New York state courts requiring the electronic
data that contained the client information and all copies to be
delivered to the New Jersey state court and the Company for
safekeeping. The court has now returned the data to counsel for
the Company. The Company has made voluntary self-disclosures
to various state and federal regulatory agencies. Notifications
have been sent to clients whose personal identifying data was
contained in the inadvertent production.
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Wells Fargo & Company
INTERCHANGE LITIGATION Plaintiffs representing a putative
class of merchants have filed putative class actions, and
individual merchants have filed individual actions, against Wells
Fargo Bank, N.A., Wells Fargo & Company, Wachovia Bank, N.A.
and Wachovia Corporation regarding the interchange fees
associated with Visa and MasterCard payment card transactions.
Visa, MasterCard and several other banks and bank holding
companies are also named as defendants in these actions. These
actions have been consolidated in the United States District
Court for the Eastern District of New York. 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 action 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 totaled
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 was
appealed to the United States Court of Appeals for the Second
Circuit by settlement objector merchants. Other merchants
opted out of the settlement and are pursuing several individual
actions. On June 30, 2016, the Second Circuit vacated the
settlement agreement and reversed and remanded the
consolidated action to the United States District Court for the
Eastern District of New York for further proceedings. On
November 23, 2016, prior class counsel filed a petition to the
United States Supreme Court, seeking review of the reversal of
the settlement by the Second Circuit, and the Supreme Court
denied the petition on March 27, 2017. On November 30, 2016,
the district court appointed lead class counsel for a damages
class and an equitable relief class. Several of the opt-out
litigations were settled during the pendency of the Second
Circuit appeal while others remain pending. Discovery is
proceeding in the opt-out litigations and the remanded class
cases.
MORTGAGE BANKRUPTCY LOAN MODIFICATION
LITIGATION Plaintiffs, representing a putative class of
mortgage borrowers who were debtors in Chapter 13 bankruptcy
cases, filed a putative class action, Cotton, et al. v. Wells Fargo,
et al., against Wells Fargo & Company and Wells Fargo Bank,
N.A. in the United States Bankruptcy Court for the Western
District of North Carolina on June 7, 2017. Plaintiffs allege that
Wells Fargo improperly and unilaterally modified the mortgages
of borrowers who were debtors in Chapter 13 bankruptcy
cases. Plaintiffs allege that Wells Fargo implemented these
modifications by improperly filing mortgage payment change
notices in Chapter 13 bankruptcy cases, in violation of
bankruptcy rules and process. The amended complaint asserts
claims based on, among other things, alleged fraud, violations of
bankruptcy rules and laws, and unfair and deceptive trade
practices. The amended complaint seeks monetary damages,
attorneys’ fees, and declaratory and injunctive relief.
MORTGAGE INTEREST RATE LOCK RELATED REGULATORY
INVESTIGATION The CFPB is conducting an investigation into
the Company’s policies and procedures regarding the
circumstances in which the Company required customers to pay
fees for the extension of interest rate lock periods for residential
mortgages. This matter has also subjected the Company to
formal or informal inquiries, investigations or examinations
from other federal and state government agencies. On October 4,
2017, the Company announced plans to reach out to all home
lending customers who paid fees for mortgage rate lock
extensions requested from September 16, 2013, through
February 28, 2017, and to provide refunds, with interest, to
customers who believe they should not have paid those fees. The
Company is named in a putative class action, filed in the United
States District Court for the Northern District of California,
alleging violations of federal and state consumer fraud statutes
relating to mortgage rate lock extension fees. A second suit was
also filed, but was voluntarily dismissed in November 2017. In
addition, former team members have asserted claims, including
in pending litigation, that they were terminated for raising
concerns regarding these policies and procedures. Allegations
related to mortgage interest rate lock extension fees are also
among the subjects of two shareholder derivative lawsuits filed
in California state court.
MORTGAGE RELATED REGULATORY INVESTIGATIONS
Federal and state government agencies, including the United
States Department of Justice (the “Department of Justice”),
continue investigations or examinations of certain mortgage
related activities 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. These agencies have advanced
theories of purported liability with respect to certain of these
activities. The Department of Justice and Wells Fargo continue
to discuss the matter, including potential settlement of the
Department of Justice's concerns; however, litigation with these
agencies, including with the Department of Justice, remains a
possibility. Other financial institutions have entered into similar
settlements with these agencies, the nature of which related to
the specific activities of those financial institutions, including the
imposition of significant financial penalties and remedial
actions.
OFAC RELATED INVESTIGATION The Company has self-
identified an issue whereby certain foreign banks utilized a Wells
Fargo software-based solution to conduct import/export trade-
related financing transactions with countries and entities
prohibited by the Office of Foreign Assets Control (“OFAC”) of
the United States Department of the Treasury. We do not believe
any funds related to these transactions flowed through accounts
at Wells Fargo as a result of the aforementioned conduct. The
Company has made voluntary self-disclosures to OFAC and is
cooperating with an inquiry from the Department of Justice.
Wells Fargo & Company
213
Note 15: Legal Actions (continued)
ORDER OF POSTING LITIGATION Plaintiffs filed a series of
putative class actions 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. Most of these
actions were consolidated in multi-district litigation proceedings
(the “MDL proceedings”) in the United States District Court for
the Southern District of Florida. The court in the MDL
proceedings has certified a class of putative plaintiffs, and Wells
Fargo moved to compel arbitration of the claims of unnamed
class members. The court denied the motions to compel
arbitration on October 17, 2016. Wells Fargo has appealed this
decision to the United States Court of Appeals for the Eleventh
Circuit.
RMBS TRUSTEE LITIGATION In November 2014, a group of
institutional investors (the “Institutional Investor Plaintiffs”),
including funds affiliated with BlackRock, Inc., filed a putative
class action in the United States District Court for the Southern
District of New York against Wells Fargo Bank, N.A., alleging
claims against the Company in its capacity as trustee for a
number of residential mortgage-backed securities (RMBS) trusts
(the “Federal Court Complaint”). Similar complaints have been
filed against other trustees in various courts, including in the
Southern District of New York, in New York state court, and in
other states, by RMBS investors. The Federal Court Complaint
alleges that Wells Fargo Bank, N.A., as trustee, caused losses to
investors and asserts causes of action based upon, among other
things, the trustee's alleged failure to notify and enforce
repurchase obligations of mortgage loan sellers for purported
breaches of representations and warranties, notify investors of
alleged events of default, and abide by appropriate standards of
care following alleged events of default. Plaintiffs seek money
damages in an unspecified amount, reimbursement of expenses,
and equitable relief. In December 2014 and December 2015,
certain other investors filed four complaints alleging similar
claims against Wells Fargo Bank, N.A. in the Southern District of
New York (the “Related Federal Cases”), and the various cases
pending against Wells Fargo are proceeding before the same
judge. On January 19, 2016, the Southern District of New York
entered an order in connection with the Federal Court
Complaint dismissing claims related to certain of the trusts at
issue (the “Dismissed Trusts”). The Company's motion to
dismiss the Federal Court Complaint and the complaints for the
Related Federal Cases was granted in part and denied in part in
March 2017. In May 2017, the Company filed third-party
complaints against certain investment advisors affiliated with
the Institutional Investor Plaintiffs seeking contribution with
respect to claims alleged in the Federal Court Complaint. The
investment advisors have moved to dismiss those complaints.
A complaint raising similar allegations to the Federal Court
Complaint was filed in May 2016 in New York state court by a
different plaintiff investor. In addition, the Institutional Investor
Plaintiffs subsequently filed a complaint relating to the
Dismissed Trusts and certain additional trusts in California state
court (the “California Action”). The California Action was
subsequently dismissed in September 2016. In December 2016,
the Institutional Investor Plaintiffs filed a new putative class
action complaint in New York state court in respect of 261 RMBS
trusts, including the Dismissed Trusts, for which Wells Fargo
Bank, N.A. serves or served as trustee (the “State Court Action”).
The Company has moved to dismiss the State Court Action.
In July 2017, certain of the plaintiffs from the State Court
Action filed a civil complaint relating to Wells Fargo Bank,
N.A.'s setting aside reserves for legal fees and expenses in
connection with the liquidation of eleven RMBS trusts at issue
in the State Court Action. The complaint seeks, among other
relief, declarations that Wells Fargo Bank, N.A. is not entitled
to indemnification, the advancement of funds or the taking of
reserves from trust funds for legal fees and expenses it incurs
in defending the claims in the State Court Action. In
November 2017, the Company's motion to dismiss the
complaint was granted. Plaintiffs filed a notice of appeal in
January 2018. In September 2017, one of the plaintiffs in the
Related Federal Cases filed a similar complaint in the
Southern District of New York seeking declaratory and
injunctive relief and money damages on an individual and
class action basis.
SALES PRACTICES MATTERS Federal, state and local
government agencies, including the Department of Justice,
the United States Securities and Exchange Commission and
the United States Department of Labor, and state attorneys
general and prosecutors’ offices, as well as Congressional
committees, have undertaken formal or informal inquiries,
investigations or examinations arising out of certain sales
practices of the Company that were the subject of settlements
with the Consumer Financial Protection Bureau, the Office of
the Comptroller of the Currency and the Office of the Los
Angeles City Attorney announced by the Company on
September 8, 2016. These matters are at varying stages. The
Company has responded, and continues to respond, to
requests from a number of the foregoing and has discussed
the resolution of some of the matters.
In addition, a number of lawsuits have also been filed by
non-governmental parties seeking damages or other remedies
related to these sales practices. First, various class plaintiffs
purporting to represent consumers who allege that they received
products or services without their authorization or consent have
brought separate putative class actions against the Company in
the United States District Court for the Northern District of
California and various other jurisdictions. In April 2017, the
Company entered into a settlement agreement in the first-filed
action, Jabbari v. Wells Fargo Bank, N.A., to resolve claims
regarding certain products or services provided without
authorization or consent for the time period May 1, 2002 to April
20, 2017. Pursuant to the settlement, the Company will pay
$142 million for remediation, attorneys’ fees, and settlement
fund claims administration. In the unlikely event that the
$142 million settlement total is not enough to provide
remediation, pay attorneys' fees, pay settlement fund claims
administration costs, and have at least $25 million left over to
distribute to all class members, the Company will contribute
additional funds to the settlement. In addition, in the unlikely
event that the number of unauthorized accounts identified by
settlement class members in the claims process and not disputed
by the claims administrator exceeds plaintiffs’ 3.5 million
account estimate, the Company will proportionately increase the
$25 million reserve so that the ratio of reserve to unauthorized
accounts is no less than what was implied by plaintiffs’ estimate
at the time of the district court’s preliminary approval of the
settlement in July 2017. A final approval hearing has been
scheduled for March 2018, although this timing is subject to
change. Second, Wells Fargo shareholders are pursuing a
consolidated securities fraud class action in the United States
District Court for the Northern District of California alleging
certain misstatements and omissions in the Company’s
disclosures related to sales practices matters. Third, Wells Fargo
shareholders have brought numerous shareholder derivative
lawsuits asserting breach of fiduciary duty claims, among others,
214
Wells Fargo & Company
against current and former directors and officers for their
alleged failure to detect and prevent sales practices issues, which
were consolidated into two separate actions in the United States
District Court for the Northern District of California and
California state court, as well as two separate actions in
Delaware state court. Fourth, a range of employment litigation
has been brought against Wells Fargo, including an Employee
Retirement Income Security Act (ERISA) class action in the
United States District Court for the District of Minnesota on
behalf of 401(k) plan participants; class actions pending in the
United States District Courts for the Northern District of
California and Eastern District of New York on behalf of team
members who allege that they protested sales practice
misconduct and/or were terminated for not meeting sales goals;
various wage and hour class actions brought in federal and state
court in California, New Jersey, Florida, and Pennsylvania on
behalf of non-exempt branch based team members alleging sales
pressure resulted in uncompensated overtime; and multiple
single plaintiff Sarbanes-Oxley Act complaints and state law
whistleblower actions filed with the United States Department of
Labor or in various state courts alleging adverse employment
actions for raising sales practice misconduct issues.
SEMINOLE TRIBE TRUSTEE LITIGATION The Seminole Tribe
of Florida filed a complaint in Florida state court alleging that
Wells Fargo, as trustee, charged excess fees in connection with
the administration of a minor’s trust and failed to invest the
assets of the trust prudently. The complaint was later amended
to include three individual current and former beneficiaries as
plaintiffs and to remove the Tribe as a party to the case. In
December 2016, the Company filed a motion to dismiss the
amended complaint on the grounds that the Tribe is a necessary
party and that the individual beneficiaries lack standing to bring
claims.
OUTLOOK As described above, the Company establishes
accruals for legal actions when potential losses associated with
the actions become probable and the costs can be reasonably
estimated. The high end of the range of reasonably possible
potential losses in excess of the Company’s accrual for probable
and estimable losses was approximately $2.7 billion as of
December 31, 2017. The outcomes of legal actions are
unpredictable and subject to significant uncertainties, and it is
inherently difficult to determine whether any loss is probable or
even possible. It is also inherently difficult to estimate the
amount of any loss and there may be matters for which a loss is
probable or reasonably possible but not currently estimable.
Accordingly, actual losses may be in excess of the established
accrual or the range of reasonably possible loss. Wells Fargo is
unable to determine whether the ultimate resolution of either
the mortgage related regulatory investigations or the sales
practices matters will have a material adverse effect on its
consolidated financial condition. Based on information currently
available, advice of counsel, available insurance coverage and
established reserves, Wells Fargo believes that the eventual
outcome of other actions against Wells Fargo and/or its
subsidiaries will not, individually or in the aggregate, have a
material adverse effect on Wells Fargo’s consolidated financial
condition. However, it is possible that the ultimate resolution of
a matter, if unfavorable, may be material to Wells Fargo’s results
of operations for any particular period.
Wells Fargo & Company
215
Note 16: Derivatives
We 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. We use
derivatives to help 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, which may
cause the hedged assets and liabilities to gain or lose fair value,
do not have a significantly adverse effect on the net interest
margin, cash flows and earnings. In a fair value or economic
hedge, the effect of change in fair value will generally be offset by
the unrealized 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 recorded in
other comprehensive income.
We also offer various derivatives, including interest rate,
commodity, equity, credit and foreign exchange contracts, as an
accommodation to our customers as part of our trading
businesses. These derivative transactions, which involve our
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. These customer
accommodations and any offsetting derivatives are treated as
customer accommodation trading and other derivatives in our
disclosures. Additionally, embedded derivatives that are
required to be accounted for separately from their host contracts
are included in the customer accommodation trading and other
derivatives disclosures as applicable.
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.
216
Wells Fargo & Company
Table 16.1: Notional or Contractual Amounts and Fair Values of Derivatives
December 31, 2017
December 31, 2016
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
$ 209,677
34,135
2,492
1,482
1,092
1,137
235,222
25,861
6,587
673
2,710
2,779
3,974
2,229
7,260
5,489
Economic hedges:
Interest rate contracts (2)
Equity contracts
Foreign exchange contracts
Credit contracts - protection purchased
Subtotal
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
220,558
12,315
15,976
111
159
716
78
37
990
201
138
309
—
648
228,051
1,098
1,441
7,964
20,435
482
545
626
102
83
165
—
2,371
1,689
6,434,673
14,979
14,179
6,018,370
57,583
61,058
62,530
213,750
362,896
9,021
17,406
—
2,354
6,291
7,413
147
207
—
1,335
8,363
7,122
214
208
—
65,532
151,675
318,999
10,483
19,964
961
31,391
31,421
32,381
32,069
36,355
34,298
3,057
4,813
9,595
85
365
—
75,498
77,869
85,129
2,551
6,029
9,798
389
138
47
80,010
81,699
87,188
(24,127)
(25,502)
(70,631)
(72,696)
$ 12,228
8,796
14,498
14,492
(1) Notional amounts presented exclude $500 million and $1.9 billion of interest rate contracts at December 31, 2017 and 2016, respectively, 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, 2017 and 2016, excludes $13.5 billion
and $9.6 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.
(2)
(3) 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.
Wells Fargo & Company
217
Note 16: Derivatives (continued)
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 and
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 includes $30.0 billion and $29.9 billion of
gross derivative assets and liabilities, respectively, at
December 31, 2017, and $74.4 billion and $78.4 billion,
respectively, at December 31, 2016, 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 $6.4 billion and $4.4 billion,
respectively, at December 31, 2017 and $10.7 billion and
$8.7 billion, respectively, at December 31, 2016, 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 netting
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.
We do not net non-cash collateral that we receive and
pledge on the balance sheet. 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 Table 16.2 represents the
aggregate of our net exposure to each counterparty after
considering the balance sheet and Disclosure-only netting
adjustments. We manage derivative exposure by monitoring the
credit risk associated with each counterparty using counterparty
specific credit risk limits, using master netting arrangements
and obtaining collateral. Derivative contracts executed in over-
the-counter markets include bilateral contractual arrangements
that are not cleared through a central clearing organization but
are typically subject to master netting arrangements. The
percentage of our bilateral derivative transactions outstanding at
period end in such markets, based on gross fair value, is
provided within the following table. Other derivative contracts
executed in over-the-counter or exchange-traded markets are
settled through a central clearing organization and are excluded
from this percentage. In addition to the netting amounts
included in the table, we also have balance sheet netting related
to resale and repurchase agreements that are disclosed within
Note 14 (Guarantees, Pledged Assets and Collateral, and Other
Commitments).
218
Wells Fargo & Company
Table 16.2: Gross Fair Values of Derivative Assets and Liabilities
Gross
amounts
offset in
consolidated
balance
sheet (1)(2)
Gross amounts
not offset in
consolidated
balance sheet
(Disclosure-only
netting) (3)
Net amounts in
consolidated
balance sheet
Gross amounts
recognized (1)
Percent
exchanged in
over-the-counter
market (1)(4)
Net
amounts
(in millions)
December 31, 2017
Derivative assets
Interest rate contracts
$
17,630
(11,929)
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
2,354
7,007
8,973
147
244
(966)
(4,233)
(6,656)
(145)
(198)
5,701
1,388
2,774
2,317
2
46
(145)
5,556
99%
(4)
1,384
(596)
2,178
(25)
2,292
—
(3)
2
43
88
76
100
10
89
Total derivative assets
$
36,355
(24,127)
12,228
(773)
11,455
(1,078)
1,168
99%
Derivative liabilities
Interest rate contracts
$
15,472
(13,226)
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
Other contracts
1,335
8,501
8,568
214
208
—
(648)
(4,041)
(7,189)
(204)
(194)
—
2,246
687
4,460
1,379
10
14
—
(1)
686
(400)
4,060
(204)
1,175
(9)
—
—
1
14
—
Total derivative liabilities
$
34,298
(25,502)
8,796
(1,692)
7,104
December 31, 2016
Derivative assets
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
Total derivative assets
Derivative liabilities
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts-protection sold
Credit contracts-protection purchased
Other contracts
$
65,268
(59,880)
3,057
5,358
10,894
85
467
(707)
(3,018)
(6,663)
(48)
(315)
5,388
2,350
2,340
4,231
37
152
(987)
(30)
(365)
(362)
—
(1)
4,401
2,320
1,975
3,869
37
151
$
$
85,129
(70,631)
14,498
(1,745)
12,753
65,209
(58,956)
2,551
6,112
(402)
(2,433)
12,742
(10,572)
389
138
47
(295)
(38)
—
6,253
2,149
3,679
2,170
94
100
47
(3,129)
(37)
(331)
(251)
(44)
(2)
—
3,124
2,112
3,348
1,919
50
98
47
76
85
100
85
9
—
34 %
74
75
97
61
98
30 %
38
85
100
98
50
100
Total derivative liabilities
$
87,188
(72,696)
14,492
(3,794)
10,698
(1)
In second quarter 2017, we adopted Settlement to Market treatment for the cash collateralizing our interest rate derivative contracts with certain centrally cleared
counterparties. As a result of this adoption, the “gross amounts recognized” and “gross amounts offset in the consolidated balance sheet” columns do not include exposure
with certain centrally cleared counterparties because the contracts are considered settled by the collateral. Likewise, what remains in these gross amount columns consists
primarily of over-the-counter (OTC) market contracts for most of the contract types as reflected by the high percentage of OTC contracts in the “percent exchanged in over-
the counter market” column as of December 31, 2017.
(2) 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 $245 million and $348 million related to derivative assets and
$95 million and $114 million related to derivative liabilities as of December 31, 2017 and 2016, respectively. Cash collateral totaled $2.7 billion and $4.2 billion, netted
against derivative assets and liabilities, respectively, at December 31, 2017, and $4.8 billion and $7.1 billion, respectively, at December 31, 2016.
(3) 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.
(4) Represents derivatives executed in over-the-counter markets not settled through a central clearing organization. Over-the-counter percentages are calculated based on
Gross amounts recognized as of the respective balance sheet date. The remaining percentage represents derivatives settled through a central clearing organization, which
are executed in either over-the-counter or exchange-traded markets.
Wells Fargo & Company
219
Note 16: Derivatives (continued)
Fair Value and Cash Flow Hedges
For fair value hedges, we use interest rate swaps to convert
certain of our fixed-rate long-term debt and time certificates of
deposit 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.
For 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.
Based upon current interest rates, we estimate $90 million
pre-tax of deferred net losses on derivatives in OCI at
December 31, 2017, 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 4 years.
Table 16.3 shows the net gains (losses) related to derivatives
in fair value and cash flow hedging relationships.
Table 16.3: Gains (Losses) Recognized in Consolidated Statement of Income on Fair Value and Cash Flow Hedging
Relationships (1)
(in millions)
Year ended December 31, 2017
Net interest income
Noninterest
Income
Investment
securities
Mortgages
held for
Loans
sale Deposits
Long-
term debt
Other
Total
Total amounts presented in the consolidated statement of
income
10,664 41,388
786
(3,013)
(5,157)
1,603 46,271
Gains (losses) on fair value hedging relationships
Interest contracts
Amounts related to interest settlements on derivatives
(2)
Recognized on derivatives
Recognized on hedged items
Foreign exchange contracts
Amounts related to interest settlements on derivatives
(2)(3)
Recognized on derivatives (4)
Recognized on hedged items
(469)
(43)
(52)
14
13
(10)
(1)
1
(1)
—
—
—
(5)
(5)
(4)
36
1,286
(20)
(912)
36
938
—
—
—
847
(979)
917
—
—
—
—
—
—
(210)
(230)
—
(196)
3,118
2,901
255
(2,855) (2,610)
Net income (expense) recognized on fair value hedges
(547)
(1)
(14)
52
1,127
263
880
Gains (losses) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre tax) reclassified from
cumulative OCI into net income (5)
Net income (expense) recognized on cash flow hedges
(continued on following page)
—
—
551
551
—
—
—
—
(8)
(8)
—
—
543
543
220
Wells Fargo & Company
(continued from previous page)
(in millions)
Year ended December 31, 2016
Net interest income
Noninterest
Income
Investment
securities
Loans
Mortgages
held for
sale Deposits
Long-
term debt
Other
Total
Total amounts of line items presented in the consolidated
statement of income
9,248
39,505
784
(1,395)
(3,830)
1,289
45,601
Gains (losses) on fair value hedging relationships
Interest contracts
Amounts related to interest settlements on derivatives (2)
(582)
Recognized on derivatives
Recognized on hedged items
Foreign exchange contracts
Amounts related to interest settlements on derivatives (2)
(3)
Recognized on derivatives
Recognized on hedged items
—
—
9
—
—
Net income (expense) recognized on fair value hedges
(573)
—
—
—
—
—
—
—
Gains (losses) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre tax) reclassified from
cumulative OCI into net income (5)
Gains (losses) (before tax) recognized in income for hedge
ineffectiveness
Net income (expense) recognized on cash flow hedges
Year ended December 31, 2015
Total amounts of line items presented in the consolidated
statement of income
—
—
—
1,043
—
1,043
(6)
—
—
—
—
—
(6)
—
—
—
62
—
—
—
—
—
62
—
—
—
1,830
—
1,304
—
—
31
—
—
(2,175)
(2,175)
2,157
2,157
—
40
(274)
(274)
286
286
1,861
(6)
1,338
(14)
—
(14)
—
1,029
(1)
(1)
(1)
1,028
8,937
36,575
785
(963)
(2,592)
464
43,206
Gains (losses) on fair value hedging relationships
Interest contracts
Amounts related to interest settlements on derivatives (2)
(782)
Recognized on derivatives
Recognized on hedged items
Foreign exchange contracts
Amounts related to interest settlements on derivatives (2)
(3)
Recognized on derivatives
Recognized on hedged items
—
—
—
—
—
Net income (expense) recognized on fair value hedges
(782)
—
—
—
—
—
—
—
Gains (losses) on cash flow hedging relationships
Interest contracts
Realized gains (losses) (pre tax) reclassified from
cumulative OCI into net income (5)
Gains (losses) (before tax) recognized in income for hedge
ineffectiveness
Net income (expense) recognized on cash flow hedges
3
1,103
—
3
—
1,103
(13)
—
—
—
—
—
(13)
—
—
—
69
—
—
—
—
—
69
—
—
—
1,886
—
—
182
—
—
2,068
—
300
1,160
300
(248)
(248)
—
182
(2,117)
(2,117)
2,143
78
2,143
1,420
(17)
—
(17)
—
1,089
1
1
1
1,090
(1) Prior period gain or loss amounts and presentation location were not conformed to new hedge accounting guidance that we adopted in 2017.
(2)
Includes $(143) million, $(104) million and $(106) million for years ended December 31, 2017, 2016, and 2015, respectively, which represents changes in fair value due to
the passage of time associated with the non-zero fair value amount at hedge inception.
Includes $(3) million, $(13) million and $(7) million for years ended December 31, 2017, 2016, and 2015, respectively, 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.
(3)
(4) For certain fair value hedges of foreign currency risk, changes in fair value of cross-currency swaps attributable to changes in cross-currency basis spreads are excluded
from the assessment of hedge effectiveness and recorded in other comprehensive income. See Note 24 (Other Comprehensive Income) for the amounts recognized in other
comprehensive income.
(5) See Note 24 (Other Comprehensive Income) for details of amounts reclassified to net income.
Wells Fargo & Company
221
Note 16: Derivatives (continued)
Table 16.4 shows the carrying amount and associated
cumulative basis adjustment related to the application of hedge
accounting that is included in the carrying amount of hedged
assets and liabilities in fair value hedging relationships.
Table 16.4: Hedged Items in Fair Value Hedging Relationship
(in millions)
December 31, 2017
Investment securities, Available-for-sale (5)
Loans
Mortgages held for sale
Deposits
Long-term debt
Hedged Items Currently Designated
Hedged Items No Longer Designated (1)
Hedge Accounting
Basis Adjustment
Assets/(Liabilities) (2)(4) Assets/(Liabilities) (3)
Carrying Amount of
Carrying Amount of
Assets/(Liabilities) (4)
Hedge Accounting
Basis Adjustment
Assets/(Liabilities)
32,498
140
465
(23,679)
(128,950)
870
(1)
(1)
158
5,221
—
—
—
(2,154)
(1,953)
343
—
—
—
16
(1) Represents hedged items no longer designated in qualifying fair value hedging relationships for which an associated basis adjustment exists at the balance sheet date.
(2) Does not include the carrying amount of hedged items where only foreign currency risk is the designated hedged risk. The carrying amount excluded for investment
securities is $1.5 billion and for long-term debt is $(7.7) billion.
(3) The balance includes $2.1 billion and $297 million of investment securities and long-term debt cumulative basis adjustments, respectively, on terminated hedges whereby
the hedged items have subsequently been re-designated into existing hedges.
(4) Represents the full carrying amount of the hedged asset or liability item as of the balance sheet date, except for circumstances in which only a portion of the asset or
liability was designated as the hedged item in which case only the portion designated is presented.
(5) Carrying amount represents the amortized cost.
Derivatives Not Designated as Hedging Instruments
We use economic hedge derivatives 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. We also
use economic hedge derivatives to mitigate the periodic earnings
volatility caused by mismatches between the changes in fair
value of the hedged item and hedging instrument recognized on
our fair value accounting hedges. 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 $413 million in
2017, net derivative gains of $261 million in 2016 and net
derivative gains of $671 million in 2015, which are included in
mortgage banking noninterest income. The aggregate fair value
of these derivatives was a net asset of $89 million at
December 31, 2017, and a net liability of $617 million at
December 31, 2016. 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
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 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 $17 million
and a net liability of $6 million at December 31, 2017 and 2016,
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 as an accommodation
to our customers as part of our trading businesses. 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 in
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
222
Wells Fargo & Company
instrument or separate the embedded derivative from the host
contract and account for the host contract and derivative
separately.
Table 16.5 shows the net gains (losses), recognized by
income statement lines, related to derivatives not designated as
hedging instruments.
Table 16.5: Gains (Losses) on Derivatives Not Designated as Hedging Instruments
(in millions)
Mortgage banking
Net gains (losses) Net gains (losses)
from trading
activities
from equity
investments
Noninterest income
Other
Total
Year ended December 31, 2017
Net gains (losses) recognized on
economic hedges derivatives:
Interest contracts (1)
$
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal (2)
Net gains (losses) recognized on
customer accommodation trading
and other derivatives:
Interest contracts (3)
Equity contracts
Foreign exchange contracts
Credit contracts
Commodity contracts
Other
Subtotal
Net gains (losses) recognized
related to derivatives not
designated as hedging
instruments
(Continued on following page)
448
—
—
—
448
614
—
—
—
—
—
614
—
(1,483)
—
—
(1,483)
—
—
—
—
—
—
—
—
—
—
—
—
160
(3,932)
638
(81)
178
—
(3,037)
(75)
17
(866)
5
(919)
—
1
—
—
—
—
1
373
(1,466)
(866)
5
(1,954)
774
(3,931)
638
(81)
178
—
(2,422)
$
1,062
(1,483)
(3,037)
(918)
(4,376)
Wells Fargo & Company
223
Note 16: Derivatives (continued)
(continued from previous page)
(in millions)
Mortgage banking
Net gains (losses)
from equity
investments
Net gains (losses)
from trading
activities
Noninterest income
Other
Total
Year ended December 31, 2016
Net gains (losses) recognized on
economic hedges derivatives:
Interest contracts (1)
$
1,029
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal (2)
Net gains (losses) recognized on
customer accommodation trading and
other derivatives:
Interest contracts (3)
Equity contracts
Foreign exchange contracts
Credit contracts
Commodity contracts
Other
Subtotal
Net gains (losses) recognized related to
derivatives not designated as hedging
instruments
$
Year ended December 31, 2015
Net gains (losses) recognized on
economic hedges derivatives:
Interest contracts (1)
$
Equity contracts
Foreign exchange contracts
Credit contracts
Subtotal (2)
Net gains (losses) recognized on
customer accommodation trading and
other derivatives:
Interest contracts (3)
Equity contracts
Foreign exchange contracts
Credit contracts
Commodity contracts
Other
Subtotal
Net gains (losses) recognized related to
derivatives not designated as hedging
instruments
$
—
—
—
1,029
818
—
—
—
—
—
818
—
125
—
—
125
—
—
—
—
—
—
—
—
—
—
—
—
255
(1,643)
1,077
(105)
216
11
(189)
(51)
(11)
954
21
913
—
—
—
—
—
—
—
978
114
954
21
2,067
1,073
(1,643)
1,077
(105)
216
11
629
1,847
125
(189)
913
2,696
723
—
—
—
723
941
—
—
—
—
—
941
—
(393)
—
—
(393)
—
—
—
—
—
—
—
—
—
—
—
—
265
563
812
44
88
(15)
1,757
(42)
—
496
—
454
—
—
—
—
—
—
—
681
(393)
496
—
784
1,206
563
812
44
88
(15)
2,698
1,664
(393)
1,757
454
3,482
(1)
(2)
Includes gains (losses) on the derivatives used as economic hedges of MSRs measured at fair value, interest rate lock commitments and mortgages held for sale.
Includes hedging losses of $(71) million, $(8) million, and $(24) million for the years ended December 31, 2017, 2016, and 2015, respectively, which partially offset hedge
accounting ineffectiveness.
(3) Amounts presented in mortgage banking noninterest income are gains on interest rate lock commitments.
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 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 sold 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.
Table 16.6 provides details of sold and purchased credit
derivatives.
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Wells Fargo & Company
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
Table 16.6: Sold and Purchased Credit Derivatives
(in millions)
December 31, 2017
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-backed securities index
Asset-backed securities index
Other
$
35
86
—
83
9
1
Total credit derivatives
$
214
December 31, 2016
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-backed securities index
Asset-backed securities index
Other
$
22
193
—
156
17
1
2,007
267
2,626
423
42
3,656
9,021
4,324
405
1,515
627
45
3,567
Total credit derivatives
$
389
10,483
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.
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
$8.3 billion at December 31, 2017, and $12.8 billion at
December 31, 2016, respectively, for which we posted $7.1 billion
and $8.9 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
510
252
540
—
—
3,306
4,608
1,704
333
257
—
—
3,568
5,862
1,575
232
308
401
42
—
2,558
3,060
295
139
584
40
—
4,118
432
35
946
153
2018 - 2027
2022 - 2047
2,318
3,932
2018 - 2027
22
—
3,656
6,463
87
1
2047 - 2058
2045 - 2046
9,840
2018 - 2031
14,959
1,264
110
1,804
79
2017 - 2026
2020 - 2047
1,376
3,668
43
5
3,567
6,365
71
187
10,519
16,328
2017 - 2021
2047 - 2058
2045 - 2046
2017 - 2047
amount of collateral to be posted, on December 31, 2017, or
December 31, 2016, we would have been required to post
additional collateral of $1.2 billion or $4.0 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
225
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 Table 17.2 in this Note. From
time to time, we may be required to record fair value
adjustments on a nonrecurring basis. These nonrecurring fair
value adjustments typically involve application of LOCOM
accounting or write-downs of individual assets. Assets recorded
on a nonrecurring basis are presented in Table 17.12 in this Note.
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 accordance with new accounting guidance that we
adopted effective January 1, 2016, we do not classify an
investment in the fair value hierarchy if we use the non-
published net asset value (NAV) per share (or its equivalent) that
has been communicated to us as an investor as a practical
expedient to measure fair value. We generally use NAV per share
as the fair value measurement for certain nonmarketable equity
fund investments. Marketable equity investments with published
NAVs continue to be classified in the fair value hierarchy.
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 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 valued using internal trader prices
that are subject to price verification procedures. The 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
226
Wells Fargo & Company
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
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, 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 plus the
allowance for unfunded credit commitments.
DERIVATIVES Quoted market prices are available and used for
our exchange-traded derivatives, such as certain interest rate
futures and option contracts, which we classify as Level 1.
However, substantially all of our derivatives are traded in over-
the-counter (OTC) markets where quoted market prices are not
always readily available. Therefore we value most OTC
derivatives using internal valuation techniques. Valuation
techniques and inputs to internally-developed models depend on
the type of derivative and nature of the underlying rate, price or
index upon which the derivative’s value is based. Key inputs can
include yield curves, credit curves, foreign exchange rates,
prepayment rates, volatility measurements and correlation of
such inputs. Where model inputs can be observed in a liquid
market and the model does not require significant judgment,
such derivatives are typically classified as Level 2 of the fair
value hierarchy. Examples of derivatives classified as Level 2
include generic interest rate swaps, foreign currency swaps,
commodity swaps, and certain option and forward contracts.
When instruments are traded in less liquid markets and
significant inputs are unobservable, such derivatives are
classified as Level 3. Examples of derivatives classified as Level 3
include complex and highly structured derivatives, certain credit
default swaps, interest rate lock commitments written for our
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
Wells Fargo & Company
227
Note 17: Fair Values of Assets and Liabilities (continued)
appraised values of the collateral and, accordingly, we classify
foreclosed assets as Level 2.
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
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.
Of 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 predominantly 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 largely 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. This
committee consists of senior executive management and reports
228
Wells Fargo & Company
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
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 Valuations”
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 by 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
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Brokers
Third-party pricing services
$
$
(in millions)
December 31, 2017
Trading assets
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
Derivative assets
Derivative liabilities
Other liabilities (2)
December 31, 2016
Trading assets
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
Derivative assets
Derivative liabilities
Other liabilities (2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
33
307
340
—
340
—
—
—
—
—
—
171
450
621
—
621
—
—
—
—
—
—
—
1,158
1,158
—
926
215
3,389
—
—
—
2,930
50,401
168,948
44,465
3,389
266,744
—
227
1,158
3,389
266,971
—
—
—
—
—
—
—
968
968
—
968
—
—
—
19
(19)
—
899
—
—
—
60
22,870
—
—
—
2,949
49,837
176,923
49,162
22,870
278,871
—
358
22,870
279,229
22
(109)
—
—
(1)
—
(1)
(2)
Includes corporate debt securities, collateralized loan and other debt obligations, asset-backed securities, and other debt securities.
Includes short sale liabilities and other liabilities.
Wells Fargo & Company
—
—
49
75
22
146
—
146
—
—
—
—
—
208
92
54
354
—
354
—
—
—
229
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, 2017
Trading assets
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Collateralized loan obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities (1)
Other trading assets
Total trading assets
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 (2)
Asset-backed securities:
Automobile loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total available-for-sale securities
Mortgages held for sale
Loans
Mortgage servicing rights (residential)
Derivative assets:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Netting
Total derivative assets
Other assets – excluding nonmarketable equity investments at NAV
Total assets included in the fair value hierarchy
Other assets – nonmarketable equity investments at NAV (5)
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
Short sale liabilities:
Securities of U.S. Treasury and federal agencies
Corporate debt securities
Equity securities
Other securities
Total short sale liabilities
Other liabilities
Level 1
Level 2
Level 3
Netting
Total
$
$
$
12,491
—
—
—
—
—
33,480
45,971
—
45,971
3,389
—
—
—
—
—
56
—
—
—
—
—
—
3,445
131
320
451
3,896
—
—
—
17
—
1,698
19
—
—
1,734
—
51,601
(17)
—
(1,313)
(19)
—
—
—
(1,349)
(10,420)
—
(2,168)
—
(12,588)
—
2,383
3,732
565
11,760
25,273
993
210
44,916
1,021
45,937
2,930
50,401
160,219
4,607
4,490
169,316
7,203
35,036
553
149
4,380
5,082
—
269,968
227
—
227
270,195
15,118
—
—
17,479
2,318
3,970
8,944
269
—
32,980
46
364,276
(15,392)
(1,318)
(5,338)
(8,546)
(336)
—
—
(30,930)
(568)
(4,986)
(45)
(285)
(5,884)
—
—
3
354
31
—
—
—
388
33
421
—
925
—
1
75
76
407
1,020
—
—
566
566
—
2,994 (3)
—
—
—
2,994
998
376
13,625
134
36
1,339
10
122
—
1,641
4,821
24,876
(63)
(17)
(1,850)
(3)
(86)
—
—
(2,019)
—
—
—
—
—
(3)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(24,127) (4)
(24,127)
—
(24,127)
—
—
—
—
—
—
25,502 (4)
25,502
—
—
—
—
—
—
14,874
3,735
919
11,791
25,273
993
33,690
91,275
1,054
92,329
6,319
51,326
160,219
4,608
4,565
169,392
7,666
36,056
553
149
4,946
5,648
—
276,407
358
320
678
277,085
16,116
376
13,625
17,630
2,354
7,007
8,973
391
(24,127)
12,228
4,867
416,626
—
416,626
(15,472)
(1,335)
(8,501)
(8,568)
(422)
—
25,502
(8,796)
(10,988)
(4,986)
(2,213)
(285)
(18,472)
(3)
(27,271)
Total liabilities recorded at fair value
$
(13,937)
(36,814)
(2,022)
25,502
(1) Net gains from trading activities recognized in the income statement for the year ended December 31, 2017, include $2.1 billion in net unrealized gains on trading
securities held at December 31, 2017.
Includes collateralized debt obligations of $1.0 billion.
(2)
(3) Balance primarily consists of securities that are investment grade based on ratings received from the ratings agencies or internal credit grades categorized as investment
grade if external ratings are not available. The securities are classified as Level 3 due to limited market activity.
(4) Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 16 (Derivatives) for additional information.
(5) Consists of certain nonmarketable equity investments that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded
from the fair value hierarchy.
(continued on following page)
230
Wells Fargo & Company
(continued from previous page)
(in millions)
December 31, 2016
Trading assets
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Collateralized loan obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities (1)
Other trading assets
Total trading assets
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 (3)
Asset-backed securities:
Automobile loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total available-for-sale securities
Mortgages held for sale
Loans
Mortgage servicing rights (residential)
Derivative assets:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Netting
Total derivative assets
Other assets – excluding nonmarketable equity investments at NAV
Total assets included in the fair value hierarchy
Other assets – nonmarketable equity investments at NAV (5)
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
Short sale liabilities:
Securities of U.S. Treasury and federal agencies
Corporate debt securities
Equity securities
Other securities
Total short sale liabilities
Other liabilities
Level 1
Level 2
Level 3
Netting
Total
$
$
$
14,950
—
—
—
—
—
20,462
35,412
—
35,412
22,870
—
—
—
—
—
58
—
—
—
—
—
—
22,928
112
741
853
23,781
—
—
—
44
—
1,314
22
—
—
1,380
—
60,573
(45)
—
(919)
(109)
—
—
—
(1,073)
(9,722)
—
(1,795)
—
(11,517)
—
2,710
2,910
501
9,481
20,254
1,128
290
37,274
1,337
38,611
2,949
49,961
161,230
7,815
8,411
177,456
10,967
34,141
9
327
4,909
5,245
1
280,720
357
1
358
281,078
21,057
—
—
64,986
3,020
2,997
10,843
280
—
82,126
16
422,888
(65,047)
(2,537)
(3,879)
(12,616)
(332)
—
—
(84,411)
(701)
(4,063)
—
(98)
(4,862)
—
—
3
309
34
—
—
—
346
28
374
—
1,140 (2)
—
1
91
92
432
879 (2)
—
—
962 (2)
962
—
3,505
—
—
—
3,505
985
758
12,959
238
37
1,047
29
272
—
1,623
3,259
23,463
(117)
(14)
(1,314)
(17)
(195)
(47)
—
(1,704)
—
—
—
—
—
(4)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(70,631) (4)
(70,631)
—
(70,631)
—
—
—
—
—
—
72,696
72,696
(4)
—
—
—
—
—
—
17,660
2,913
810
9,515
20,254
1,128
20,752
73,032
1,365
74,397
25,819
51,101
161,230
7,816
8,502
177,548
11,457
35,020
9
327
5,871
6,207
1
307,153
469
742
1,211
308,364
22,042
758
12,959
65,268
3,057
5,358
10,894
552
(70,631)
14,498
3,275
436,293
—
436,293
(65,209)
(2,551)
(6,112)
(12,742)
(527)
(47)
72,696
(14,492)
(10,423)
(4,063)
(1,795)
(98)
(16,379)
(4)
(30,875)
Total liabilities recorded at fair value
$
(12,590)
(89,273)
(1,708)
72,696
(1) Net gains from trading activities recognized in the income statement for the year ended December 31, 2016, include $820 million in net unrealized gains on trading
securities held at December 31, 2016.
(2) 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 $847 million.
(3)
(4) Represents balance sheet netting of derivative asset and liability balances and related cash collateral. See Note 16 (Derivatives) for additional information.
(5) Consists of certain nonmarketable equity investments that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded
from the fair value hierarchy.
Wells Fargo & Company
231
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 are
provided within Table 17.3 for the periods presented. 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, 2017
Trading assets
Available-for-sale securities
Mortgages held for sale
Other assets
Net derivative assets and liabilities (2)
Short sale liabilities
Total transfers
Year ended December 31, 2016
Trading assets
Available-for-sale securities
Mortgages held for sale
Other assets
Net derivative assets and liabilities (2)
Short sale liabilities
Total transfers
Year ended December 31, 2015
Trading assets
Available-for-sale securities (3)
Mortgages held for sale
Other assets
Net derivative assets and liabilities (2)
Short sale liabilities
Total transfers
$
$
$
$
$
$
—
—
—
—
—
—
—
55
—
—
—
—
(1)
54
15
—
—
—
—
(1)
14
—
—
—
—
—
—
—
(48)
—
—
—
—
1
(47)
(9)
—
—
—
—
1
22
1,334
10
—
(43)
—
(40)
(5)
(134)
(1)
51
—
1,323
(129)
61
481
17
—
(51)
(1)
507
103
76
471
—
48
(1)
(56)
(80)
(98)
—
(41)
1
(28)
(8)
(194)
—
15
1
(8)
697
(214)
40
5
134
1
(51)
—
129
1
80
98
—
41
—
(22)
(1,334)
(10)
—
43
—
(1,323)
(13)
(481)
(17)
—
51
—
13
8
194
—
(15)
—
200
(94)
(76)
(471)
—
(48)
—
(689)
(274)
220
(460)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Includes transfers of net derivative assets and net derivative liabilities between levels due to changes in observable market data.
(1) All transfers in and out of Level 3 are disclosed within the recurring Level 3 rollforward tables in this Note.
(2)
(3) 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.
232
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, 2017,
are presented in Table 17.4.
Table 17.4: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2017
(in millions)
Year ended December 31, 2017
Trading assets:
Securities of U.S. states and
political subdivisions
Collateralized loan obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total 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:
Automobile loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed 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) (7)
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Other assets
Short sale liabilities
Other liabilities
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)
$
3
309
34
—
—
—
346
28
374
—
3
2
—
—
—
5
(8)
(3)
1,140
4
1
91
92
432
879
—
—
962
962
—
—
—
—
(4)
(4)
(1)
22
—
—
1
1
22
—
—
—
3,505
985
22
(36)
758
12,959
(6)
(2,115)
121
23
(267)
12
77
(47)
(81)
604
(17)
(199)
(5)
24
27
434
3,259
1,563
—
(4)
—
1
—
—
—
—
—
—
—
—
—
5
—
—
—
23
103
—
—
3
3
134
—
—
—
134
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(13)
2
—
—
—
(11)
(4)
(15) (3)
—
—
(11)
(11)
—
—
—
—
—
—
—
42
(7)
—
—
—
35
(3)
32
—
—
6
—
—
—
6
34
40
—
—
(4)
—
—
—
(4)
(18)
(22)
3
354
31
—
—
—
388
33
421
1,105
5
(1,334)
925
—
—
—
—
—
—
—
—
—
1
75
76
407
1,020
—
—
566
566
—
(12)
(12)
(47)
16
—
—
(400)
(400)
662
—
—
—
662
(75)
(376)
2,781
(654)
13
(37)
—
(65)
20
—
—
—
—
—
—
—
—
—
5
—
—
—
5
—
—
—
2
(53)
—
—
—
(723)
(51)
(2)
—
—
1
—
—
134
(10)
(1,334)
2,994
(11) (4)
—
—
—
—
—
—
—
—
— (5)
(1,334)
2,994
(11)
998
376
13,625
71
19
(511)
7
36
—
(378)
4,821
—
(3)
(34) (6)
(12) (6)
(126) (6)
(52)
15
(259)
6
(62)
—
(352) (8)
1,569 (5)
— (3)
— (6)
—
—
—
(2)
45
—
—
—
43
—
—
—
Total debt securities
3,505
(1) See Table 17.5 for detail.
(2) Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/
realization of cash flows over time.
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.
(3)
(4)
(5)
(6)
(7) For more information on the changes in mortgage servicing rights, see Note 9 (Mortgage Banking Activities).
(8)
Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.
(continued on following page)
Wells Fargo & Company
233
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, 2017.
Table 17.5: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2017
(in millions)
Year ended December 31, 2017
Trading assets:
Securities of U.S. states and political subdivisions
$
Collateralized loan obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total 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:
Automobile 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) (1)
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
Purchases
Sales
Issuances
Settlements
Net
37
439
25
—
—
—
501
—
501
—
—
—
—
14
135
—
—
—
—
(36)
(250)
(32)
—
—
—
(318)
(2)
(320)
—
—
—
—
—
—
—
—
—
(1)
(147)
—
—
—
—
(148)
(1)
(149)
—
42
(7)
—
—
—
35
(3)
32
(68)
1,369
(196)
1,105
—
—
—
(4)
—
—
—
—
—
—
—
—
—
—
—
—
211
211
149
(72)
1,580
—
—
—
149
79
6
541
—
—
—
—
6
—
6
—
3
—
—
—
—
(72)
(485)
(129)
(24)
—
—
(118)
—
(3)
—
(121)
(2)
(3)
—
—
—
—
1,580
489
19
2,263
—
—
—
—
—
—
—
—
—
—
—
(12)
(12)
(57)
(119)
—
—
(611)
(611)
(995)
—
—
—
(995)
(158)
(272)
1
—
(12)
(12)
(47)
16
—
—
(400)
(400)
662
—
—
—
662
(75)
(376)
2,781
(654)
(654)
13
81
—
(68)
20
(608)
—
—
—
13
(37)
—
(65)
20
(723)
(2)
—
—
(1) For more information on the changes in mortgage servicing rights, see Note 9 (Mortgage Banking Activities).
234
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, 2016,
are presented in Table 17.6.
Table 17.6: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2016
(in millions)
Year ended December 31, 2016
Trading assets:
Securities of U.S. states and
political subdivisions
Collateralized loan obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total 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:
Automobile 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)
$
8
343
56
—
—
—
407
34
441
—
(38)
(7)
—
—
—
(45)
(6)
(51)
—
—
—
—
—
—
—
—
—
1,500
6
(25)
1
73
74
405
565
—
—
1,182
1,182
3,726
—
—
—
3,726
1,082
5,316
—
—
—
21
50
—
—
2
2
79
—
—
—
79
(19)
(59)
—
1
1
35
(1)
—
—
(8)
(8)
2
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
—
(5)
15
(13)
—
—
(1)
(4)
—
(4)
60
—
17
17
(29)
265
—
—
(214)
(214)
99
—
—
—
99
(159)
(4,499)
2,139
(1,003)
(2)
(156)
(1)
49
—
(1,113)
224
—
25
—
—
—
—
—
1
1
—
1
—
(11)
(2)
—
—
—
(13)
—
(13)
3
309
34
—
—
—
346
28
374
80
(481)
1,140
—
—
—
—
—
—
—
—
—
1
91
92
432
879
—
—
962
962
—
(42)
—
—
—
—
(42)
1
(41) (3)
—
—
(1)
(1)
(2)
—
—
—
(4)
(4)
(481)
3,505
(7) (4)
—
—
—
—
—
—
(481)
3,505
(17)
—
—
(7)
(1)
59
—
—
—
51
—
—
—
985
758
12,959
121
23
(267)
12
77
(47)
(81)
3,259
—
(4)
—
—
— (5)
(7)
(24) (6)
(24) (6)
565 (6)
170
11
(176)
(4)
26
11
38 (8)
(30) (5)
— (3)
— (6)
—
—
—
—
—
—
—
—
—
80
—
—
—
80
98
—
—
—
4
21
16
—
—
41
—
—
—
Mortgage servicing rights (residential) (7)
12,415
(1,595)
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
288
12
(111)
—
(3)
(58)
128
3,065
—
(30)
843
10
(80)
(3)
31
11
812
(30)
—
1
(1) See Table 17.7 for detail.
(2) Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/
realization of cash flows over time.
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.
(3)
(4)
(5)
(6)
(7) For more information on the changes in mortgage servicing rights, see Note 9 (Mortgage Banking Activities).
(8)
Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.
(continued on following page)
Wells Fargo & Company
235
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, 2016.
Table 17.7: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2016
Purchases
Sales
Issuances
Settlements
Net
(2)
(357)
(50)
—
—
(1)
(410)
—
(410)
—
—
—
—
—
—
—
—
—
(5)
—
—
—
—
—
(5)
—
(5)
(24)
547
(491)
—
—
—
(12)
(54)
—
—
(28)
(28)
(118)
—
—
—
(118)
(618)
(3,791)
(66)
—
—
(147)
—
(4)
—
(151)
—
—
—
—
—
—
—
—
—
—
235
235
782
—
—
—
782
565
302
2,204
—
—
—
—
—
—
—
—
—
—
(5)
15
(13)
—
—
(1)
(4)
—
(4)
60
—
17
17
(29)
265
—
—
(214)
(214)
99
—
—
—
99
(159)
(4,499)
2,139
—
(5)
(5)
(53)
(299)
—
—
(471)
(471)
(1,319)
—
—
—
(1,319)
(193)
(1,031)
1
(1,003)
(1,003)
(2)
(38)
(1)
46
—
(2)
(156)
(1)
49
—
(998)
(1,113)
(1)
—
25
224
—
25
(in millions)
Year ended December 31, 2016
Trading assets:
Securities of U.S. states and political subdivisions
$
Collateralized loan obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total 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:
Automobile 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) (1)
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
2
372
37
—
—
—
411
—
411
28
—
22
22
36
618
—
—
50
50
754
—
—
—
754
87
21
—
—
—
29
—
7
—
36
225
—
—
(1) For more information on the changes in mortgage servicing rights, see Note 9 (Mortgage Banking Activities).
236
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 17.8.
Table 17.8: Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis – 2015
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)
(in millions)
Year ended December 31, 2015
Trading assets:
Securities of U.S. states and
political subdivisions
Collateralized loan obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total 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:
Automobile 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
$
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
194
—
—
—
(2)
(13)
—
—
—
—
—
(12)
—
(81)
—
(93)
(1)
(94)
8
343
56
—
—
—
407
34
441
(76)
1,500
—
—
—
—
—
—
—
—
—
(76)
(640)
—
(640)
(716)
(471)
—
—
—
—
1
73
74
405
565
—
—
1,182
1,182
3,726
—
—
—
3,726
1,082
5,316
12,415
288
12
(48)
(111)
—
—
—
—
(3)
(58)
128
3,065
—
(30)
—
(28)
(2)
1
—
—
(29)
(14)
(43) (3)
(5)
—
(2)
(2)
(32)
—
—
—
(1)
(1)
(40) (4)
—
—
— (5)
(40)
(23) (6)
(117) (6)
214 (6)
97
10
74
—
10
(15)
176 (8)
457 (5)
— (3)
— (6)
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
293
1
(84)
—
(189)
(44)
(23)
2,512
(6)
(28)
1,132
7
116
—
19
(15)
1,259
456
—
(13)
(977)
(344)
1,547
(1,137)
6
(82)
—
167
1
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,045)
(15)
(48)
97
6
11
—
—
—
—
—
—
(1) See Table 17.9 for detail.
(2) Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/
realization of cash flows over time.
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.
(3)
(4)
(5)
(6)
(7) For more information on the changes in mortgage servicing rights, see Note 9 (Mortgage Banking Activities).
(8)
Included in mortgage banking, trading activities, equity investments and other noninterest income in the income statement.
(continued on following page)
Wells Fargo & Company
237
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, 2015.
Table 17.9: Gross Purchases, Sales, Issuances and Settlements – Level 3 – 2015
(in millions)
Year ended December 31, 2015
Trading assets:
Securities of U.S. states and political subdivisions
Collateralized loan obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total 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:
Automobile 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) (1)
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
Purchases
Sales
Issuances
Settlements
Net
$
4
1,093
45
—
—
—
1,142
4
1,146
—
—
—
—
200
109
—
—
141
141
450
—
—
—
450
202
72
—
—
—
15
—
12
—
27
97
21
—
(2)
(1,203)
(45)
(1)
(5)
—
(1,256)
(27)
(1,283)
(65)
(22)
(8)
(30)
(11)
(325)
—
—
(1)
(1)
(432)
—
—
—
(432)
(1,605)
—
(3)
—
—
(103)
—
(3)
—
(106)
—
(15)
—
—
—
—
—
—
—
—
—
—
(1)
—
—
—
(9)
(11)
(21)
(1)
(22)
1
(110)
—
(1)
(14)
(11)
(135)
(24)
(159)
555
(1,181)
(691)
—
—
—
—
—
—
—
274
274
829
—
—
—
829
777
379
1,556
—
—
—
—
—
—
—
—
—
—
—
(22)
(22)
(10)
(355)
(264)
—
(593)
(857)
(22)
(30)
(52)
179
(571)
(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)
—
—
11
6
(82)
—
167
1
(1,045)
97
6
11
(1) For more information on the changes in mortgage servicing rights, see Note 9 (Mortgage Banking Activities).
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, 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.
238
Wells Fargo & Company
Table 17.10: Valuation Techniques – Recurring Basis – 2017
($ 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, 2017
Trading and available-for-sale securities:
Securities of U.S. states and
political subdivisions:
Government, healthcare and
other revenue bonds
Other municipal bonds
Collateralized loan and other debt
obligations (2)
Asset-backed securities:
11
49
354
1,020
$
868
Discounted cash flow
Discount rate
Discounted cash flow
Discount rate
1.7 -
4.7 -
5.8 %
4.9
2.7
4.8
Vendor priced
Market comparable
pricing
Vendor priced
Comparability
adjustment
(22.0) -
19.5
3.0
Diversified payment rights (3)
292
Discounted cash flow
Other commercial and consumer
248 (4)
Discounted cash flow
Discount rate
Discount rate
Weighted average life
Mortgages held for sale (residential)
26
974
Vendor priced
Discounted cash flow
Default rate
Loans
24
Market comparable
pricing
376 (5)
Discounted cash flow
Mortgage servicing rights (residential)
13,625
Discounted cash flow
Net derivative assets and (liabilities):
Interest rate contracts
54
Discounted cash flow
2.4 -
3.7 -
2.0 -
0.0 -
2.6 -
0.1 -
6.5 -
3.9
5.2
2.3 yrs
7.1 %
7.3
41.4
15.9
3.1
3.9
2.1
1.3
5.6
19.6
9.1
(56.3) -
(6.3)
(42.7)
3.1 -
8.7 -
0.0 -
78 -
6.6 -
9.7 -
7.5
100.0
33.9
587
12.9 %
20.5
Discount rate
Loss severity
Prepayment rate
Comparability
adjustment
Discount rate
Prepayment rate
Loss severity
Cost to service per
loan (6) $
Discount rate
Prepayment rate (7)
Default rate
Loss severity
Prepayment rate
0.0 -
50.0 -
2.8 -
5.0
50.0
12.5
4.2
91.9
6.6
143
6.9
10.5
2.1
50.0
10.5
15.2
2.7
(7.6)
1.6
24.2
19.2
(0.2)
1.3
50.7
10.0
1.4
Interest rate contracts: derivative loan
commitments
17
Discounted cash flow
Fall-out factor
1.0 -
99.0
Initial-value
servicing
(59.9) -
101.1 bps
Equity contracts
102
Discounted cash flow
Conversion factor
(9.7) -
0.0 %
Credit contracts
Other assets: nonmarketable equity
investments
(613)
Option model
Correlation factor
(77.0) -
98.0 %
Weighted average life
0.5 -
3.0 yrs
Volatility factor
5.7 -
95.5
(3)
39
Market comparable
pricing
Option model
Comparability
adjustment
Credit spread
Loss severity
(29.9) -
0.0 -
13.0 -
8
Discounted cash flow
Discount rate
10.0 -
Volatility Factor
0.5
17.3
63.7
60.0
10.0
1.9
4,813
Market comparable
pricing
Comparability
adjustment
(21.1) -
(5.5)
(15.0)
Insignificant Level 3 assets, net of liabilities
570 (8)
Total level 3 assets, net of liabilities
$ 22,854 (9)
(1) Weighted averages are calculated using outstanding unpaid principal balance for cash instruments, such as loans and securities, and notional amounts for derivative
instruments.
Includes $1.0 billion of collateralized debt obligations.
(2)
(3) Securities backed by specified sources of current and future receivables generated from foreign originators.
(4) A significant portion of the balance consists of investments in asset-backed securities that are revolving in nature, for which the timing of advances and repayments of
principal are uncertain.
(5) Consists of reverse mortgage loans.
(6) The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $78 - $252.
(7)
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.
(8) Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The
amount includes corporate debt securities, mortgage-backed securities, other trading assets, other liabilities and certain net derivative assets and liabilities, such as
commodity contracts, foreign exchange contracts, and other derivative contracts.
(9) Consists of total Level 3 assets of $24.9 billion and total Level 3 liabilities of $2.0 billion, before netting of derivative balances.
Wells Fargo & Company
239
Note 17: Fair Values of Assets and Liabilities (continued)
Table 17.11: Valuation Techniques – Recurring Basis – 2016
Fair Value
Level 3
Valuation Technique(s)
Significant
Unobservable Input
Range of Inputs
Weighted
Average (1)
($ in millions, except cost to service amounts)
December 31, 2016
Trading and available-for-sale securities:
Securities of U.S. states and
political subdivisions:
Government, healthcare and
other revenue bonds
Other municipal bonds
Collateralized loan and other debt
obligations (2)
Asset-backed securities:
Diversified payment rights (3)
$
906
29
208
309
879
443
Mortgages held for sale (residential)
27
955
30
Discounted cash flow
Discounted cash flow
Discount rate
Discount rate
Weighted average life
1.1 -
3.7 -
3.6 -
5.6
%
4.9
3.6
yrs
2.0
4.5
3.6
Comparability
adjustment
(15.5) -
20.3 %
2.9
Vendor priced
Market comparable
pricing
Vendor priced
Discounted cash flow
Vendor priced
Discounted cash flow
Other commercial and consumer
492 (4)
Discounted cash flow
Discount rate
Discount rate
Weighted average life
Default rate
Discount rate
Loss severity
Prepayment rate
1.9 -
3.0 -
0.8 -
0.5 -
1.1 -
0.1 -
6.3 -
Prepayment rate
0.4 -
100.0
Utilization rate
0.0 -
0.8
4.8
4.6
4.2 yrs
7.9 %
6.9
42.5
17.1
0.0
3.9
18.4 %
20.6
6.8
50.0
12.5
Loans
758 (5)
Discounted cash flow
Discount rate
0.0 -
Market comparable
pricing
Comparability
adjustment
(53.3) -
Mortgage servicing rights (residential)
12,959
Discounted cash flow
Cost to service per
loan (6)
Discount rate
Prepayment rate (7)
6.5 -
9.4 -
$
79 -
598
Net derivative assets and (liabilities):
Interest rate contracts
127
Discounted cash flow
Default rate
0.1 -
Loss severity
50.0 -
Prepayment rate
2.8 -
Interest rate contracts: derivative loan
commitments
Equity contracts
Credit contracts
(6)
79
Discounted cash flow
Fall-out factor
1.0 -
99.0
Discounted cash flow
Conversion factor
(10.6) -
0.0 %
Initial-value servicing
(23.0) -
131.2 bps
(346)
Option model
Correlation factor
(65.0) -
98.5 %
Weighted average life
1.0 -
3.0 yrs
(28)
105
Market comparable
pricing
Comparability
adjustment
(27.7) -
Option model
Credit spread
0.0 -
Loss severity
12.0 -
21.3
11.6
60.0
Volatility factor
6.5 -
100.0
Other assets: nonmarketable equity investments
21
Discounted cash flow
Discount rate
5.0 -
10.3
Volatility Factor
0.3 -
2.4
3.3
3.9
2.9
1.9
5.1
26.9
10.0
(37.8)
0.6
83.7
0.1
155
6.8
10.3
2.1
50.0
9.6
15.0
56.8
(7.9)
2.0
39.9
20.7
0.02
1.2
50.4
8.7
1.1
3,238
Market comparable
pricing
Comparability
adjustment
(22.1) -
(5.5)
(16.4)
Insignificant Level 3 assets, net of liabilities
570 (8)
Total level 3 assets, net of liabilities
$ 21,755 (9)
(1) Weighted averages are calculated using outstanding unpaid principal balance for cash instruments such as loans and securities, and notional amounts for derivative
instruments.
Includes $847 million of collateralized debt obligations.
(2)
(3) Securities backed by specified sources of current and future receivables generated from foreign originators.
(4) A significant portion of the balance consists of investments in asset-backed securities that are revolving in nature, for which the timing of advances and repayments of
principal are uncertain.
(5) Consists of reverse mortgage loans.
(6) The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $79 - $293.
(7)
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.
(8) Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The
amount includes corporate debt securities, mortgage-backed securities, other trading assets, other liabilities and certain net derivative assets and liabilities, such as
commodity contracts, foreign exchange contracts, and other derivative contracts.
(9) Consists of total Level 3 assets of $23.5 billion and total Level 3 liabilities of $1.7 billion, before netting of derivative balances.
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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 for 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. We also consider 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 Overnight Index Swap
(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 calculate the
present value of 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 estimated 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
241
Note 17: Fair Values of Assets and Liabilities (continued)
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.
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).
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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,
2017, and 2016, 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, 2017
December 31, 2016
Mortgages held for sale (LOCOM) (1)
$
Loans held for sale
Loans:
Commercial
Consumer
Total loans (2)
Other assets - excluding nonmarketable equity
investments at NAV (3)
Total included in the fair value hierarchy
$
Other assets - nonmarketable equity investments at
NAV (4)
Total assets at fair value on a nonrecurring
basis
—
—
—
—
—
—
—
1,646
1,333
2,979
108
—
108
374
502
876
—
10
10
374
512
886
177
297
474
2,807
1,640
4,447
—
—
—
—
—
—
—
2,312
1,350
3,662
8
464
822
1,286
—
—
7
7
8
464
829
1,293
233
412
645
3,839
1,769
5,608
6
$ 4,453
13
5,621
(1)
(2)
(3)
(4)
Consists of commercial mortgages and residential real estate 1-4 family first mortgage loans.
Represents the carrying value of loans for which nonrecurring adjustments are based on the appraised value of the collateral.
Includes the fair value of foreclosed real estate, other collateral owned, operating lease assets and nonmarketable equity investments.
Consists of certain nonmarketable equity investments that are measured at fair value on a nonrecurring basis using NAV per share (or its equivalent) as a practical
expedient and are excluded from the fair value hierarchy.
Table 17.13 presents the increase (decrease) in value of
certain assets held at the end of the respective reporting periods
presented 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,
2017
2016
Mortgages held for sale (LOCOM)
$
Loans held for sale
Loans:
Commercial
Consumer
Total loans (1)
Other assets (2)
Total
10
(2)
(335)
(424)
(759)
(299)
1
—
(913)
(717)
(1,630)
(438)
$
(1,050)
(2,067)
(1) Represents write-downs of loans based on the appraised value of the
(2)
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
243
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 that are
measured at fair value on a nonrecurring basis using 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 valuation techniques and
significant unobservable inputs for certain classes of Level 3
Table 17.14: Valuation Techniques – Nonrecurring Basis
assets measured using an internal model that we consider, both
individually and in the aggregate, insignificant relative to our
overall Level 3 nonrecurring measurements. We made this
determination based upon an evaluation of each class 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.
($ in millions)
December 31, 2017
Residential mortgages held
for sale (LOCOM)
Fair Value
Level 3
Valuation Technique(s) (1)
Significant Unobservable
Inputs (1)
Range of inputs
Weighted
Average (2)
$ 1,333 (3)
Discounted cash flow
Default rate (4)
0.1 –
4.1%
1.7%
Other assets: nonmarketable
equity investments
Insignificant level 3 assets
122
185
Total
$ 1,640
Discount rate
1.5 –
8.5
Loss severity
0.7 –
52.9
Prepayment rate
(5)
5.4
–
100.0
Discounted cash flow
Discount rate
5.0
–
10.5
3.8
2.2
50.6
10.2
December 31, 2016
Residential mortgages held for
sale (LOCOM)
$
1,350 (3)
Discounted cash flow
Default rate
(4)
0.2
–
4.3 %
1.9 %
Other assets: nonmarketable
equity investments
Insignificant level 3 assets
220
199
Total
$
1,769
Discount rate
1.5
–
8.5
Loss severity
0.7
–
50.1
Prepayment rate
(5)
3.0
–
100.0
Discounted cash flow
Discount rate
4.7
–
9.3
3.8
2.4
50.7
7.3
(1) Refer to the narrative following Table 17.11 for a definition of the valuation technique(s) and significant unobservable inputs.
(2) For residential MHFS, weighted averages are calculated using the outstanding unpaid principal balance of the loans.
(3) Consists of approximately $1.3 billion of government insured/guaranteed loans purchased from GNMA-guaranteed mortgage securitizations at both December 31, 2017 and
2016, and $26 million and $33 million of other mortgage loans that are not government insured/guaranteed at December 31, 2017 and 2016, respectively.
(4) Applies only to non-government insured/guaranteed loans.
(5)
Includes the impact on prepayment rate of expected defaults for government insured/guaranteed loans, which impact the frequency and timing of early resolution of loans.
Alternative Investments
We hold certain nonmarketable equity investments for which we
use NAV per share (or its equivalent) as a practical expedient for
fair value measurements, including estimated fair values for
investments accounted for under the cost method. The
investments consist of private equity funds that invest in equity
and debt securities issued by private and publicly-held
companies. The fair values of these investments and related
unfunded commitments totaled $30 million and $23 million,
respectively, at December 31, 2017, and $48 million and
$37 million, respectively, at December 31, 2016. The investments
do not allow redemptions. We receive distributions as the
underlying assets of the funds liquidate, which we expect to
occur through 2025.
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Wells Fargo & Company
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
generally 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 17.15: 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 newly consolidated VIEs if 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 17.15 reflects differences between the fair value
carrying amount of the assets 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, 2017
December 31, 2016
Fair value Aggregate
unpaid
principal
carrying
amount
$
1,023
1,069
34
50
16,116
15,827
127
16
—
—
376
253
4,867
165
21
6
6
404
281
N/A
Fair value
carrying
amount less
aggregate
unpaid
principal
(46)
(16)
289
(38)
(5)
(6)
(6)
(28)
(28)
N/A
Fair value
carrying
amount
Aggregate
unpaid
principal
1,332
100
1,418
115
22,042
21,961
136
12
—
—
758
297
3,275
182
16
6
6
775
318
N/A
Fair value
carrying
amount less
aggregate
unpaid
principal
(86)
(15)
81
(46)
(4)
(6)
(6)
(17)
(21)
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.
Wells Fargo & Company
245
Note 17: Fair Values of Assets and Liabilities (continued)
The assets 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 measured at fair value are
shown in Table 17.16 by income statement line item.
Table 17.16: Fair Value Option – Changes in Fair Value Included in Earnings
2017
2016
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
—
1,229
—
—
—
45
—
—
—
(9)
2
—
—
1,592
—
—
1,456
—
—
—
55
—
—
—
(5)
3
—
(60)
(12)
—
—
1,808
—
—
—
4
—
—
—
(6)
2015
Other
noninterest
income
4
—
(122)
457
—
(in millions)
Trading assets - loans
$
Mortgages 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 17.17 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 17.17: Fair Value Option – Gains/Losses Attributable to
Instrument-Specific Credit Risk
(in millions)
2017
2016
2015
Year ended December 31,
Gains (losses) attributable to
instrument-specific credit risk:
Trading assets - loans
Mortgages held for sale
Total
$
$
45
(12)
33
55
3
58
4
29
33
246
Wells Fargo & Company
Disclosures about Fair Value of Financial
Instruments
Table 17.18 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
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.
Table 17.18: Fair Value Estimates for Financial Instruments
We have not included assets and liabilities that are not
financial instruments in our disclosure, such as the value of the
long-term relationships with our deposit, credit card and trust
customers, amortized MSRs, premises and equipment, goodwill
and other intangibles, deferred taxes and other liabilities. The
total of the fair value calculations presented does not represent,
and should not be construed to represent, the underlying value
of the Company.
(in millions)
December 31, 2017
Financial assets
Carrying
amount
Level 1
Level 2
Level 3
Total
Estimated fair value
Cash and due from banks (1)
$
23,367
23,367
—
—
23,367
Federal funds sold, securities purchased under resale
agreements and other short-term investments (1)
Held-to-maturity securities
Mortgages held for sale (2)
Loans held for sale
Loans, net (3)
Nonmarketable equity investments (cost method)
Excluding investments at NAV
272,605
193,457
139,335
44,806
3,954
108
926,273
7,136
—
—
—
—
79,079
93,694
2,625
108
69
485
1,333
—
272,605
138,985
3,958
108
51,713
886,622
938,335
23
7,605
7,628
Total financial assets included in the fair value hierarchy
1,372,778
261,630
227,242
896,114
1,384,986
Investments at NAV (4)
Total financial assets
Financial liabilities
Deposits
Short-term borrowings (1)
Long-term debt (5)
Total financial liabilities
December 31, 2016
Financial assets
27
$ 1,372,805
$ 1,335,991
103,256
224,981
$ 1,664,228
30
1,385,016
—
—
—
—
1,315,648
19,768
1,335,416
103,256
227,109
—
103,256
3,159
230,268
1,646,013
22,927
1,668,940
Cash and due from banks (1)
$
20,729
20,729
—
Federal funds sold, securities purchased under resale agreements and
other short-term investments (1) (6)
266,038
207,003
Held to maturity securities
Mortgages held for sale (2)
Loans held for sale
Loans, net (3)
Nonmarketable equity investments (cost method)
Excluding investments at NAV
99,583
4,267
80
936,358
8,362
45,079
—
—
—
—
—
82
2,370
1,350
—
20,729
266,038
99,155
4,277
81
58,953
51,706
2,927
81
60,245
887,589
947,834
18
8,924
8,942
Total financial assets included in the fair value hierarchy
1,335,417
272,811
173,930
900,315
1,347,056
Investments at NAV (4)
Total financial assets
Financial liabilities
Deposits
Short-term borrowings (1)
Long-term debt (5)
Total financial liabilities
35
$ 1,335,452
$ 1,306,079
96,781
255,070
$ 1,657,930
48
1,347,104
—
—
—
—
1,282,158
23,995
1,306,153
96,781
—
96,781
245,704
10,075
255,779
1,624,643
34,070
1,658,713
(1) Amounts consist of financial instruments for which carrying value approximates fair value.
(2) Excludes MHFS for which we elected the fair value option.
(3) Excludes loans for which the fair value option was elected and also excludes lease financing with a carrying amount of $19.4 billion and $19.3 billion at December 31, 2017
and 2016, respectively.
(4) Consists of certain nonmarketable equity investments for which estimated fair values are determined using NAV per share (or its equivalent) as a practical expedient and
are excluded from the fair value hierarchy.
(5) Excludes capital lease obligations under capital leases of $39 million and $7 million at December 31, 2017 and 2016, respectively.
(6) The fair value classification level of certain interest-earning deposits have been reclassified to conform with the current period end classification.
Wells Fargo & Company
247
Note 17: Fair Values of Assets and Liabilities (continued)
Loan commitments, standby letters of credit and
commercial and similar letters of credit are not included in Table
17.18. A reasonable estimate of the fair value of these
instruments is the carrying value of deferred fees plus the
allowance for unfunded credit commitments, which totaled
Note 18: Preferred Stock
$1.0 billion and $1.2 billion at December 31, 2017 and 2016,
respectively.
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 H
Floating Class A Preferred Stock (1)
Series I
Floating Class A Preferred Stock
Series J
December 31, 2017
December 31, 2016
Liquidation
preference
per share
Shares
authorized
and
designated
Liquidation
preference
per share
Shares
authorized
and
designated
10
—
97,000
$
10
97,000
—
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
5.90% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
25,000
80,000
25,000
80,000
Series T
6.00% 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
25,000
80,000
Series V
6.00% Non-Cumulative Perpetual Class A Preferred Stock
25,000
40,000
25,000
40,000
Series W
5.70% Non-Cumulative Perpetual Class A Preferred Stock
25,000
40,000
25,000
40,000
Series X
5.50% Non-Cumulative Perpetual Class A Preferred Stock
25,000
46,000
25,000
46,000
Series Y
5.625% Non-Cumulative Perpetual Class A Preferred Stock
25,000
27,600
ESOP
Cumulative Convertible Preferred Stock (2)
Total
—
1,556,104
12,036,414
—
—
—
1,439,181
11,941,891
(1) On January 26, 2017, we filed with the Delaware Secretary of State a Certificate Eliminating the Certificate of Designations with respect to the Series H preferred Stock.
(2) See the ESOP Cumulative Convertible Preferred Stock section of this Note for additional information about the liquidation preference for the ESOP Cumulative Preferred
Stock.
248
Wells Fargo & Company
Table 18.2: Preferred Stock – Shares Issued and Carrying Value
(in millions, except shares)
DEP Shares
December 31, 2017
December 31, 2016
Shares
issued and
outstanding
Liquidation
preference
value
Carrying
value Discount
Shares
issued and
outstanding
Liquidation
preference
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)
69,000
1,725
1,725
33,600
840
840
5.90% Fixed-to-Floating Non-Cumulative Perpetual Class A
Preferred Stock
80,000
2,000
2,000
Series T (1)
6.00% 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
6.00% Non-Cumulative Perpetual Class A Preferred Stock
40,000
1,000
1,000
Series W (1)
5.70% Non-Cumulative Perpetual Class A Preferred Stock
40,000
1,000
1,000
Series X (1)
5.50% Non-Cumulative Perpetual Class A Preferred Stock
46,000
1,150
1,150
Series Y (1)
5.625% Non-Cumulative Perpetual Class A Preferred Stock
27,600
690
690
ESOP
Cumulative Convertible Preferred Stock
1,556,104
1,556
1,556
—
—
—
—
—
—
—
—
—
—
—
—
—
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
80,000
2,000
2,000
40,000
1,000
1,000
40,000
1,000
1,000
46,000
1,150
1,150
—
—
—
1,439,181
1,439
1,439
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
11,677,235 $ 26,757
25,358
1,399
11,532,712
$ 25,950
24,551
1,399
(1) Preferred shares qualify as Tier 1 capital.
In April 2017, we issued 27.6 million Depositary Shares,
each representing a 1/1,000th interest in a share of Non-
Cumulative Perpetual Class A Preferred Stock, Series Y, for an
aggregate public offering price of $690 million.
See Note 8 (Securitizations and Variable Interest Entities)
for additional information on our trust preferred securities.
Wells Fargo & Company
249
Note 18: Preferred Stock (continued)
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
2017
2016
2015
2014
2013
2012
2011
2010
2008
Shares issued and outstanding
Carrying value
Adjustable dividend rate
Dec 31,
2017
273,210
322,826
187,436
237,151
201,948
128,634
129,296
75,603
—
Dec 31,
Dec 31,
Dec 31,
2016
2017
2016
Minimum
Maximum
— $
358,528
200,820
255,413
222,558
144,072
149,301
90,775
17,714
273
323
187
237
202
129
129
76
—
—
358
201
255
223
144
149
91
18
7.00%
9.30
8.90
8.70
8.50
10.00
9.00
9.50
10.50
8.00
10.30
9.90
9.70
9.50
11.00
10.00
10.50
11.50
Total ESOP Preferred Stock (1)
1,556,104
1,439,181 $
1,556
1,439
Unearned ESOP shares (2)
$
(1,678)
(1,565)
(1) At December 31, 2017 and 2016, additional paid-in capital included $122 million and $126 million, respectively, related to ESOP preferred stock.
(2) We recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as
shares of the ESOP Preferred Stock are committed to be released.
250
Wells Fargo & Company
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, 2017.
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
10,973,760
572,270
459,744,943
89,163,322
560,454,295
5,481,811,474
2,957,734,231
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, 2017, we had 23,327,854 warrants
outstanding and exercisable to purchase shares of our common
stock with an exercise price of $33.701 per share, expiring on
October 28, 2018. The terms of the warrants require that the
number of shares entitled to be purchased upon exercise of a
warrant be adjusted under certain circumstances. At
December 31, 2017, each warrant was exercisable to purchase
approximately 1.01 shares of our common stock. We purchased
none of these warrants in 2017 or 2016. Holders exercised
9,774,052 and 1,714,726 warrants to purchase shares of our
common stock in 2017 and 2016, 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. Subject to compliance with
applicable laws, rules and regulations, RSRs generally continue
to vest and are distributed after retirement according to the
original vesting schedule. Except for retirement and other
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. Subject to compliance with
applicable laws, rules, and regulations, PSAs continue to vest
and are distributed 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. 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 conditions that can
result in forfeiture and are subject to variable accounting. For
these awards, the associated compensation expense fluctuates
with changes in our stock price. 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
Year ended December 31,
(in millions)
RSRs
Performance shares
Stock options
$
2017
743
112
(6)
Total stock incentive
compensation expense (1) $
849
Related recognized tax benefit
$
320
2016
692
87
—
779
294
2015
675
169
—
844
318
(1) Amount for the year-ended December 31, 2017, is net of $26 million related to
clawback credits taken against a prior PSA awarded under our LTICP.
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, 2017, was 147 million.
Wells Fargo & Company
251
Note 19: Common Stock and Stock Plans (continued)
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.
Restricted Share Rights
A summary of the status of our RSRs and restricted share awards
at December 31, 2017, and changes during 2017 is presented in
Table 19.3.
Table 19.3: Restricted Share Rights
Weighted-
average
grant-date
fair value
Number
Nonvested at January 1, 2017
35,678,586 $
Granted
Vested
Canceled or forfeited
15,082,229
(14,777,208)
(1,089,231)
Nonvested at December 31, 2017
34,894,376
46.40
57.54
46.61
51.99
50.95
The weighted-average grant date fair value of RSRs granted
during 2016 and 2015 was $48.31 and $55.34, respectively.
At December 31, 2017, there was $781 million of total
unrecognized compensation cost related to nonvested RSRs. The
cost is expected to be recognized over a weighted-average period
of 2.4 years. The total fair value of RSRs that vested during 2017,
2016 and 2015 was $865 million, $1.1 billion and $1.4 billion,
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, 2017, the determination of the number of
performance shares that will vest will occur in first quarter of
2018 after review of the Company’s performance by the Human
Resources Committee of the Board of Directors. Beginning in
2013, PSAs granted include discretionary conditions that can
result in forfeiture 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, 2017,
and changes during 2017 is in Table 19.4, based on the
performance adjustments recognized as of December 2017.
Table 19.4: Performance Share Awards
Weighted-
average
grant-date
fair value (1)
Number
Nonvested at January 1, 2017
5,528,405 $
Granted
Vested
Canceled or forfeited
2,073,942
(1,993,598)
(116,645)
Nonvested at December 31, 2017
5,492,104
43.99
57.14
46.63
52.97
47.81
(1) Reflects approval date fair value for grants subject to variable accounting.
The weighted-average grant date fair value of performance
awards granted during 2016 and 2015 was $44.73 and $45.52,
respectively.
At December 31, 2017, there was $43 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 2017, 2016 and 2015 was $117 million,
$220 million, and $299 million, respectively.
252
Wells Fargo & Company
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, 2016
Canceled or forfeited
Exercised
Options exercisable and outstanding as of December 31, 2017
Director awards
Options outstanding as of December 31, 2016
Exercised
Options exercisable and outstanding as of December 31, 2017
The total intrinsic value to option holders, which is the stock
market value in excess of the option exercise price, of options
exercised during 2017, 2016 and 2015 was $623 million,
$546 million and $497 million, respectively.
Cash received from the exercise of stock options for 2017,
2016 and 2015 was $602 million, $893 million and $618 million,
respectively.
We do not have a specific policy on repurchasing shares to
satisfy share option exercises. Rather, we have a general policy
on repurchasing shares to meet common stock issuance
requirements for our benefit plans (including share option
exercises), conversion of our convertible securities, acquisitions
and other corporate purposes. Various factors determine the
amount and timing of our share repurchases, including our
capital requirements, the number of shares we expect to issue for
acquisitions and employee benefit plans, market conditions
(including the trading price of our stock), and regulatory and
legal considerations. These factors can change at any time, and
there can be no assurance as to the number of shares we will
repurchase or when we will repurchase them.
Weighted-
average
exercise price
Number
Weighted-
average
remaining
contractual
term (in yrs.)
Aggregate
intrinsic
value
(in millions)
44,266,998 $
(2,550,555)
(21,537,264)
20,179,179
199,820
(94,920)
104,900
34.62
106.71
27.79
32.80
32.06
34.48
29.87
0.8 $
777
0.3
3
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 2017, 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.
Wells Fargo & Company
253
Note 19: Common Stock and Stock Plans (continued)
Table 19.6 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 19.6: 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,
2017
2016
2015
124,670,717
128,189,305
137,418,176
1,556,104
1,439,181
1,252,386
$
1,556
1,439
1,252
$
2017
195
166
Dividends paid
Year ended December 31,
2016
208
169
2015
201
143
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.
254
Wells Fargo & Company
Note 20: Revenue from Contracts with Customers
Our revenue includes net interest income on financial
instruments and noninterest income. Table 20.1 presents our
year ended December 31, 2017, revenue by operating segment
given our current accounting policies. For additional description
of our operating segments, including additional financial
information and the underlying management accounting
process, see Note 25 (Operating Segments) to Financial
Statements in this Report.
Table 20.1: Revenue by Operating Segment
We will reflect the adoption of Accounting Standards
Update (ASU) 2014-09 – Revenue from Contracts with
Customers (“the new revenue guidance”) in first quarter 2018
and will include additional disaggregation of specific categories
of revenue.
(in millions)
Net interest income (1)
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:
Charges and fees on loans (1)
Cash network fees
Commercial real estate brokerage commissions
Letters of credit fees (1)
Wire transfer and other remittance fees
All other fees (1)
Total other fees
Mortgage banking (1)
Insurance (1)
Net gains from trading activities (1)
Net gains (losses) on debt securities (1)
Net gains from equity investments (1)
Lease income (1)
Other income of the segment (1)
Total noninterest income
Revenue
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Other (2)
Consolidated
Company
30,365
16,967
4,493
(2,268)
49,557
Year ended December 31, 2017
2,905
2,205
17
(16)
5,111
1,831
889
(60)
2,660
3,613
307
498
—
5
240
447
1,497
3,895
98
59
709
1,144
—
1,762
18,342
48,707
303
524
1,827
2,654
345
956
8
461
300
204
125
2,054
458
913
700
(232)
117
1,907
85
11,206
28,173
9,072
2,877
(2)
11,947
(1,848)
(918)
—
(2,766)
6
4
—
1
4
8
1
18
(10)
88
294
2
7
—
64
12,433
16,926
(4)
(4)
—
—
(4)
(4)
—
(12)
7
(50)
—
—
—
—
(308)
(3,149)
(5,417)
9,358
3,372
1,765
14,495
3,960
1,263
506
462
305
448
573
3,557
4,350
1,049
1,053
479
1,268
1,907
1,603
38,832
88,389
(1) Most of our revenue is not within the scope of Accounting Standards Update (ASU) 2014-09 – Revenue from Contracts with Customers, and additional details are included
in other footnotes to our financial statements. The scope explicitly excludes net interest income as well as many other revenues for financial assets and liabilities, including
loans, leases, securities, and derivatives.
Includes the 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.
(2)
Following is a discussion of key revenues within the scope of the
new revenue guidance. We provide services to customers which
have related performance obligations that we complete to
recognize revenue. Our revenues are generally recognized either
immediately upon the completion of our service or over time as
we perform services. Any services performed over time generally
require that we render services each period and therefore we
measure our progress in completing these services based upon
the passage of time.
SERVICE CHARGES ON DEPOSIT ACCOUNTS are earned on
depository accounts for commercial and consumer customers
and include fees for account and overdraft services. Account
services include fees for event-driven services and fees for
periodic account maintenance activities. Our obligation for
event-driven services is satisfied at the time of the event when
the service is delivered, while our obligation for maintenance
services is satisfied over the course of each month. Our
obligation for overdraft services is satisfied at the time of the
overdraft.
BROKERAGE ADVISORY, COMMISSIONS AND OTHER FEES
are earned for providing full-service and discount brokerage
services predominantly to retail brokerage clients. These
revenues include fees earned on asset-based and transactional
accounts and other brokerage advisory services.
Asset-based revenues are charged based on the market
value of the client’s assets. The services associated with these
revenues, which include investment advice, active management
of client assets, or assistance with selecting and engaging a third-
party advisory manager, are generally performed over a month
or quarter.
Wells Fargo & Company
255
Note 20: Revenue from Contracts with Customers (continued)
Transactional revenues are based on the size and number of
transactions executed at the client’s direction and are generally
recognized on the trade date.
TRUST AND INVESTMENT MANAGEMENT FEES are earned
for providing trust, investment management and other related
services.
Trust services include acting as a trustee for corporate trust,
personal trust, and agency assets. Obligations for trust services
are generally satisfied over time but may be satisfied at points in
time for certain activities that are transactional in nature.
Investment management services include managing and
administering assets, including mutual funds, and institutional
separate accounts. Fees for these services are generally
determined based on a tiered scale relative to the market value of
assets under management (AUM). 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. Services with
AUM and AUA-based fees are generally performed over time.
Other related services include the custody and safekeeping
of accounts.
INVESTMENT BANKING FEES are earned for services related
to underwriting debt and equity securities, arranging loan
syndications and performing other advisory services. Our
performance obligation for these services is satisfied at closing of
the transaction.
CARD FEES include credit and debit card interchange and
network revenues and various card-related fees. Card-related
fees such as late fees, cash advance fees, and balance transfer
fees are loan-related and excluded from the scope of the new
revenue guidance.
Credit and debit card interchange and network revenues are
earned on credit and debit card transactions conducted through
payment networks such as Visa, MasterCard, and American
Express. Interchange income is recognized concurrently with the
delivery of services on a daily basis.
Interchange and network revenues are presented net of
cardholder rewards and rebates. Cardholder rewards and rebates
reduced card fee revenue by $1.2 billion, $1.0 billion, and
$863 million for the years ended December 31, 2017, 2016, and
2015, respectively.
CASH NETWORK FEES are earned for processing ATM
transactions. Our obligation is completed daily upon settlement
of ATM transactions.
COMMERCIAL REAL ESTATE BROKERAGE COMMISSIONS
are earned for assisting customers in the sale of real estate
property. Revenue is recognized once the client has signed and
accepted an offer for sale of the property, which is when our
performance obligation is met. Fees are based on a fixed
percentage of the sales price.
WIRE TRANSFER AND OTHER REMITTANCE FEES consist of
fees earned for funds transfer services and issuing cashier’s
checks and money orders. The payment terms and pricing of the
fees for each type of transaction are fixed and outlined in
published fee schedules. Our obligation is satisfied at the time of
the transaction processing.
256
Wells Fargo & Company
Note 21: Employee Benefits and Other Expenses
Pension and Postretirement Plans
We sponsor a frozen noncontributory qualified defined benefit
retirement plan, 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’ accounts based on their accumulated balances.
We did not make a contribution to our Cash Balance Plan in
2017. We do not expect that we will be required to make a
contribution to the Cash Balance Plan in 2018; however, this is
dependent on the finalization of the actuarial valuation in 2018.
Our decision of whether to make a contribution in 2018 will be
based on various factors including the actual investment
performance of plan assets during 2018. Given these
uncertainties, we cannot estimate at this time the amount, if any,
that we will contribute in 2018 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 sponsored the Pension and Life Assurance Plan of
Wachovia Bank to employees in the United Kingdom (UK
Pension Plan). In September 2017, an annuity contract was
entered into that effected a full settlement of this UK Pension
Plan, resulting in a plan settlement of $74 million and a
settlement loss of $7 million.
Our nonqualified defined benefit plans are unfunded and
provide supplemental defined benefit pension benefits to certain
eligible employees. The benefits under these plans were frozen in
prior years.
We provide health care and life insurance benefits for
certain retired employees and we reserve the right to amend,
modify or terminate any of the benefits at any time. In
October 2016, the Wells Fargo & Company Retiree Plan (Retiree
Plan), a postretirement plan, was amended and restated effective
January 1, 2017. Significant changes included eliminating certain
self-insured options and replacing these with a fully-insured
Group Medicare Advantage Plan, and adjusting the retirement
medical allowance and subsidy amounts to reflect the reduced
Group Medicare Advantage Plan premiums. These changes
resulted in a net prior service credit of $177 million that reduced
the Retiree Plan obligation in 2016.
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.
Table 21.1 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 21.1: Changes in Benefit Obligation and Fair Value of Plan Assets
(in millions)
Change in benefit obligation:
December 31, 2017
December 31, 2016
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
Benefit obligation at beginning of year
$ 10,774
630
731
10,673
647
1,002
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss (gain)
Benefits paid
Medicare Part D subsidy
Amendment
Settlement
Foreign exchange impact
5
412
—
634
—
24
—
46
(651)
(79)
—
—
(74)
10
—
—
—
—
—
28
40
(102)
(88)
1
—
—
1
3
422
—
336
—
26
—
9
(649)
(52)
—
—
—
(11)
—
—
—
—
Benefit obligation at end of year
11,110
621
611
10,774
630
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
Settlement
Foreign exchange impact
Fair value of plan assets at end of year
10,667
Funded status at end of year
Amounts recognized on the balance sheet at end of year:
Liabilities
$
$
10,120
1,253
11
—
—
—
79
—
549
56
7
40
(651)
(79)
(88)
—
(74)
8
—
—
—
—
1
—
—
565
(46)
8,836
642
1,303
—
(649)
—
—
(12)
10,120
—
—
52
—
—
—
—
—
(443)
(621)
(654)
(630)
(443)
(621)
(46)
(654)
(630)
(182)
Wells Fargo & Company
257
(52)
(132)
—
39
72
(82)
(132)
9
(177)
—
—
731
568
30
2
72
9
—
—
549
(182)
Note 21: Employee Benefits and Other Expenses (continued)
Table 21.2 provides information for pension plans with
benefit obligations in excess of plan assets.
Table 21.2: Pension Plans with Benefit Obligations in Excess
of Plan Assets
(in millions)
Dec 31,
Dec 31,
2017
2016
Projected benefit obligation
$ 11,721
Accumulated benefit obligation
Fair value of plan assets
11,717
10,656
11,398
11,395
10,113
Table 21.3 presents the components of net periodic benefit
cost and other comprehensive income (OCI).
Table 21.3: Net Periodic Benefit Cost and Other Comprehensive Income
(in millions)
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss (gain)
Amortization of prior service credit
Settlement loss
Curtailment gain
Net periodic benefit cost
Other changes in plan assets and
benefit obligations recognized in
other comprehensive income:
Prior service cost (credit)
Amortization of prior service credit
Settlement
Total recognized in other
comprehensive income
Total recognized in net periodic benefit
cost and other comprehensive
income
December 31, 2017
December 31, 2016
December 31, 2015
Pension benefits
Pension benefits
Pension benefits
Qualified qualified benefits Qualified
Non-
Other
Non-
qualified
Other
benefits Qualified
Non-
qualified
Other
benefits
$
5
412
(652)
148
—
7
—
(80)
—
24
—
11
—
6
—
41
—
28
(30)
(9)
(10)
—
—
3
422
(608)
146
—
5
—
(21)
(32)
—
26
—
12
—
2
—
40
—
39
2
429
(30)
(644)
(5)
(2)
—
—
2
108
—
—
—
(105)
560
(108)
—
—
—
—
25
—
18
—
13
—
56
(25)
(18)
—
—
(13)
6
42
(35)
(4)
(3)
—
(43)
(37)
(23)
4
18
3
—
2
Net actuarial loss (gain)
33
Amortization of net actuarial gain (loss)
(148)
46
(11)
—
—
(6)
(128)
9
—
10
—
302
(146)
—
—
(5)
9
(12)
—
—
(2)
(82)
5
(177)
2
—
1
—
(8)
(122)
29
(109)
151
(5)
(252)
452
(56)
$
(202)
70
(130)
119
35
(250)
347
—
(35)
Table 21.4 provides the amounts recognized in cumulative
OCI (pre tax).
Table 21.4: Benefits Recognized in Cumulative OCI
(in millions)
Net actuarial loss (gain)
Net prior service credit
Total
December 31, 2017
December 31, 2016
Pension benefits
Pension benefits
Qualified
$
3,156
—
$
3,156
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
192
—
192
(360)
(166)
(526)
3,279
(1)
3,278
163
—
163
(242)
(175)
(417)
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 2018 is
$127 million. The net prior service credit for other post
retirement plans that will be amortized from cumulative OCI
into net periodic benefit cost in 2018 is $10 million.
258
Wells Fargo & Company
Plan Assumptions
For additional information on our pension accounting
assumptions, see Note 1 (Summary of Significant Accounting
Policies). Table 21.5 presents the weighted-average discount
rates used to estimate the projected benefit obligation for
pension benefits.
Table 21.5: Discount Rates Used to Estimate Projected Benefit Obligation
Discount rate
3.65%
3.55
3.54
4.00
4.00
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
4.00
December 31, 2017
December 31, 2016
Table 21.6 presents the weighted-average assumptions used
to determine the net periodic benefit cost.
Table 21.6: Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost
December 31, 2017
December 31, 2016
December 31, 2015
Pension benefits
Pension benefits
Pension benefits
Qualified
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
Discount rate (1)
Expected return on plan assets
3.98%
6.70
3.93
N/A
4.00
5.75
3.99
6.75
4.11
N/A
4.16
5.75
4.00
7.00
3.60
N/A
4.00
6.00
(1) The discount rate includes the impact of interim remeasurements as applicable.
To account for postretirement health care plans we used
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 assumed an average annual increase of
approximately 9.00% for health care costs in 2018. This rate is
assumed to trend down 0.40%-0.70% per year until the trend
rate reaches an ultimate rate of 4.50% in 2026. The 2017
periodic benefit cost was determined using an initial annual
trend rate of 8.90%. This rate was assumed to decrease
0.50%-0.60% per year until the trend rate reached an ultimate
rate of 4.50% in 2026. Increasing the assumed health care trend
by one percentage point in each year would increase the benefit
obligation as of December 31, 2017, by $13 million and the total
of the interest cost and service cost components of the net
periodic benefit cost for 2017 by $1 million. Decreasing the
assumed health care trend by one percentage point in each year
would decrease the benefit obligation as of December 31, 2017,
by $11 million and the total of the interest cost and service cost
components of the net periodic benefit cost for 2017 by
$1 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 25%-45%
equities, 45%-65% 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. 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 21.7.
Table 21.7: Projected Benefit Payments
(in millions)
Year ended December 31,
2018
2019
2020
2021
2022
Pension benefits
Qualified
Non-
qualified
Other
Benefits
$
789
797
775
774
768
54
52
50
49
46
48
48
48
47
46
2023-2027
3,426
206
205
Wells Fargo & Company
259
Note 21: Employee Benefits and Other Expenses (continued)
Fair Value of Plan Assets
Table 21.8 presents the balances of pension plan assets and other
benefit plan assets measured at fair value. In accordance with
accounting guidance that we adopted effective January 1, 2016,
we do not classify an investment in the fair value hierarchy
(Level 1, 2 or 3), if we use the non-published net asset value
(NAV) per share (or its equivalent) that has been communicated
to us as an investor as a practical expedient to measure fair
value. We generally use NAV per share as the fair value
measurement for certain investments, including some hedge
funds and real estate holdings. Investments with published
NAVs continue to be classified in the fair value hierarchy. See
Note 17 (Fair Values of Assets and Liabilities) for fair value
hierarchy level definitions.
Table 21.8: Pension and Other Benefit Plan Assets
Pension plan assets
Other benefits plan assets
Carrying value at year end
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(in millions)
December 31, 2017
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
Global stocks (4)
International stocks (5)
Emerging market stocks
Real estate
Hedge funds/absolute return
Other
$
1
234
875
4,424
—
—
60
825
227
224
89
542
—
157
62
—
255
267
223
300
133
12
391
257
305
31
28
72
—
—
—
—
—
—
—
—
—
—
—
20
—
8
235
5,299
255
267
283
1,125
360
236
480
799
305
208
90
80
85
—
—
—
—
—
—
—
—
23
—
—
—
3
23
—
185
—
—
130
34
20
—
38
—
—
—
—
Plan investments - excluding investments
at NAV
$ 3,062
6,932
28
10,022
111
430
Investments at NAV (6)
Net receivables
Total plan assets
December 31, 2016
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
Global stocks (4)
International stocks (5)
Emerging market stocks
Real estate
Hedge funds/absolute return
Other
4
868
—
5
54
750
205
185
90
515
—
116
59
—
275
4,023
307
258
261
316
124
12
372
221
277
1
53
77
Plan investments - excluding investments at NAV $ 2,851
6,577
Investments at NAV (6)
Net receivables
Total plan assets
594
51
$10,667
279
4,910
307
263
315
1,066
329
197
462
736
277
142
112
85
103
—
—
—
—
—
—
—
—
21
—
—
—
3
5
—
98
—
—
68
18
10
—
11
—
—
—
—
9,480
127
210
592
48
$ 10,120
—
19
—
—
—
—
—
—
—
—
—
25
—
8
52
—
—
—
—
—
—
—
—
—
—
—
—
—
23
23
—
—
—
—
—
—
—
—
—
—
—
—
—
23
23
108
—
185
—
—
130
34
20
—
61
—
—
—
26
564
—
1
565
108
—
98
—
—
68
18
10
—
32
—
—
—
26
360
189
—
549
(1) This category includes a diversified mix of assets which are being managed in accordance with a duration target of approximately 10 years and an emphasis on corporate
credit bonds combined with investments in U.S. Treasury securities and other U.S. agency and non-agency bonds.
(2) This category includes assets that are intermediate duration, investment grade bonds held in investment strategies benchmarked to the Bloomberg Barclays Capital U.S.
Aggregate Bond Index, including U.S. Treasury securities, agency and non-agency asset-backed bonds and corporate bonds.
(3) 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.
(4) This category consists of four 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 non-U.S. equities, with no single strategy representing more than 1.5% of total Plan assets.
(5) This category includes assets diversified across five unique investment strategies providing exposure to companies in developed market, non-U.S. countries with no single
strategy representing more than 2.5% of total plan assets.
(6) Consists of certain investments that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value
hierarchy.
260
Wells Fargo & Company
Table 21.9 presents the changes in Level 3 pension plan and
other benefit plan assets measured at fair value.
Table 21.9: Fair Value Level 3 Pension and Other Benefit Plan Assets
(in millions)
Year ended December 31, 2017
Pension plan assets:
Long duration fixed income
High-yield fixed income
Real estate
Other
Total pension plan assets
Other benefits plan assets:
Other
Total other benefit plan assets
Year ended December 31, 2016
Pension plan assets:
Long duration fixed income
High-yield fixed income
Real estate
Other
Total pension plan assets
Other benefits plan assets:
Other
Total other benefit plan assets
Gains (losses)
Balance
beginning
of year
Realized
Unrealized (1)
Purchases,
sales
and
settlements
(net)
Transfers
Into/
(Out of)
Level 3
Balance
end of
year
$
$
$
$
$
$
$
$
19
—
25
8
52
23
23
16
4
33
8
61
23
23
—
—
(3)
—
(3)
—
—
—
—
6
—
6
1
1
—
—
5
—
5
—
—
—
—
(1)
—
(1)
—
—
—
—
(4)
—
(4)
—
—
3
(3)
(13)
—
(13)
(1)
(1)
(19)
—
(3)
—
(22)
—
—
—
(1)
—
—
(1)
—
—
—
—
20
8
28
23
23
19
—
25
8
52
23
23
(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
fund’s NAV per share held at year-end. The NAV per share is
quoted on a private market that is not active; however, the NAV
per share 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 per share
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, 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 and
collective investment funds described above.
Real Estate – includes investments in real estate, which are
valued at fair value based on an income capitalization valuation
approach. Market values are estimates, and the actual market
price of the real estate can only be determined by negotiation
between independent third parties in sales transactions. This
group of assets also includes investments in exchange-traded
equity securities and collective investment funds described
above.
Hedge Funds / Absolute Return – includes investments in
registered investment companies, limited partnerships and
collective investment funds, as described above.
Other – insurance contracts that are stated at cash
surrender value. This group of assets also includes investments
in collective investment funds 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.
Wells Fargo & Company
261
Note 21: Employee Benefits and Other Expenses (continued)
Defined Contribution Retirement Plans
We sponsor a defined contribution retirement plan, the Wells
Fargo & Company 401(k) Plan (401(k) Plan). Under the 401(k)
Plan, after one month of service, eligible employees may
contribute up to 50% of their certified compensation, subject to
statutory limits. Eligible employees who complete one year of
service are eligible for quarterly 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 for a plan year. Eligible employees who complete
one year of service are eligible for profit sharing contributions.
Profit sharing contributions are vested after three years of
service. Total defined contribution retirement plan expenses
were $1.2 billion in both 2017 and 2016 and $1.1 billion in 2015.
Other Expenses
Table 21.10 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 21.10: Other Expenses
(in millions)
Operating losses
Outside professional services
Contract services
Operating leases
Cardholder rewards and rebates (1)
1,201
Outside data processing
891
Year ended December 31,
2017
2016
2015
$ 5,492
3,813
1,369
1,351
1,608
3,138
1,203
1,329
1,047
888
1,871
2,665
978
278
863
985
(1) Noninterest income from card fees is net of cardholder rewards and rebates
expense.
262
Wells Fargo & Company
Note 22: Income Taxes
On December 22, 2017, the Tax Cuts & Jobs Act (Tax Act) was
enacted resulting in significant changes to both domestic tax law
and the U.S taxation of foreign subsidiaries. While many
provisions of the law became effective January 1, 2018, we were
required to recognize various tax impacts of the Tax Act as of
December 31, 2017, in accordance with ASC Topic 740, Income
Taxes and SEC Staff Accounting Bulletin 118. Accordingly, our
income tax expense for 2017 reflected $3.7 billion of net
estimated tax benefits related to the Tax Act, primarily as a
result of re-measuring our deferred taxes for the federal tax rate
reduction from 35% to 21%. We used reasonable estimates and
recorded provisional amounts as of December 31, 2017, when re-
measuring our deferred taxes. Our initial accounting related to
the re-measurement is incomplete, since the temporary
difference calculations need to be finalized as we complete our
U.S. tax filing during 2018. We will collect and analyze the final
temporary difference data and monitor any interpretations that
may emerge for various provisions of the Tax Act throughout
2018 and adjust our original estimate accordingly.
Table 22.1 presents the components of income tax expense.
Table 22.1: Income Tax Expense
(in millions)
Current:
Federal
State and local
Foreign
Year ended December 31,
2017
2016
2015
$ 3,507
561
183
6,712
1,395
175
10,822
1,669
139
Total current
4,251
8,282
12,630
Deferred:
Federal
State and local
Foreign
Total deferred
156
564
(54)
666
1,498
(2,047)
296
(1)
(235)
17
1,793
(2,265)
Total
$ 4,917
10,075
10,365
The tax effects of our temporary differences that gave rise to
significant portions of our deferred tax assets and liabilities are
presented in Table 22.2.
Table 22.2: Net Deferred Tax Liability
(in millions)
Deferred tax assets
Dec 31,
Dec 31,
2017
2016
Allowance for loan losses
$
2,816
4,374
Deferred compensation and employee
benefits
Accrued expenses
PCI loans
Net unrealized losses on investment
securities
Net operating loss and tax credit carry
forwards
Other
2,377
722
1,057
—
341
409
4,045
1,022
1,762
707
391
1,307
Total deferred tax assets
7,722
13,608
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
(397)
(280)
(3,421)
(4,084)
(5,816)
(539)
(55)
(750)
(821)
(5,292)
(4,522)
(5,511)
(1,001)
—
(1,588)
(2,465)
Total deferred tax liabilities
(15,486)
(20,379)
Net deferred tax liability (1) $
(8,161)
(7,051)
(1) The net deferred tax liability is included in accrued expenses and other
liabilities.
Wells Fargo & Company
263
Note 22: Income Taxes (continued)
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 24
(Other Comprehensive Income)). These associated adjustments
decreased OCI by $434 million in 2017. OCI was not adjusted to
reflect a $400 million impact of the Tax Act recognized in 2017
tax expense for the re-measurement of deferred tax assets
related to the items recorded in OCI. In 2018, we expect to adopt
ASU 2018-02 – Income Statement-Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income, and reclassify
the $400 million from OCI to retained earnings.
We have determined that a valuation reserve is required for
2017 in the amount of $397 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, 2017, we had net operating loss carry
forwards with related deferred tax assets of $341 million. If these
Table 22.3: Effective Income Tax Expense and Rate
carry forwards are not utilized, they will expire in varying
amounts through 12/31/2037.
As a result of the deemed mandatory repatriation provision
in the Tax Act, we included an estimated $4.0 billion of
undistributed foreign earnings in taxable income and recognized
an associated $173 million of net income tax expense. We were
able to reasonably estimate our foreign earnings and profits
calculations as of December 31, 2017, and will finalize these
calculations in 2018 as we complete our tax filings and our
analysis of the new provisions of the Tax Act. We do not intend
to distribute these foreign earnings in a taxable manner, and
therefore intend to limit distributions to foreign earnings
previously taxed in the U.S., that would qualify for the 100%
dividends received deduction, and that would not result in any
significant state or foreign taxes. All other undistributed foreign
earnings will continue to be permanently reinvested outside the
U.S. and the related tax liability on these earnings is
insignificant.
Table 22.3 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.
(in millions)
Amount
Rate
Amount
Rate
Amount
2017
2016
2015
Rate
Statutory federal income tax expense and rate
$ 9,485
35.0% $ 11,204
35.0% $ 11,641
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
Non-deductible accruals
Tax reform
Other
926
(812)
(1,419)
1,320
3.4
(3.0)
(5.2)
4.9
(3,713)
(13.7)
1,004
(725)
(1,251)
81
—
3.1
(2.2)
(3.9)
0.3
—
1,025
(641)
(1,108)
25
—
3.1
(1.9)
(3.3)
0.1
—
(870)
(3.3)
(238)
(0.8)
(577)
(1.8)
Effective income tax expense and rate
$ 4,917
18.1% $ 10,075
31.5% $ 10,365
31.2%
The effective income tax rate for 2017 reflected the
estimated impact of the Tax Act, including a benefit of
$3.9 billion resulting from the re-measurement of the
Company's estimated net deferred tax liability as of December
31, 2017, partially offset by $173 million of tax expense relating
to the estimated tax impact of the deemed repatriation of the
Company's previously undistributed foreign earnings. The
effective tax rate was also adversely impacted by $1.3 billion tax
expense relating to discrete non tax-deductible items
(predominantly litigation accruals). The effective income tax rate
for 2016 included net reductions in reserves for uncertain tax
positions resulting from settlements with tax authorities,
partially offset by a net increase in tax benefits related to tax
credit investments. The effective income 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.
264
Wells Fargo & Company
Table 22.4 presents the change in unrecognized tax benefits.
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.
We are litigating or appealing various issues related to prior
IRS examinations for the periods 2003 through 2010. For the
2003 through 2006 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 $1.0 billion to our gross unrecognized tax benefits.
Table 22.4: Change in Unrecognized Tax Benefits
Year ended
December 31,
(in millions)
2017
Balance at beginning of year
$
5,029
2016
4,806
Additions:
For tax positions related to the current
year
For tax positions related to prior years
367
158
284
177
Reductions:
For tax positions related to prior years
(319)
(127)
Lapse of statute of limitations
Settlements with tax authorities
(48)
(20)
(27)
(84)
Balance at end of year
$
5,167
5,029
Of the $5.2 billion of unrecognized tax benefits at
December 31, 2017, approximately $3.5 billion would, if
recognized, affect the effective tax rate. The remaining
$1.7 billion of unrecognized tax benefits relates to income tax
positions on temporary differences.
We recognize interest and penalties related to unrecognized
tax benefits as a component of income tax expense. As of
December 31, 2017 and 2016, we have accrued approximately
$726 million and $589 million for the payment of interest and
penalties, respectively. In 2017, we recognized in income tax
expense a net tax expense related to interest and penalties of
$96 million. In 2016, we recognized in income tax expense a net
tax expense related to interest and penalties of $136 million.
Wells Fargo & Company
265
Note 23: Earnings Per Common Share
Table 23.1 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.
2017
$
22,183
1,629
$
20,554
Year ended December 31,
2016
21,938
1,565
20,373
2015
22,894
1,424
21,470
4,964.6
5,052.8
5,136.5
$
4.14
4.03
4.18
4,964.6
5,052.8
5,136.5
17.1
24.7
10.9
18.9
25.9
10.7
26.7
32.8
13.8
5,017.3
5,108.3
5,209.8
$
4.10
3.99
4.12
Table 23.1: 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 23.2 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 23.2: Outstanding Anti-Dilutive Options
(in millions)
Options
Weighted-average shares
Year ended December 31,
2017
1.9
2016
3.2
2015
5.7
266
Wells Fargo & Company
Note 24: Other Comprehensive Income
Table 24.1 provides the components of other comprehensive
income (OCI), reclassifications to net income by income
statement line item, and the related tax effects.
Table 24.1: 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
2017
Net of
tax
Before
tax
Tax
effect
Year ended December 31,
2016
Net of
tax
Before
tax
Tax
effect
2015
Net of
tax
$ 2,719
(1,056)
1,663
(3,458)
1,302
(2,156)
(3,318)
1,237
(2,081)
Interest income on investment securities (1)
198
(75)
123
7
(3)
4
Net gains on debt securities
Net gains from equity investments
Other noninterest income
(479)
(456)
—
Subtotal reclassifications to net income
(737)
181
172
—
278
(298)
(284)
—
(942)
(300)
(5)
(459)
(1,240)
355
113
2
467
(587)
(187)
(3)
(1)
(952)
(571)
(6)
(773)
(1,530)
—
356
213
3
572
(1)
(596)
(358)
(3)
(958)
Net change
1,982
(778)
1,204
(4,698)
1,769
(2,929)
(4,848)
1,809
(3,039)
Derivatives and hedging activities:
Fair Value Hedges:
Change in fair value of excluded
components on fair value hedges (3)
Cash Flow Hedges:
Net unrealized gains (losses) arising during
the period on cash flow hedges
Reclassification of net (gains) losses to net
income on cash flow hedges:
Interest income on investment securities
Interest income on loans
Interest expense on long-term debt
Subtotal reclassifications
to net income
Net change
Defined benefit plans adjustments:
Net actuarial and prior service gains (losses)
arising during the period
Reclassification of amounts to net periodic
benefit costs (2):
Amortization of net actuarial loss
Settlements and other
Subtotal reclassifications to net periodic
benefit costs
Net change
Foreign currency translation adjustments:
Net unrealized gains (losses) arising during the
period
Reclassification of net gains to net income:
Net gains from equity investments
Subtotal reclassifications
to net income
Net change
(253)
95
(158)
—
—
—
—
—
—
(287)
108
(179)
177
(67)
110
1,549
(584)
965
—
(551)
8
(543)
(1,083)
—
208
(3)
205
408
—
—
(343)
(1,043)
5
14
(338)
(1,029)
(675)
(852)
—
393
(5)
388
321
—
(3)
(650)
(1,103)
9
17
1
416
(6)
(2)
(687)
11
(641)
(1,089)
411
(678)
(531)
460
(173)
287
49
(12)
37
(52)
(40)
(92)
(512)
193
(319)
150
3
153
202
96
—
—
96
(57)
2
(55)
(67)
93
5
98
135
153
5
158
106
(57)
(1)
(58)
(98)
96
4
100
8
122
(8)
114
(398)
(46)
3
(43)
150
76
(5)
71
(248)
3
—
—
3
99
(3)
4
1
(137)
(12)
(149)
—
—
99
—
—
(3)
—
—
4
—
—
1
(5)
(5)
—
—
(5)
(5)
(142)
(12)
(154)
Other comprehensive income (loss)
$ 1,197
(434)
763
(5,447)
1,996
(3,451)
(4,928)
1,774
(3,154)
Less: Other comprehensive income (loss) from
noncontrolling interests, net of tax
Wells Fargo other comprehensive income
(loss), net of tax
(62)
$ 825
(17)
(3,434)
67
(3,221)
(1) 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.
(2) These items are included in the computation of net periodic benefit cost, which is recorded in employee benefits expense (see Note 21 (Employee Benefits and Other
Expenses) for additional details).
(3) Represents changes in fair value of cross-currency swaps attributable to changes in cross-currency basis spreads, which are excluded from the assessment of hedge
effectiveness and recorded in other comprehensive income.
Wells Fargo & Company
267
Note 24: Other Comprehensive Income (continued)
Table 24.2 provides the cumulative OCI balance activity on
an after-tax basis.
Table 24.2: Cumulative OCI Balances
(in millions)
Balance, December 31, 2014
Net unrealized gains (losses) arising during the period
Amounts reclassified from accumulated other comprehensive
income
Net change
Less: Other comprehensive income (loss) from noncontrolling
interests
Balance, December 31, 2015
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, 2016
Transition adjustment (1)
Balance, January 1, 2017
Net unrealized gains (losses) arising during the period
Amounts reclassified from accumulated other
comprehensive income
Net change
Less: Other comprehensive income (loss) from
noncontrolling interests
Balance, December 31, 2017
Investment
securities
$
4,926
(2,081)
(958)
(3,039)
74
1,813
(2,156)
(773)
(2,929)
(17)
(1,099)
—
(1,099)
1,663
(459)
1,204
(66)
171
$
Derivatives
and
hedging
activities
Defined
benefit
plans
adjustments
Foreign
currency
translation
adjustments
Cumulative
other
comprehensive
income (loss)
333
965
(678)
287
—
620
110
(641)
(531)
—
89
168
257
(337)
(338)
(675)
—
(1,703)
(319)
71
(248)
—
(1,951)
(92)
100
8
—
(1,943)
—
(1,943)
37
98
135
—
(38)
(149)
(5)
(154)
(7)
(185)
1
—
1
—
(184)
—
(184)
99
—
99
4
3,518
(1,584)
(1,570)
(3,154)
67
297
(2,137)
(1,314)
(3,451)
(17)
(3,137)
168
(2,969)
1,462
(699)
763
(62)
(418)
(1,808)
(89)
(2,144)
(1) Transition adjustment relates to the adoption of ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. See
Note 1 for more information.
268
Wells Fargo & Company
Wealth and Investment Management 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.
Other includes 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.
Note 25: Operating Segments
We have three reportable operating segments: Community
Banking; Wholesale Banking; and Wealth and Investment
Management (WIM). 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.
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. These
financial products and services include checking and savings
accounts, credit and debit cards, and automobile, student,
mortgage, home equity and small business lending, as well as
referrals to Wholesale Banking and WIM business partners.
Community Banking serves customers through a complete
range of channels, including traditional and in-supermarket and
other small format branches, ATMs, digital (online, mobile, and
social), and contact centers (phone, email and correspondence).
The Community Banking segment also includes the results
of our Corporate Treasury activities net of allocations (including
funds transfer pricing, capital, liquidity and certain corporate
expenses) 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
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, 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.
Wells Fargo & Company
269
Note 25: Operating Segments (continued)
Table 25.1 presents our results by operating segment.
Table 25.1: Operating Segments
(income/expense in millions, average balances in billions)
2017
Community
Banking
Wholesale
Banking
Wealth and
Investment
Management
Other (1)
Consolidated
Company
Net interest income (2)
$
30,365
16,967
4,493
(2,268)
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
Net income (loss) (3)
2016
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 (loss) from noncontrolling interests
Net income (loss) (3)
2015
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)
2017
Average loans
Average assets
Average deposits
2016
Average loans
Average assets
Average deposits
2,555
18,342
32,478
13,674
1,327
12,347
276
$
12,071
$
29,833
2,691
19,033
27,422
18,753
6,182
12,571
136
12,435
29,242
2,427
20,099
26,981
19,933
6,202
13,731
240
13,491
476.7
984.2
729.3
486.9
977.3
701.2
$
$
$
$
(19)
(5)
11,206
16,755
11,437
2,753
8,684
(15)
8,699
16,052
1,073
12,490
16,126
11,343
3,136
8,207
(28)
8,235
14,350
27
11,554
14,116
11,761
3,424
8,337
143
8,194
464.6
821.8
464.5
449.3
782.0
438.6
12,433
12,631
4,300
1,610
2,690
16
2,674
3,913
(5)
12,033
12,059
3,892
1,467
2,425
(1)
2,426
3,478
(25)
12,299
12,067
3,735
1,420
2,315
(1)
2,316
71.9
214.4
189.0
67.3
211.5
187.8
(3)
(3,149)
(3,380)
(2,034)
(773)
(1,261)
—
49,557
2,528
38,832
58,484
27,377
4,917
22,460
277
(1,261)
22,183
(2,044)
11
(3,043)
(3,230)
(1,868)
(710)
(1,158)
—
(1,158)
(1,769)
13
(3,196)
(3,190)
(1,788)
(681)
(1,107)
—
(1,107)
(57.1)
(87.4)
(78.2)
(53.5)
(85.4)
(77.0)
47,754
3,770
40,513
52,377
32,120
10,075
22,045
107
21,938
45,301
2,442
40,756
49,974
33,641
10,365
23,276
382
22,894
956.1
1,933.0
1,304.6
950.0
1,885.4
1,250.6
(1)
Includes the elimination of certain items that are included in more than one business segment, most of which represents products and services for Wealth and Investment
Management customers served through Community Banking distribution channels.
(2) Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on
segment assets and, if the segment has excess liabilities, interest credits for providing funding to other segments. The cost of liabilities includes interest expense on
segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment.
(3) Represents segment net income (loss) for Community Banking; Wholesale Banking; and Wealth and Investment Management segments and Wells Fargo net income for the
consolidated company.
270
Wells Fargo & Company
Note 26: Parent-Only Financial Statements
The following tables present Parent-only condensed financial
statements.
Table 26.1: Parent-Only Statement of Income
(in millions)
Income
Dividends from subsidiaries (1)
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,
2017
2016
2015
$
20,746
1,984
146
1,238
12,776
1,615
155
177
14,346
907
199
576
24,114
14,723
16,028
189
—
3,595
5
1,888
5,677
18,437
(319)
3,427
387
—
2,619
19
1,300
4,325
10,398
(1,152)
10,388
21,938
325
1
1,784
4
932
3,046
12,982
(870)
9,042
22,894
Net income
$
22,183
(1)
Includes dividends paid from indirect bank subsidiaries of $17.9 billion, $12.5 billion and $13.8 billion in 2017, 2016 and 2015, respectively.
Wells Fargo & Company
271
Note 26: Parent-Only Financial Statements (continued)
Table 26.2: 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:
2017
$
22,183
94
(158)
118
771
825
Total comprehensive income
$
23,008
Table 26.3: 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 (1)
Other assets
Total assets
Liabilities and equity
Accrued expenses and other liabilities
Long-term debt
Indebtedness to nonbank subsidiaries
Total liabilities
Stockholders’ equity
Total liabilities and equity
Year ended December 31,
2016
21,938
(76)
—
(20)
(3,338)
(3,434)
18,504
2015
22,894
52
—
(254)
(3,019)
(3,221)
19,673
Dec 31,
2017
Dec 31,
2016
$
23,180
1
—
18
—
138,681
206,367
7,156
$
375,403
7,902
146,130
14,435
168,467
206,936
$
375,403
36,657
3
15,009
9,271
54,937
41,343
201,550
6,750
365,520
7,064
133,920
24,955
165,939
199,581
365,520
(1) The years ended December 31, 2017, and December 31, 2016, include indirect ownership of bank subsidiaries with equity of $170.5 billion and $159.5 billion, respectively.
272
Wells Fargo & Company
Table 26.4: Parent-Only Statement of Cash Flows
(in millions)
Cash flows from operating activities:
Year ended December 31,
2017
2016
2015
Net cash provided by operating activities (1)
$
22,359
10,652
13,469
Cash flows from investing activities:
Available-for-sale securities:
Sales proceeds:
Subsidiary banks
Nonaffiliates
Prepayments and maturities:
Subsidiary banks
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:
8,658
9,226
—
5,472
—
5,345
10,250
15,000
7,750
(3,900)
—
(35,876)
(73,729)
69,286
(2,029)
113
(15,000)
(6,544)
3,174
(32,641)
15,164
(606)
18
(12,750)
(2,709)
460
(29,860)
301
(1,283)
714
(18,001)
(15,963)
(32,032)
Net increase in short-term borrowings and indebtedness to subsidiaries
(8,685)
789
2,084
Long-term debt:
Proceeds from issuance
Repayment
Preferred stock:
Proceeds from issuance
Cash dividends paid
Common stock:
Proceeds from issuance
Stock tendered for payment of withholding taxes (1)
Repurchased
Cash dividends paid
Other, net
Net cash provided (used) 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
(1) Prior periods have been revised to conform to the current period presentation.
22,217
(13,709)
34,362
(15,096)
677
(1,629)
1,211
(393)
(9,908)
(7,480)
(138)
(17,837)
(13,479)
36,660
$
23,181
2,101
(1,566)
1,415
(494)
(8,116)
(7,472)
(118)
5,805
494
36,166
36,660
31,487
(9,194)
2,972
(1,426)
1,726
(679)
(8,697)
(7,400)
10
10,883
(7,680)
43,846
36,166
Wells Fargo & Company
273
Note 27: 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 27.1 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. 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 reflects risk-weighted assets (RWAs) under the
Standardized and Advanced Approaches with Transition
Requirements. The Standardized Approach applies assigned risk
weights to broad risk categories, while the calculation of RWAs
under the Advanced Approach differs by requiring applicable
Table 27.1: Regulatory Capital Information
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, 2017, 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.
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Wells Fargo & Company
Wells Fargo Bank, N.A.
Advanced
Approach
Standardized
Approach
Advanced
Approach
Standardized
Approach
Advanced
Approach
Standardized
Approach
Advanced
Approach
Standardized
Approach
(in millions, except ratios)
Regulatory capital:
Common equity tier 1
$ 154,765
154,765
Tier 1
Total
Assets:
178,209
178,209
210,333
220,097
148,785
171,364
204,425
148,785
171,364
214,877
143,292
143,292
143,292
143,292
156,661
165,734
132,225
132,225
145,665
132,225
132,225
155,281
Risk-weighted
$ 1,199,545
1,260,663
1,274,589
1,336,198
1,090,360
1,169,863
1,143,681
1,222,876
Adjusted average (1)
1,905,568
1,905,568
1,914,802
1,914,802
1,708,828
1,708,828
1,714,524
1,714,524
Regulatory capital
ratios:
Common equity tier 1
capital
Tier 1 capital
Total capital
Tier 1 leverage (1)
12.90%
12.28 *
14.86
17.53
9.35
11.67
13.44
14.14 *
17.46 *
16.04 *
9.35
8.95
11.13 *
12.82 *
16.08
8.95
13.14
13.14
14.37
8.39
12.25 *
12.25 *
14.17 *
8.39
11.56
11.56
12.74
7.71
10.81 *
10.81 *
12.70 *
7.71
*Denotes the lowest capital ratio as determined under the Advanced and Standardized Approaches.
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items.
Table 27.2 presents the minimum required regulatory
capital ratios under Transition Requirements to which the
Company and the Bank were subject as of December 31, 2017,
and December 31, 2016.
Table 27.2: Minimum Required Regulatory Capital Ratios – Transition Requirements (1)
Regulatory capital ratios:
Common equity tier 1 capital
Tier 1 capital
Total capital
Tier 1 leverage
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Wells Fargo & Company
Wells Fargo Bank, N.A.
6.750%
8.250
10.250
4.000
5.625
7.125
9.125
4.000
5.750
7.250
9.250
4.000
5.125
6.625
8.625
4.000
(1) At December 31, 2017, under transition requirements, the CET1, tier 1 and total capital minimum ratio requirements for Wells Fargo & Company include a capital
conservation buffer of 1.250% and a global systemically important bank (G-SIB) surcharge of 1.000%. Only the 1.250% capital conservation buffer applies to the Bank at
December 31, 2017.
274
Wells Fargo & Company
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Wells Fargo & Company:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Wells Fargo & Company and Subsidiaries (the Company) as of
December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the consolidated financial
statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2017, 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) (PCAOB),
the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 1, 2018, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 1931.
San Francisco, California
March 1, 2018
Wells Fargo & Company
275
Quarterly Financial Data
Condensed Consolidated Statement of Income - Quarterly (Unaudited)
2017
Quarter ended
2016
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 (1)
Interest expense (1)
Net interest income (1)
Provision for credit losses
$14,958
15,044
14,694
14,213
14,058
13,487
13,146
12,972
2,645
2,595
2,223
1,889
1,656
1,535
1,413
1,305
12,313
12,449
12,471
12,324
12,402
11,952
11,733
11,667
651
717
555
605
805
805
1,074
1,086
Net interest income after provision for credit losses
11,662
11,732
11,916
11,719
11,597
11,147
10,659
10,581
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 (1)
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
1,246
3,687
996
913
928
223
132
157
439
458
558
1,276
3,609
1,000
877
1,276
3,629
1,019
902
1,313
3,570
945
865
1,357
3,698
1,001
962
1,370
3,613
997
926
1,336
3,547
997
906
1,309
3,385
941
933
1,046
1,148
1,228
1,417
1,667
1,414
1,598
269
245
166
238
475
199
280
237
120
188
493
472
277
439
36
403
481
374
262
(109)
145
306
523
(382)
293
415
106
140
534
315
286
328
447
189
497
482
427
200
244
244
373
874
9,737
9,400
9,764
9,931
9,180
10,376
10,429
10,528
4,403
2,665
1,293
608
715
288
312
4,356
2,553
1,279
523
716
288
314
4,343
2,499
1,308
529
706
287
328
4,261
2,725
1,686
577
712
289
333
4,193
2,478
1,101
642
710
301
353
4,224
2,520
1,223
491
718
299
310
4,099
2,604
1,244
493
716
299
255
4,036
2,645
1,526
528
711
293
250
Other
6,516
4,322
3,541
3,209
3,437
3,483
3,156
3,039
Total noninterest expense
16,800
14,351
13,541
13,792
13,215
13,268
12,866
13,028
Income before income tax expense (1)
4,599
6,781
Income tax expense (benefit) (1)
(1,642)
2,181
8,139
2,245
7,858
2,133
Net income before noncontrolling interests (1)
6,241
4,600
5,894
5,725
Less: Net income from noncontrolling interests
90
58
38
91
7,562
2,258
5,304
30
8,255
2,601
5,654
10
8,222
2,649
5,573
15
8,081
2,567
5,514
52
Wells Fargo net income (1)
$ 6,151
4,542
5,856
5,634
5,274
5,644
5,558
5,462
Less: Preferred stock dividends and other
411
411
406
401
402
401
385
377
Wells Fargo net income applicable to common
stock (1)
Per share information
$ 5,740
4,131
5,450
5,233
4,872
5,243
5,173
5,085
Earnings per common share (1)
Diluted earnings per common share (1)
$ 1.17
1.16
0.83
0.83
1.09
1.08
1.05
1.03
0.97
0.96
1.04
1.03
1.02
1.01
1.00
0.99
Dividends declared per common share
0.390
0.390
0.380
0.380
0.380
0.380
0.380
0.375
Average common shares outstanding
4,912.5
4,948.6
4,989.9
5,008.6
5,025.6
5,043.4
5,066.9
5,075.7
Diluted average common shares outstanding
4,963.1
4,996.8
5,037.7
5,070.4
5,078.2
5,094.6
5,118.1
5,139.4
Market price per common share (2)
High
Low
Quarter-end
$ 62.24
52.84
60.67
56.45
49.28
55.15
56.60
50.84
55.41
59.99
53.35
55.66
58.02
43.55
55.11
51.00
44.10
44.28
51.41
44.50
47.33
53.27
44.50
48.36
(1) Financial information for prior quarters in 2017 has been revised to reflect the impact of the adoption in fourth quarter 2017 of Accounting Standards Update (ASU)
2017-12 – Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The effect of adoption on previously reported quarter-to-
date net income includes $(54) million, $46 million, and $177 million for periods ended September 30, June 30, and March 31, 2017, respectively. See Note 1 (Summary of
Significant Accounting Policies) for more information on the adoption of ASU 2017-12.
(2) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
276
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
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 and other 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:
Total earning assets
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
Total interest-bearing liabilities
Portion of noninterest-bearing funding sources
Total funding sources
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
Average
balance
Yields/
rates
2017
Interest
income/
expense
Quarter ended December 31,
Average
balance
Yields/
rates
2016
Interest
income/
expense
$ 264,940
1.25% $
835
273,073
0.56% $
111,213
3.01
838
102,757
2.96
381
761
99
547
875
242
492
2,255
246
63
209
20
538
2,793
235
2
2,369
352
1,135
216
273
4,345
1.53
4.06
2.37
5.87
3.71
3.03
2.20
5.31
1.81
2.26
2.17
2.82
3.43
5.42
3.46
2.58
3.44
3.61
5.78
3.45
2,785
4.01
524
4.42
1,043
11.73
870
5.54
595
5.91
5,817
5.01
10,162
4.20
3.27
56
3.24% $ 14,390
0.17% $
0.07
0.30
1.16
0.35
0.18
0.33
1.68
2.15
0.51
—
0.37
2.87% $
19
122
18
144
97
400
102
1,061
94
1,657
—
1,657
12,733
6,423
52,390
152,910
9,371
49,138
270,232
44,716
6,263
89,622
1,194
141,795
412,027
20,517
114
270,294
59,233
127,199
24,408
19,226
500,360
1.66
3.91
2.62
4.85
3.70
3.12
2.19
5.26
2.25
2.64
2.36
2.86
3.82
8.14
3.89
2.96
3.88
4.38
0.62
3.68
27
513
1,000
114
456
2,110
246
83
503
8
840
2,950
196
2
2,649
442
1,244
270
31
4,636
281,966
40,379
36,428
54,323
38,366
451,462
951,822
13,084
$ 1,773,717
2,826
4.01
505
4.96
1,136
12.37
702
5.13
607
6.28
5,776
5.10
10,412
4.35
2.06
68
3.43% $ 15,301
0.68% $
0.19
0.31
1.49
0.81
0.39
0.99
2.32
1.86
0.81
—
0.59
2.84%
86
319
17
255
254
931
256
1,344
115
2,646
—
2,646
$ 12,655
$
50,483
679,893
20,920
68,187
124,597
944,080
102,142
231,598
24,728
1,302,548
471,169
$ 1,773,717
$
19,152
26,579
115,870
$ 161,601
$ 367,512
57,845
207,413
(471,169)
$ 161,601
$ 1,935,318
25,935
53,917
147,980
16,456
52,692
296,980
44,686
4,738
46,009
3,597
99,030
396,010
27,503
155
272,828
54,410
131,195
23,850
18,904
501,187
277,732
47,203
35,383
62,521
40,121
462,960
964,147
6,729
1,770,374
46,907
676,365
24,362
49,170
110,425
907,229
124,698
252,162
17,210
1,301,299
469,075
1,770,374
18,967
26,713
128,196
173,876
376,929
64,775
201,247
(469,075)
173,876
1,944,250
(1) Our average prime rate was 4.30% and 3.54% for the quarters ended December 31, 2017 and 2016, respectively. The average three-month London Interbank Offered
Rate (LIBOR) was 1.46% and 0.92% for the same quarters, respectively.
(2) Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3) Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance
amounts represent amortized cost for the periods presented.
(4) Nonaccrual loans and related income are included in their respective loan categories.
(5)
Includes taxable-equivalent adjustments of $342 million and $331 million for the quarters ended December 31, 2017 and 2016, respectively, predominantly related to tax-
exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.
Wells Fargo & Company
277
Glossary of Acronyms
ABS
ACL
ALCO
ARM
ASC
ASU
AUA
AUM
AVM
BCBS
BHC
CCAR
CD
CDO
CDS
CECL
CET1
CFPB
CLO
CLTV
CMBS
CPI
CPP
CRE
DPD
ESOP
FAS
FASB
FDIC
Asset-backed security
Allowance for credit losses
Asset/Liability Management Committee
Adjustable-rate mortgage
Accounting Standards Codification
Accounting Standards Update
Assets under administration
Assets under management
Automated valuation model
Basel Committee on Bank Supervision
Bank holding company
G-SIB
HAMP
HUD
LCR
LHFS
LIBOR
LIHTC
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
LOCOM
Lower of cost or market value
LTV
MBS
MHA
Loan-to-value
Mortgage-backed security
Making Home Affordable programs
Comprehensive Capital Analysis and Review
MHFS
Mortgages held for sale
Certificate of deposit
Collateralized debt obligation
Credit default swaps
Current expected credit loss
Common Equity Tier 1
Consumer Financial Protection Bureau
Collateralized loan obligation
Combined loan-to-value
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
Commercial mortgage-backed securities
PCI Loans
Purchased credit-impaired loans
Collateral protection insurance
Capital Purchase Program
Commercial real estate
Days past due
Employee Stock Ownership Plan
PTPP
RBC
Pre-tax pre-provision profit
Risk-based capital
RMBS
Residential mortgage-backed securities
ROA
ROE
Wells Fargo net income to average total assets
Wells Fargo net income applicable to common stock
Statement of Financial Accounting Standards
to average Wells Fargo common stockholders’ equity
Financial Accounting Standards Board
ROTCE
Return on average tangible common equity
Federal Deposit Insurance Corporation
RWAs
Risk-weighted assets
FFELP
Federal Family Education Loan Program
FHA
FHLB
Federal Housing Administration
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
Fair Isaac Corporation (credit rating)
Federal National Mortgage Association
SEC
S&P
SLR
SPE
TARP
TDR
Securities and Exchange Commission
Standard & Poor’s Ratings Services
Supplementary leverage ratio
Special purpose entity
Troubled Asset Relief Program
Troubled debt restructuring
Board of Governors of the Federal Reserve System
TLAC
Total Loss Absorbing Capacity
Generally accepted accounting principles
GNMA
Government National Mortgage Association
GSE
Government-sponsored entity
VA
VaR
VIE
Department of Veterans Affairs
Value-at-Risk
Variable interest entity
FICO
FNMA
FRB
GAAP
278
Wells Fargo & Company
Stock Performance
These graphs compare the cumulative total stockholder return and total compound annual growth rate
(C GR) for our common stock (NYSE: WFC) for the five- and ten-year periods ended December 31, 2017,
with the cumulative total stockholder returns for the same periods for the Keefe, Bruyette and Woods
(KBW) Total Return Bank Index (KBW Nasdaq Bank Index (BKX)) and the S&P 500 Index.
The cumulative total stockholder returns (including reinvested dividends) in the graphs assume the
investment of $100 in Wells Fargo’s common stock, the KBW Nasdaq Bank Index, and the S&P 500 Index.
Five Year Performance Graph
$260
$240
$220
$200
$180
$160
$140
$120
$100
$ 80
$ 60
$ 40
$ 20
Wells Fargo
(WFC)
S&P 500
KBW Nasdaq
Bank Index
2012
$100
100
100
2013
$137
132
138
2014
$169
151
151
2015
$173
153
151
2016
$180
171
195
2017
$204
208
231
5-year
CAGR
15% Wells Fargo
16% S&P 500
18% KBW Nasdaq
Bank Index
Ten Year Performance Graph
$260
$240
$220
$200
$180
$160
$140
$120
$100
$ 80
$ 60
$ 40
$ 20
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Wells Fargo
(WFC)
S&P 500
KBW Nasdaq
Bank Index
10-year
CAGR
1
t
r
o
p
e
R
l
a
u
n
n
A
7
1
0
2
$100
$102
100
100
63
52
$97
80
52
$112
$102
$130
$177
$220
$224
$234
$265
10% Wells Fargo
92
64
94
49
109
65
144
89
163
98
166
98
186
126
226
150
8% S&P 500
4% KBW Nasdaq
Bank Index
279
Wells Fargo & Company
Wells Fargo & Company (NYSE: WFC) is a diversified, community-based financial services company with $2.0 trillion in assets. Wells Fargo's vision
is to satisfy our customers’ financial needs and help them succeed financially. Founded in 1852 and headquartered in San Francisco, W ells Fargo
provides banking, investments, m ortgage, and consumer and commercial finance through more than 8,300 locations, 13,000 ATMs, the internet
(wellsfargo.com) and mobile banking, and has offices in 42 countries and territories to support customers who conduct business in the global
economy. W ith approxim ately 263,000 team members, W ells Fargo serves one in three households in the United States. W ells Fargo & Com pany
was ranked No. 25 on Fortune’s 2017 rankings of America’s largest corporations.
Common stock
SEC filings
Wells Fargo & Com pany is listed and trades
on the New York Stock Exchange: W FC
4,891,616,628 common shares outstanding (12/31/17)
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 you r d ividends
reinvested automatically. It’s a convenient,
economical way to increase your Wells Fargo
investment.
Call 1-877-840-0492 for an enrollment kit,
which includes a plan prospectus.
Form 10-K
We will send Wells Fargo's 2017 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 W ells Fargo
Center, M AC D1053-300, 301 S. College Street,
30th Floor, Charlotte, North Carolina 28202.
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 m aterially from our
expectations, refer to the discussion under
“Forward-Looking Statem ents” 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
C ontacts
Investor Relations
1-415-371-2921
investorrelations@wellsfargo.com
Shareowner Services and
Transfer Agent
EQ Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
1-877-840-0492
www.shareowneronline.com
Annual Stockholders' Meeting
10:00 a.m. Central Time
Tuesday, April 24, 2018
Des Moines Marriott Downtown
700 Grand Avenue
Des Moines, Iowa 50309
Strong for our customers and communities
Company
3rd
Innovation leadership
Diversity
#1
Top Company for LGBT (2017)
Corporate social
responsibility
Total Deposits (2017)
Overall Mobile Performance,
Diversitylnc
#1
9th Top Company for Diversity
(2017) Diversitylnc
Perfect Score - 100 Corporate
Equality Index (2018,15th year)
Human Rights Cam paign
Perfect Score - 100 Disability
Equality Index (DEI) Best
Places to Work (2017, 2nd year)
Largest workplace employee
givin g cam paign in the U.S.
for ninth consecutive year,
based on 2017 donations (2018)
United W ay Worldwide
Brand
Most Valuable Banking Brand
in North America and Retail
Banking (2017) Brand Finance®
Third-Most Valuable Financial
Services Brand in World (2017)
Forbes
FDIC data
3rd
Total Assets (2017)
SNL Financial
5th
Biggest Public Company
in the World* (2017) Forbes
25th
Biggest Company
by Revenue in the U.S.
(2017) Fortune
Functionality, Ease of Use,
Quality & Availability, and Best
App & Mobile Web Experience
(2017) Keynote Competitive
Research
Best Corporate/Institutional
Digital Bank in North America
(2017) Global Finance magazine
#1
Mobile prowess in transfers,
wallets, and security, providing
customers the ability to
temporarily disable debit cards
and use a smartphone in place
of a card at an ATM (2017)
Business Insider's Mobile
Banking Competitive
Edge Study
*Based on sales, profits, assets, and market value.
280
Wells Fargo’s extensive network
Around the world
A rgentina
A ustralia
B angladesh
B elgium
Brazil
C anada
C aym an Islands
C hile
C hina
C olom bia
D om inican R epublic
Ecuador
Finland
France
G erm any
H o n g K ong
India
Indonesia
Ireland
Italy
Japan
Luxem bourg
M exico
N etherlands
N ew Zealand
N orw ay
Philippines
Singap ore
South A frica
South Korea
Spain
Sw eden
Taiwan
Thailand
T urkey
U nited A ra b Em irates
U nited Kingd om
V ietnam
W ash in g to n
221
O reg o n
154
M o ntana
55
Idaho
98
W y o m in g
3 4
N o rth D akota
34
S o u th D a kota
65
N e b raska
59
M in n esota
216
Iowa
101
N e va d a
122
Utah
135
C olo ra d o
216
C aliforn ia
1340
A la s k a
62
A riz o n a
3 0 3
N e w M e xico
103
H aw aii
10
Locations*
8,300
ATMs
13,000
*Number o f domestic and global locations.
Includes Wells Fargo Advisors Private Client
Group and Financial Network locations.
N u m b e r o f d o m e s tic
lo c a tio n s b y sta te
W isc o n sin
9 4
M ich ig a n
68
Vt.
6
N.H.
10
New York
198
M ain e
5
M a ssac h u setts
4 0
Illin o is
115
Indiana
70
O hio
78
P e n n sylva n ia
359
Kentucky
13
T en n essee
53
W. V irg in ia
10
V ir g in ia
3 45
N o rth C aro lin a
398
R h ode Island
8
C o n n ec tic u t
97
N e w J e r s e y
3 6 8
D elaw are
2 6
M arylan d
132
D.C.
41
K an sas
34
M issou ri
4 0
O klah om a
20
A rk a n sa s
25
M ississip p i
28
A lab am a
159
Texas
819
Louisiana
23
So u th C aro lin a
178
G e o rg ia
336
F lorid a
764
Customers
70+ million
wellsfargo.com
28.1 million digital
(online and mobile)
active custom ers
Mobile banking
21.2 million
mobile active
users
In supporting
homeowners and
consumers
#1
Provider of private student
loans among banks (2017)
Company and competitor
#1
Retail m ortgage lender (2017)
Inside Mortgage Finance
reports
# 2
#5
Home loan originator
to minority borrowers,
and in low- to moderate-income
neighborhoods
(2017) HM DA data
# 1
Home loan servicer (2017)
Inside Mortgage Finance
Used auto lender
(AutoCount, 2017)
In helping
small businesses
#1
In overall performance and
best in quality, availability,
and ease o f use for providing
a positive small business
banking experience through
digital channels (2017) Keynote
Competitive Research
In wealth and
investment management
#2
U.S. annuity sales (2016)
Transamerica Roundtable
survey
#3
U.S. full-service retail
brokerage provider (2017)
Company and competitor
reports
#5
U.S. wealth management
provider (2017) Barron's
#7
U.S. IRA provider (2017)
Cerulli Associates
#7
U.S. institutional retirement
plan record keeper, based on
assets (2017) PLANSPONSOR
magazine
In treasury
management
Best Bank for Payments
and Collections in North
America (2018) Global
Finance magazine
Global Best Investment
M anagem ent Services (2017)
Global Finance magazine
281
Wells Fargo & Company
4 2 0 Montgomery Street
San Francisco, California 94104
1-866-878-5865 wellsfargo.com
Wells Fargo’s Vision
We want to satisfy our customers’ financial needs and help them succeed financially.
Our Values
Five primary values guide every action Wells Fargo takes:
▪ W hat’s right for customers
▪ People as a competitive advantage
▪ Ethics
▪ Diversity and inclusion
▪ Leadership
Our Goals
Wells Fargo wants to become the financial services leader in:
▪ Customer service and advice
▪ Team member engagement
▪ Innovation
▪ Risk management
▪ Corporate citizenship
▪ Shareholder value
F or m ore in form ation , v isit w ellsfarg o.com /ou rv ision
© 2018 Wells Fargo & Company. All rights reserved.
Deposit products offered through W ells Fargo Bank, N.A. M em ber FDIC.
CCM2432 (Rev 00, 1/e a ch )